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North Central Farm Management Extension Committee University of Wisconsin, Madison

May 12 – 14, 2009 Attendees: Doug Jose, Dwight Aakre, Damona Doye, Ray Massey, Kevin Dhuyvetter, Bill Lazarus, Arlin Brannstrom, William Edwards, George Patrick, Steve Harsh, Barry Ward, Dale Nordquist, Greg Hanson, and Gary Schnitkey. Dwight Aakre chaired the meeting. Minutes motion to approve by Doug, second Damona. Damona reviewed a meeting she attended in Dallas the previous week concerning Managing in Tough Times. Janie Hipp and Bob Craven also attended. Plan is to create a web library of information on farm management and family issues to prepare provide materials for educators who are working with producers in financial difficulty. Topic was tabled until later in the meeting. Dr. Brad Barham, Chair Agricultural and Applied Economics, UW, Madison: Overview of Ag and Applied Economics

• Centennial 1909 – 2009 – Celebration Sept 23-25, 2009 • Reviewed department – powerpoint

Robert Cropp – Dairy Situation and Outlook

• Forecasting difficult – much more volatility • Price components • Current downturn has not been caused by over-production – but soft economy

State Reports

• Reports were distributed and presented. See attached. Ag Program Leader Advisor’s Report – Rick Klemme & Dave Williams

• Emphasis on measuring impact of farm management programs • Communicating impact at every level • Strong encouragement to be involvement in Federal grant programs

Encourage stakeholder input into grant programs Encourage integrated programs with better balanced between Extension

and research Encourage state and county staff to volunteer for review panels Encourage emphasis on project evaluation

National Program Leader Report – Janie Hipp

• Beginning Farmer and Rancher Grant program – due May 13 (today) Panels 2 weeks following 4th of July Hope to have funds out the door by end of fiscal year

• Agricultural Prosperity for Small and Medium-sized Farms Grants

Deadline June 5 • Asked committee members to consider being on review panels • Confirmation close for Undersecretary for Research, Education, and Economics –

Dr. Shah – Director of Agricultural Development for the Gates Foundation • Trade Adjustment Assistance Program will be funded

Interagency team leadership Regulations are going through clearance process Goal to get TAA up before end of fiscal year Requires Extension participation

• Managing in Tough Times website discussion – see below • Emerging Issues -- Seminar series on carbon market – cap and trade – in DC but

maybe by webinar – early June

Biomass Feedstocks Logistics • Dr. Kevin Shinners – Biological Systems Engineering Dept – University of

Wisconsin Wind Energy Economics

• Steve Harsh, Michigan State University Land Values Outlook

• David Oppendahl – Chicago Federal Reserve Bank Development of Switchgrass as a Feedstock for Bioenergy

• Mike Casler – Dairy Forage Research Center, USDA-ARS, Madison Legal and Tax Update

• Phil Harris, Department of Agricultural and Applied Economics, University of Wisconsin

Wisconsin Bio Energy Initiative

• Margaret Broeren, Great Lakes Bioenergy Research Center • $135m grant from DOE • Basic research in sustainable cellulosic energy development • Partner with MSU

Crop Insurance Education

• Paul Mitchell – Ag & Applied Economics – University of Wisconsin • How should we in Extension talk about crop insurance to farmers

Farm Machinery & Labor Sharing Manual – NCFMEC-21 -- William Edwards

• North Central RME funded • Found efficiencies in combining labor in addition to sharing machinery • Case studies – there are more complete writeups available on the web

• Extension meetings have been conducted – small groups, each group gets a case to review and report

• Available through MWPS -- $32 • Followup evaluation on workshops – 90% had taken action

Midwest Plan Service – William Edwards

• National distribution network • No longer provide setup assistance – must provide them camera ready • All publications are copyrighted

Trienniel Conference – June 13 – confirm dates

• Potentially include sessions at NDSU • Extension paper sessions

Call for papers in November Announce selections if February

• Committee meeting Sunday afternoon – request more time • Invite the Western Committee as full partners – add someone on the planning

committee – Dwight will contact • Investigate Canadian involvement -- Bill Brown or Dick Schoney – Saskatoon • Suggested topics

Bioenergy future Climate change – from a climatologist’s perspective Climate change from an economist’s perspective – if we can’t stop it, how

do we deal with it – possibly Wally Tyner, Purdue Water issues General economoy – possibly Jason Henderson – Kansas City Federal

Reserve Bank, Omaha AAEA Extension Section – Milwaukee – July 26 – 28 – Doug Jose

• Tour Saturday Farmers market Wind farm Dairy farm Port of Milwaukee

• Extension Lunchion – Monday Dr. Mike Martin – Chancellor at LSU

• Election of Officers – Slate of Officers very shortly • Website competition – farm policy sites – farm program – to John Hewlett,

Wyoming – Deadline May 20 • Graduate student competition – 12 applications

NCRME Report – Doug

• TAA Part of the Stimulus Package Likely to be some activity – dairy is a possibility

• Distributed focus group summaries • Need for contacts with immigrant farmer groups • Desire to fund projects in 5 main areas – see NCRME report

Farm Financial Management Training, Omaha – June 2-4, 2009

• National workshop • 4 slots per state for NC region • Negotiated slots for other regions • Worked through Extension Ag Program Leaders in NC • Goal is capacity building

Managing in Tough Times – Damona Doye

• Short fuse, need materials in June • Farm management committees nominate materials • CFFM will create state publication lists and work with Domona & Bob Craven to

nominate and categorize Shared Outreach Materials Library – William Edwards

• Effort to create a library of outreach materials that has been peer reviewed • Aaea.execinc.com/resource • Committee was encouraged to participate to ensure success

Software Sharing – Arlin Brannstrom

• Business Feasibility: a first cut • www.uwex.edu/ces/agmarkets/aic/businessfeasibility • Paul Mitchell – software for small diversified vegetable producers

Fixed and Flexible Cash Rental Arrangements for Your Farm – NCR Ext Pub #75

• Dwight Aakre and Barry Ward reviewed proposed changes • Part II: Establishing a Fair Fixed Cash Rental Rate: Additions under Cash Rent

Market Approach Percent land value Percent gross income $ per bushel of production Alternatives: Fixed Bushel Rent

• Part III: Establishing Rents for Other Cropland, Pasture, and Buildings Possibly eliminate and focus on cropland rental arrangements

• Part IV: Putting Flexibility in the Cash Rent Arrangement Add info on farm program participation and current FSA interpretation of

flexible rental arrangements • Add a section on Flexing for Price, Yield, and Input Costs

Farm Machinery Lease form – William Edwards

• Publication is reviewed and ready • Committee recommended to publish it

Election of officers

• Barry Ward was elected incoming Secretary Fall meeting

• Oct 8, 2009, 8:00 am – 5:00 pm, Oct 9, 2009, 8:00 am – 12:00 pm • Exec committee will take it under advisement and determine location

Committee thanked Arlin Brannstrom for an outstanding job of hosting the meeting. Committee thanked Dwight Aakre for an outstanding job as committee chairman for the past year. Meeting adjourn

NORTH CENTRAL FARM MANAGEMENT EXTENSION COMMITTEE Spring 2009

State: Iowa

1. Staffing Changes

Type (a) Name Effective Date Area of Responsibility

Moved Retiring Change

Robert Tigner Roger Ginder Arne Hallam out, GianCarlo Moschini in

April 22 ? February

4‐county agent in SW Nebraska Co‐ops and agribusiness management Chair, Department of Economics

(a) Refers to new (N), retirement (R), change in assignment (C) or terminated (T).

2. Program Changes

Subject Matter Area Emphasis (b) Brief Description Contact Person

2008 Farm Bill Crop production costs

New Increased

Fact sheets and decision aids posted on web site. Numerous county meetings and presentations. Managing margins for 2009 crops

Edwards Hart Duffy

(b) Refers to new (N), redirected (R), increased (I), deleted (D).

3. Successful Activities

Farm lease meetings (approximately 50 county meetings, 2,500 attendees)—Field staff Attendees reported an average increase in net income of $35 per acre or $13,400 per person One‐day continuing education workshop for crop insurance agents drew 350 people

MISCELLANEOUS NOTES: Due to substantial cuts in state appropriations to Extension and the rest of Iowa State University, the Vice‐Provost for Extension (Jack Payne) announced a restructuring plan on April 30. The main points of the plan are:

1. Elimination of the five Area Director positions and the five area offices 2. Elimination of all County Extension Director positions 3. Retention of partnership fees by County Extension Councils to be used locally 4. Creation of 20 new Extension regions (in Iowa) with a regional director for each 5. Reduction of the campus Extension budget across all program areas (about 24

positions) 6. Combining 4‐H and Youth programs with Families programs

Publications (www.extension.iastate.edu/agdm)

April 2009 Livestock -- Costs and Returns:

o Livestock Enterprise Budgets for Iowa -- B1-21 • Whole Farm --Costs and Returns:

o Comparison of Transaction Costs by Market Outlet -- Decision Tool (xls) • Whole Farm -- Land Values:

o Farmland Value Survey (Realtors Land Institute) -- C2-75 • Whole Farm -- Leasing:

o Cash Rental Rates for Iowa 2009 Survey -- C2-10 • Crops -- Costs and Returns:

o Historical Corn Yields by County -- A1-12 o Historical Soybean Yields by County -- A1-13 o Corn and Soybean County Yields -- A1-14

• Crops -- Outlook and Prices: o Season Average Price Calculator -- A2-15 o Season Average Price Calculator - Decision Tool (xls)

• Crops -- Machinery: o Iowa Farm Custom Rate Survey -- A3-10 o Transferring Ownership of Farm Machinery -- A3-32

• Whole Farm -- Other: o Understanding Double Entry Accounting -- C6-33

March 2009 • Crops -- Costs and Returns:

o Making the Transition from Conventional to Organic -- A1-26 o Making the Transition from Conventional to Organic Production - Decision Tool (xls) o Managing Risk with Crop Insurance -- A1-48 o Important Crop Insurance Dates -- A1-50 o Actual Production History Crop Insurance -- A1-52 o Crop Revenue Insurance -- A1-54 o Proven Yields and Insurance Units for Crop Insurance -- A1-55 o Group Risk Plan (GRP) & Group Risk Income Production (GRIP) -- A1-58

February 2009

• Crops -- Costs and Returns: o Historical Costs of Crop Production -- A1-21

• Crops -- Outlook and Prices: o Cash Corn and Soybean Prices -- A2-11

• Whole Farm -- Leasing: o Computing a Cropland Cash Rental Rate -- C2-20 o Flexible Farm Lease Agreements -- C2-21

• Whole Farm -- Land Values: o Historic Farmland Values -- C2-72

Publications (www.extension.iastate.edu/agdm)

January 2009 • Crops -- Costs and Returns:

o Estimated Costs of Crop Production in Iowa - 2009 -- A1-20 • Whole Farm -- Costs and Returns:

o Suggested Closing Inventory Prices -- C1-40 • Whole Farm -- Land Values:

o Farmland Value Survey (Iowa State University) -- C2-70 • Crops -- Costs and Returns:

o Estimated Costs of Crop Production in Iowa - 2009 -- A1-20 o Developing Enterprise Budgets -- A1-25 o Corn and Soybean Loan Rates -- A1-34 o Marketing Loans and LDPs -- A1-38

• Livestock -- Costs and Returns: o Livestock Planning Prices -- B1-10 o Survey of Bonus Plans for Farm Employees -- C1-61

• Whole Farm -- Leasing: o Crop-Share Leasing Provisions -- C2-30

• Whole Farm -- Financial: o Financial Performance Measures for Iowa Farms -- C3-55

November 2008

• Crops -- Costs and Returns: o Commodity Programs for Crops -- A1-32 o Supplemental Revenue Assistance (SURE) -- A1-44 o SURE Payment Calculator (Supplemental Revenue Assistance) - Decision Tool (xls) o Food, Conservation, and Energy Act of 2008 Horticulture and Organic Agriculture Titles -

- A1-46 o Pricing Forage in the Field -- A1-65

• Livestock -- Costs and Returns: o 2008 Farm Bill Dairy Provisions -- B1-55

• Whole Farm -- Costs and Returns: o Farm Costs and Returns -- C1-10 o Farm Business Summary - Northwest Iowa -- C1-11 o Farm Business Summary - Southwest Iowa -- C1-12 o Farm Business Summary - North Central Iowa -- C1-13 o Farm Business Summary - South Central Iowa -- C1-14 o Farm Business Summary - Northeast Iowa -- C1-15 o Farm Business Summary - Southeast Iowa -- C1-16

• Whole Farm -- Land Values: o Farmland Value Survey (Realtors Land Institute) -- C2-75 o


State: Illinois

1. Staffing Changes


R Dale Lattz 4/30/2009 Farm management specialist

N Ryan Batts 5/1/2009 FAST coordinator/educator


2. Program Changes




Farm Economic Summits – Four day‐long program around the state, addressing current economic conditions, Largest attendance over the last ten years. FAST Workshops – Four two‐day meeting with computer lab with 20 computers. Full workshops at all locations. Farm Bill/Crop Insurance meetings – Done in conjunction with Illinois Farm Bureau, Day‐long meetings. Attendance averaged around 120 per meeting. Illinois Farm Economics Newsletters (in management section of farmdoc (www.farmdoc.uiuc.edu)) Updated 2009 Budgets: Return Projections, 2010 Cash Rents, and Planting Decisions FEFO 09‐06, 3/27/2009 Given current projections, returns for 2009 are likely to be below any returns experienced since 2000. Lower returns could place downward pressure on 2010 cash rents. Recent cost and price changes have GRIP Provides Superior Price Protection to CRC or RA FEFO 09‐05, 3/9/2009 If lower prices are a primary concern, Group Risk Income Plan (GRIP) at a 90% coverage level will provide superior protection compared to Crop Revenue Coverage (CRC) or Revenue Assurance (RA).

The ACRE Program Decision and Some Illustrative Examples FEFO 09‐04, 2/27/2009 A fundamental change in commodity title programs in the 2008 Farm Bill resulted in the creation of the new Average Crop Revenue Election Program (ACRE). 2009 Crop Insurance Changes Suggest Considering Either Grip or Enterprise Units and BE for CRC and RA‐HP FEFO 09‐03, 2/13/2009 Changes to crop insurance will lower premiums for enterprise units on CRC and RA products. The Biotech Endorsement has been expanded to include more hybrids. Fertilizer Prices Likely to Decline in 2009 FEFO 09‐02, 1/14/2009 Difficulties within the financial sector became apparent in the middle of September as the United States government grappled with responses to a worsening credit situation. This document describes the ACRE program, a choice farmers have for receiving Federal farm commodity payments. Questions and Answers About the ACRE Provision of the 2008 Farm Bill FEFO 09‐01, 1/9/2009 This document describes the ACRE program, a choice farmers have for receiving Federal farm commodity payments. This document describes the ACRE program, a choice farmers have for receiving Federal farm commodity payments. More Red Ink Expected for Hog Producers in 2008 After Experiencing Losses in 2007 FEFO 08‐22, 12/29/2008 Higher total costs mainly due to higher feed costs in 2007 resulted in Illinois hog producer profits decreased by $9.72 per hundredweight produced compared to 2006. Costs and Returns for Illinois Beef Producers in 2007 FEFO 08‐21, 12/24/2008 Total economic costs in 2007 for Illinois beef feeding enterprises exceeded total returns by $10.81 per 100 pounds of beef produced on 6 beef feeding farms. Corn Profits Versus Soybean Profits in 2009 FEFO 08‐20, 12/9/2008 Corn and soybean prices have declined as the U.S. financial crisis became apparent in the middle of September. Besides reducing profits, price changes have caused expected relative profits of 2009 corn and soybean production to change. Landlord Returns From Illinois Farmland FEFO 08‐19, 11/14/2008 Landlord’s net returns from farmland (based on typical crop share leases) reached a low point in 2001 and 2002. Net returns increased significantly the last two years. Returns Exceed Costs for Dairy Producers in 2007, Profit Margins Likely to Turn Negative in 2008 FEFO 08‐18, 10/22/2008 Higher milk prices more than offset higher costs resulting in returns exceeding total economic costs for Illinois dairy producers in 2007, according to figures summarized by University of Illinois agricultural economists in cooperation with the Illinois Farm Business Farm Management As 2009 Rental Decisions Given Volatile Commodity Prices and Higher Input Costs FEFO 08‐17, 10/15/2008 Turmoil within the financial sector has caused concerns about the performance of economies around the world.

Increased Probabilities of Crop Insurance Payments FEFO 08‐16, 10/15/2008 Recent commodity price declines have increased the probability that crop insurance products insuring revenue will make payments. Drying and Storage Costs in 2008: Comparing Alternatives with the Grain Delivery Model FEFO 08‐15, 9/27/2008 Commercial drying and storage charges for grain will be higher in 2008 than in recent years. A FAST Microsoft Excel spreadsheet called the Grain Delivery Model has been developed that compares net revenues across delivery points. Fourth Year in a Row of Double Digit Increases for Illinois Farm Real Estate Values FEFO 08‐14, 8/5/2008 According to the U.S. Department of Agriculture, the average value of Illinois farm real estate was $5,000 per acre in 2008, 15.5 percent higher than the 2007 average of $4,330 per acre. Dramatic Increases in Corn and Soybean Costs in 2009 FEFO 08‐13, 7/11/2008 Non‐land production costs for corn are projected at $529 per acre in 2009, an increase of $141 per acre over 2008 costs. Soybean costs are projected at $321 per acre in 2009, an increase of $82 per acre over 2008 costs. Marketing Briefs (in marketing section of farmdoc) Poor Convergence Performance of CBOT Corn, Soybean and Wheat Futures Contracts: Causes and Solutions, March 2009, MORR 09‐02 Empirical Confidence Intervals for WASDE Forecasts of Corn, Soybean, and Wheat Prices, January 200, MORR 09‐01 Marketing Newsletter (in marketing section of farmdoc) May 4, Corn and Soybean Prices Diverge April 27, Crop Markets React to Swine Flu April 20, Beef Producers Slaughtered By Economy April 13, More Pressure on the 2009 Growing Season April 6, Have Hog Producers Made It Through the Shadowy Valley? March 31, Friendly Reports March 23, What's Next For Soybean Prices? March 16, Corn Consumption March 9, March 31 USDA Reports March 2, Pork Producers May Still Return to Profits February 23, Corn and Soybean Basis Risk February 16, Acreage and Biofuels February 9, Focus On South America February 2, Cattle Industry Feels the Weight of the World Economy January 26, Corn and Soybean Export Progress January 20, Any More Corn or Soybean Acreage Needed in 2009? January 12, USDA Reports Send Crop Prices Lower January 5, Hog Industry May Return to Modest Profits Weather, Growing Conditions & Miscellaneous Notes: Its wet.


State: Indiana

1. Staffing Changes


Resigned N N N N

Luc Valentin Jay Akridge Ken Foster Jim Minert Nicole Oylink

Jan. 31,2009 Feb. 2009 April 2009 June 1, 2009 January 2010

Farm Management Dean of Agriculture (permanent) Department Head (permanent) ANR Program Leader E/R Farm Management


2. Program Changes


Risk Management I NC Risk Mngt Center grant on Managing Margin Risk – 5 two‐sessions via IP Video on risk mngt broadly defined. Combined efforts of Valentin, Alexander, Hurt , Gray and Patrick Materials are available on the web www.agecon.purdue.edu/extension/programs/marginrisk.asp Login: margin Password: risk2009

Corinne Alexander



Income Tax School 11 two‐day programs with about 1,000 participants – G. Patrick Bankers School and Ag Lender Clinic – F. Barnard Farming Together Workshop – C. Dobbins and A. Miller Ag. Outlook – C. Hurt and C. Alexander

4. Publications

Identification Title Date

Financial Crisis website www.ag.purdue.edu/agecon/Pages/FinancialCrisisResources.

aspx

Weather, Growing Conditions & Miscellaneous Notes: As of May 3, 5% of corn and minimal soybeans were planted (18 days behind normal). As of May 10, 2009, % of corn was planted and % of soybeans. The record for percentage of crop planted in one week in 47% ‐ probably have the capacity to break that record, but need the good weather. MISCELLANEOUS NOTES: Legislature will go into special session in mid‐June for the budget. Universities would have taken about a 2% hit from the state (3% internally) under proposed budget. General consensus is the Universities will not fare as well in special session.


State: Kansas

1. Staffing Changes


N N C C – Resigned R C – Resigned N C – Resigned C‐ Resigned N C C ‐ Resigned N N Recruiting

Chatura Ariyaratne Lydia Cox Allen Featherstone Rodney Jones Terry Kastens Norman Kinderknecht David Lambert Ryan McMillan James Mintert Kiel Roehl Bryan Schurle Matt Thielen Gabe Weeden Todd Ziegler Asst. Professor‐Livestock Marketing

01/22/08 01/05/09 10/08/08 12/15/08 05/16/09 07/31/08 07/26/09 07/31/08 05/31/09 01/04/10 09/02/08 08/05/08 10/06/08 09/22/08 In Process

Visiting Research Assistant Professor Farm Mgt Association NC KS Interim Dept. Head Assoc Professor, Livestock Prod/Mktg Professor‐Crop Production Economics Farm Mgt Association NW KS Dept. Head Farm Mgt Association NW KS Professor – Lvsk Mktg & Ext. State Leader Farm Mgt Association NW KS Changed from Dept. Head to R&T Faculty Professor‐Farm Mgt/Prod Economics Farm Mgt Association NC KS Farm Mgt Association SC KS Farm Mgt Association NW KS Asst. Professor – Livestock Marketing


2. Program Changes


Farm Transition Planning Insurance Workshops Labor Management AGR‐Lite Workshops SURE/ACRE Presentations Risk Management Using the Internet

I I R N N N

Conducted 1 additional Transition Planning Workshops and Followup The Kansas Insurance Workshop attendance increased about 50 people. Working on updating information since Sarah Fogleman left. Twelve workshops were presented in Kansas and Colorado. Incorporated SURE/ACRE into insurance and marketing programs Presenting how to use AgManager.info and the Internet in managing risks, using decision tools and RSS Feeds

Bryan Schurle Art Barnaby Michael Langemeier Art Barnaby Art Barnaby Rich Llewelyn



Risk and Profit Conference, Kansas Insurance Workshop, Ag Profitability Conferences, and the Ag Lender’s Conferences all had increased numbers from 2007. This was largely due to the economy and new farm programs. A new program was the AGR‐Lite with more than 150 people attending with 72 percent of attendees reporting much improved understanding of AGR‐Lite following the workshops. Kansas Income Tax Institutes had slightly higher attendance in 2008 with 87 percent rating the Tax Institutes above average. Farm Transition Workshops were successful with 94 percent rating them above average in the overall evaluation. The top subject matter in the Farm Transition Workshops was Managing the Workforce.

4. Publications


Agmanager.info has our updated publications. We have publications listed under the following categories:

Agribusiness, Crops, Energy, Farm Management, Human Resources, Income Tax & Law, Livestock & Meat, Policy (including 2008 Farm Bill)

These publications are promoted and made available through weekly e‐mail updates and RSS Feeds, which have recently been installed on the site.

Weather, Growing Conditions & Miscellaneous Notes: Crop Conditions Early May The participants on the 2009 Wheat Quality Council Hard Winter Wheat Evaluation Tour estimated the size of the Kansas crop to be 333.3 million bushels. If realized, that would be down from last year’s Kansas wheat production which totaled 356 million bushels. Except for a hand full of counties in Southwestern Kansas, the wheat has recovered from a dry winter thanks to April rains. However, excessive moisture in South Central and Southeastern Kansas has left the wheat in danger of attack by diseases. In addition, wheat in the southern tier of counties suffered light freeze damage. But near ideal growing conditions in late April and early May, allowed wheat plants to grow new tillers which could bring yields back to normal. Kansas wheat will be filling grain kernels over the next few weeks. That puts the wheat crop on track for harvest to begin in Kansas about the third week in June. Producers in the northeast part of the state have been planting corn, but most Kansas corn and grain sorghum producers are waiting for fields to dry out. Rain; almost always welcome in Kansas, is causing coarse grain planting to fall behind this year. Soggy soils, with more rain in the forecast, is likely to cause row crop planting to extend beyond the date when yield potential starts to decline. The delay may also cause a greater shift to soybean acres in Kansas than anticipated. Kevin Dhuyvetter


State: Minnesota

1. Staffing Changes


New search Educator & Field Rep for SW Ass’n


2. Program Changes


Commodity Marketing Winning the Game 5, Tool Time for Pre‐Harvest Marketers

Usset

Commodity Marketing Winning the Game 6, Tool Time for Post‐Harvest Marketers

Usset



What is Manure Really Worth? Determining and Maximizing the Value of Manure with Manurwkst.xls: 32 workshops held around the state between 11/08 and 4/09. Farm Transfer and Estate Planning meetings, Winning the Game, Marketing Clubs, Ag Lender Conferences

4. Publications


Lazarus Crop Cost & Return Guide, http://www.apec.umn.edu/faculty /wlazarus/documents/cropbud.pdf

October 2008

Holcomb Deferred Payment Contracts and Pre‐paid Farm Expenses October, 2008

Lazarus Energy Crop Production Costs and Breakeven Prices under Minnesota Conditions, Staff Paper P08‐11

December 2008

Lazarus Economics of anaerobic digesters for processing animal manure (eXtension web page), http://www.extension.org/pages/Economics_of_Anaerobic_Digesters_for_Processing_Animal_Manure

March 2009

Olson Average Crop Revenue Election (ACRE) Program 4/3/09

Olson ACRE vs. CCP: Data entry and Results Summary for Minnesota, 4/28/09

4. Publications


v.1.2, Excel Worksheet

Usset, Craven, Richardson

Winning the Game 5: Tool Time for Pre-Harvest Marketers.

December, 2008

Usset, Craven, Richardson

Winning the Game 5: Tool Time for Post-Harvest Marketers.

December, 2008

Craven, et. al. FINPACK, Release 5.0 <computer software> October, 2008

Becker, et. al. Farm Finance Scorecard March, 2009

Hachfeld What Does it Take to Earn a Living on the Farm Updated April, 2009

Hachfled Why Can’t Agriculture Be Like It Was in the 1970’s? Comparing a 1970’s Farm With Current Farm Returns/Cost of Living

Updated April, 2009

Holcomb and Hachfeld

Ag Income Tax Update for Farm Families April, 2009

Holcomb How the 2009 Federal Stimulus Package Will Affect Agriculture

March, 2009

Nordquist, Kurtz, Paulson, Christensen, and Froslan

2008 Annual Report of the Southwestern Minnesota Farm Business Management Association

April, 2009

Weather, Growing Conditions & Miscellaneous Notes: Weather and soil conditions have been very good in Southern Minnesota. May 10 crop progress report showed 81% of corn planted, 28% of soybeans planted, but only 24% of spring wheat planted. MISCELLANEOUS NOTES: The median net farm income for all farms in Minnesota Farm Business Management programs was $90,998, down 14% from 2007. Crop farms were down slightly, dairy down 37%, hog and beef farms had losses.


State: Missouri

1. Staffing Changes


N Lynn Hambleton Dec 2008 Regional Ag Business Specialist

C Vern Pierce May 2009 Ag Law Specialist with the Commercial Ag Program


2. Program Changes


Law I Vern Pierce is adding to our law capability by focusing on contracts and court rulings in ag (mostly environmental at this time).

Vern Pierce

Dairy I Grazing Dairies are continuing to receive increased attention in the state

Joe Horner

Environmental Issues I Air quality issues (odor, GHG, other) have become a major educational activity.

Massey


3. Successful Activities The Ag Lender Seminars were held at 12 locations in November & December. Attendance was higher than previous year. We plan to hold them again in 2009 (this will be the 30th year). The 2008 Missouri Business/Farm Income Tax Schools were held at 6 locations in October. Attendance was down slightly. We still use Mike Hardin (Oklahoma) as the major instructor and use the National Tax Workbook. Mary Sobba and other field staff have been conducting more Annie’s Program workshops over the state. They moved into a second, more advanced series on risk management with support from grant from RMA.

4. Publications


G404 (updated) Farm Land Values March 2009

G403 (updated) Farm Land Values for Missouri Counties February 2009

Weather, Growing Conditions & Miscellaneous Notes: Planting of corn and soybeans is far behind normal because of wet soils and cool temperatures. 2008 was the slowest year; 2009 is the second slowest year on record for spring crop planting.


State: Nebraska

1. Staffing Changes


C –stepping down as Dept Head

Alan Baquet July 15 Will become Director of the Professional Golf Management Program


2. Program Changes




Risk Management/Crop Insurance Workshops. This is the tenth year Kansas, Colorado and Nebraska have collaborated to conduct one‐day workshops in November in each of the three states with the same set of speakers. The primary target audience is crop insurance agents. The attendance at the Nebraska workshop was 208 and the total attendance at the three workshops was 400. In 2009 Oklahoma will join this joint effort and hold a workshop in Enid. Returning to the Farm. This is a two‐weekend series workshop held in December and January. Each session is about 1.5 days. The target audience is multi‐generation farm family units, primarily where a young family member is joining the farm business as an operating partner. This year we had 15 families participate with 60 total participants. Cornhusker Economics Management and Outlook Conferences. Four sessions were held across the state in January and February. The focus was on production costs, economic situation, market outlook and the farm program. Women in Ag Conference. This was our 24th annual conference. This was the second year the conference has been held in February. Formerly it was held in September and there was some resistance to moving it to February due to conflicts with calving season, schools athletics and potential snowy weather. However, for some people, February is preferable as September has conflicts with the approaching harvest, the beginning of the school year and high school football. From our perspective as organizers the February time works much better than September. Our attendance increased significantly this year compared to 2008 so for 2010 we will continue with the February time frame. The attendance this year was 268. Annie’s Project. Four groups were organized and completed the program this winter. Winning the Game. The two programs presented this year were “Launch Your Pre‐harvest Marketing Plan” and “ Launch and Land Your Post‐Harvest Marketing Plan. A total of 30 workshops were conducted by teams of two presenters this year with the majority of them being the Pre‐Harvest curriculum. The teaching team included six extension educators, a graduate student, Roy Smith (famer‐


marketing consultant) and Doug Jose.

4. Publications


Weather, Growing Conditions & Miscellaneous Notes: Excellent spring moisture conditions. The western part of the state received some very beneficial spring snow and rain. The Panhandle is currently not in a drought situation for the first time in a number of years. As of May 4, corn was 52% planted and soybeans were 7% planted, both of which are slightly above average for the date. Calls to the state farm hotline are running 300 to 400 per month which is higher than last year. MISCELLANEOUS NOTES: All units in the university were required to submit proposed budget cut plans for 6%, 9% and 12% plus a plan to generate 3% of state base budget in revenue. No decisions will be announced until at least the end of June until the Board of Regents approves the overall university budget.


State: North Dakota

1. Staffing Changes


C C R/C N N

Tom Wahl Dave Saxowsky Dave Lambert Joleen Hadrich Dave Roberts

March 1, 2009 March 1, 2009 July 1, 2009 August 1, 2009 August 1, 2009

Resigned from department chair Interim department chair Dept chair, Kansas State University Teaching & research: farm managementTeaching & research: economics, natural resources


2. Program Changes


Bio‐fuels and renewable energy Crops marketing Farm Bill Education Wind Energy Leases

I I N N

Ext. and Res. In renewable energy Revived program in crop marketing and risk management (www.ndsu.edu/cropeconomics/) Producer education on 2008 Farm Bill, emphasis on ACRE and SURE Landowner education on leases

Cole Gustafson Frayne Olson Dwight Aakre & Andy Swenson Ron Haugen and Dwight Aakre



Outlook Conferences for Ag Lenders: record attendance at 4 state‐wide meetings. Northwest Farm Managers: 100th anniversary education meeting Farm Bill/Outlook meetings: nine producer meetings on the farm bill and market outlook 16th Annual Crop Insurance Conference: Computerized Accounting for farm, business and home (using Quicken and QuickBooks): 5 meetings Farm Bill In‐service: 4 in‐depth training sessions on the Farm Bill were held for county Extension agents and FSA county CEDs.

4. Publications


FMPG EC‐1090 EC‐1394 Excel

Projected 2009 Crop Budgets (nine regions: northwest, north central, north east, north valley, southwest, south central, south east, south valley, and east central). Andy Swenson, Ron Haugen.

Plotting a Course 2009: Short‐term and Long‐term

Agricultural Planning Prices for North Dakota. Ron Haugen, Tim Petry, Frayne Olson, Dwight Aakre

Wind Turbine Lease Considerations for Landowners. Dwight

Aakre, Ron Haugen. ACRE spreadsheet

Dec. 2008 January 2009 February 2009

Weather, Growing Conditions & Miscellaneous Notes: North Dakota experienced considerable flooding at nearly all rivers in the state. Field work has been delayed. As of May 3, planting progress was barley – 2%, durum – 2%, spring wheat – 3%, field peas – 7% and sugar beets – 4%. MISCELLANEOUS NOTES: Web pages www.ndsu.edu/cropeconomics/ http://www.ag.ndsu.nodak.edu/aginfo/lsmkt/livestock.htm http://www.ag.ndsu.nodak.edu/aginfo/farmmgmt/farmmgmt.htm http://www.ext.nodak.edu/homepages/aedept/index.html Submitted by: Dwight Aakre


State: Ohio

1. Staffing Changes



2. Program Changes



3. Successful Activities Policy and Outlook Meetings: Fall/Winter 2008/09: ~ 7 Meetings- 526 Attendees. “Ohio Income Tax Schools,” Fall 2008: ~1250 practitioners attend one of eight two day seminars, also 150 attend one of eight Agricultural Tax Issues workshops. AEDE Extension Update: Economic Crisis and Policy Options - March 2009: ~ Live feed webcast . http://aede.osu.edu/programs/outlook/Webcast-09.pdf Farm Bill Update Meetings – 12 programs – 600 attendees.

4. Publications


AED Economics Report Series http://aede.osu.edu/resources/docs/display.php?cat=21 Ohio Cropland Values and Cash Rents 2008‐09 Low and High Yield Estimates for 2009 U.S. Corn, Soybeans,

and Wheat Estimating the Economic and Fiscal Impacts to Appalachian

Ohio Communities

4. Publications


A Balancing Act: Disproportionate Sampling of New Organic Processed Foods

Farm Bill Resources http://aede.osu.edu/people/publications.php?user=zulauf.1 ACRE Program Decision Slides ACRE (Average Crop Revenue Election) Decision Question ACRE Decision Strategy: Diversify Election of Farm Program

Suite ACRE Decision Strategy: Insurance Buy Up Option The Agricultural and Resource Law Program at OSU http://aede.osu.edu/programs/aglaw/ Andersons’ Program in Policy for Agriculture http://aede.osu.edu/programs/Anderson/ OSU Extension Enterprise Budgets http://aede.osu.edu/Programs/FarmManagement/Budgets/i

ndex.htm

Weather, Growing Conditions & Miscellaneous Notes: Wet weather has delayed fieldwork in many parts of Ohio. MISCELLANEOUS NOTES: Budget cuts at the State level have been severe for both Extension and Research (Ohio Ag Research and Development Center) causing drastic cuts and reduction in force (RIFs). Governor’ budget proposed 10.9% cut for FY2010 and 5% for FY2011 for OSU Extension. This is on top of 2 budget rescissions for FY2009 which have amounted to 10.5%. Twenty‐two county based Extension Educators were RIFed in March. Departments have been asked to cut their Extension Budgets 10%. OSU Extension Restructuring: http://extension.osu.edu/osu‐eera‐full‐plan‐3‐18‐09.pdf County based structure transitioning to area based structure. Academic departments asked to cut 20% of their Extension Budgets for 2009‐2011 fiscal period. Proposed cuts for OARDC (research station) are 5.5% for FY2010 and 5% for 2011. Budget rescissions for OARDC were 4.75% for FY 2009.

NORTH CENTRAL FARM MANAGEMENT EXTENSION COMMITTEE

Oklahoma State Report Spring Year 2009 1. Staffing Changes


N Jody Campiche January 2009 Agricultural Policy

(a) Refers to new (N), retirement (R), change in assignment (C) or terminated (T). 2. Program Changes


(b) Refers to new (N), redirected (R), increased (I), deleted (D). 3. Successful Activities

New website: agecon.okstate.edu/farmtransitions . Also, successful farm transitions workshop

series/conferences in two locations. New Beef Cattle Manual available ($17): http://agecon.okstate.edu/cattleman/order_manual.asp Annie’s Projects in three locations this spring. Interdisciplinary Beef Value Enhancement team meets bi-weekly to plan and coordinate activities,

including an updated Oklahoma Beef Quality Network program for value-added sales, a benchmark survey of current producer practices, Master Cattleman activities.

Master Cattleman continues in multiple locations. Master Cattleman project won OCES Team plus

SAEA and WAEA Outstanding Extension Program awards.

4. Publications

IDENTIFICATION TITLE DATE

Journal of American Society of Farm Managers and Rural Appraisers

Why Has the Price of Pasture Increased Relative to the Price of Cropland?

2009

Land Economics Effects of Urban Proximity on Agricultural Land Values.

2009

Journal of American Society of Farm Managers and Rural Appraisers

Controlled vs. Continuous Calving Seasons in the South: What’s at Stake?

2008

Agricultural Economics Cow-Calf Profitability and Leptin Genotyping 2009

Review of Agricultural Economics

Expansion Opportunity at Triple F Farms 2009

OCES E-913 Oklahoma Beef Cattle Manual. Sixth Edition. December 2008

Fact Sheets (AGEC) accessible at http://pods.dasnr.okstate.edu/docushare/ Quick Tips newsletters at http://agecon.okstate.edu/quicken/index.asp?type=newsletters

Master Cattleman Quarterly newsletters at http://agecon.okstate.edu/cattleman/newsletter.asp

OSU AGEC-250 The Environment for Oklahoma Agricultural Land Values, Past and Present

October 2008

OSU AGEC-251 Farm and Non-Farm Influences on Oklahoma Agricultural Land Values

October 2008

OSU AGEC-252 Urban Influences on Oklahoma Agricultural Land Values

October 2008

OSU AGEC-253 Oklahoma Agricultural Crop versus Pasture Land Values

October 2008

OSU CR-230 Oklahoma Cropland Rental Rates: 2008-09 March 2009

OSU CR-216 Oklahoma Pasture Rental Rates: 2008-09 March 2009

Agecon.okstate.edu/quicken Quicken® for Farm and Ranch Financial Records November 2009

OSU Ag Econ. Vol. 57 Quick Tips for Farm Financial Records March 2009

OSU Ag Econ. Vol. 56 Quick Tips for Farm Financial Records December 2008

Vol. 2 Master Cattleman Quarterly March 2009

Monthly contribution on Standardized Performance Analysis in Texas & SW Cattle Raisers with Stan Bevers, TAMU

January-present

OSU AGEC-255 The Economics of Gene Testing Cattle November 2008

OSU AGEC-254 Valuing Poultry Litter for Fertilizing Oklahoma Pastures and Crop Land

November 2008

Downloadable software Valuing Poultry Litter for Fertilizing Oklahoma Pastures and Crop Land

November 2008

OSU-AGEC-256 Value of Animal Waste Calculator January 2009

Downloadable software Value of Animal Waste Calculator January 2009

Oklahoma Beef Cattle Manual December 2008

Brochure Basic Biofuels Information Guide March 2009

Miscellaneous Notes: From Ron Hays OklahomaFarmReport.com (5/7/09) “Worst Oklahoma Wheat Crop in a Half Century. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ The number is either 77.5 million bushels or 78.12 million bushels, depending on which method of prognostication you choose. Two numbers came out of the Wednesday morning Oklahoma Grain and Feed Association report session of wheat production all across the state. The first number that was reported was the total of the eight regions of the state. Those reporters from across the state predicted a cumulative 3,783,000 acres would be harvested this year, with a total production of 78.12 million bushels of wheat. After the audience heard the reports, and based on their knowledge of the wheat crop conditions, the consensus of the audience at the Grain and Feed Association meeting came in slightly smaller at 77.5 million bushels of production.

Either of those production totals would put the 2009 crop at less than half of the 2008 crop of 166,500,000 bushels, and it would be the worst crop in more than fifty years across the state, with only the almost total wipeout annual production in 1955 being smaller- the crop that year totaled just 24 million bushels.

We have extensive coverage with multiple interviews that you can listen to on our website, www.OklahomaFarmReport.Com. We talked to several of the presenters from the Wednesday session held at the annual meeting of the Oklahoma Grain and Feed Association in Oklahoma City. We also talked to Roger Gribble of Enid who was helping coordinate the overall presentation for his perspective as well as Dr. kim Anderson, our grain marketing guru to get some perspective on what all of this means from a marketing viewpoint.

One comment made by Kim was most interesting. He contends that if we had a normal "average" crop in Oklahoma and Texas, wheat prices right now would probably be fifty cents to as much as a dollar cheaper than they are right now- so the notion that the market doesn't care that the Oklahoma(and Texas) wheat crop is hurt but Kansas looks okay and the prices are not going up is wrong. The market has adjusted for that lost production already. “

Submitted by: Damona Doye


State: South Dakota

1. Staffing Changes


(a) Refers to new (N), retirement (R), change in assignment (C) or terminated (T). Douglas Richard Franklin lost his courageous 5-yr. battle against cancer on April 14, 2009. His past 21 years were spent teaching agricultural economics, primarily farm and ranch management and advanced farm management. Dr. Evert Vandersluis has been named department head ending search begun October 2007.Three active searches are currently on-going; General Economics, Resource Economics and Finance. All positions are 70% teaching / 30% research. Expect offers to be made soon for general economics and resource economics positions. Finance search may be re-advertised.

2. Program Changes


No major program changes



Standard package of regional extension programs: Winning the game, Annies Project, Sassie Project, Farm Estate Planning and Management Transfer

4. Publications


South Dakota Agricultural Real Estate Market information forthcoming soon

ECONOMICS COMMENTATOR Issue Title Author(s) Date

No.507 Economics Impact of Agriculture on South Dakota Gary Taylor Apr. 16, 2009

No.506 Insuring Corn, Soybeans, and Wheat Yield Ratios and Income

Matthew Diersen Tia Dodson

Feb. 27, 2009

No.505 Economic Outlook Scott Fausti & B. Adamson

Feb. 12, 2009

No.504 Return To College Education Bill Adamson Dec. 31, 2008

No.503 Causality and Granger Causality Dependency on the Ethanol Industry

Jing Li & Y. Hamda

Dec. 30, 2008

No.502 Solstice Surge The Polish‐American Extension Project

John A. Sondey & G. Warmann

Dec. 10, 2008

Weather, Growing Conditions & Miscellaneous Notes: Late Spring, farmers hurrying to get caught up with planting. Have not yet seen any acres intended for corn being planted to soybeans although many farmers are considering gong back to traditional crop rotation enterprise mix – about 50 / 50 corn and soybeans MISCELLANEOUS NOTES:


State: Wisconsin

1. Staffing Changes


N Victor Cabrera 8/31/2008 Dairy Farm Management (Housed in Dairy Science Department)

R Ed Jesse 3/1/2009 Dairy Marketing


2. Program Changes


Ag Econ department planning to discontinue teaching farm management course – to be replaced with an agri‐business management title. (Paul Mitchell)



Standard package of regional extension programs: Annies Project, Farm Estate Planning and Management Transfer. Farm & Industry Short Course enrollments holding steady. Quickbooks introductory seminars.

4. Publications


"Agricultural Employment Guidelines, 2009" Ken Barnett, Extension Educator, Center for Dairy Profitability. Includes State & Federal laws and provisions regarding employment, May 2009.

"Wisconsin Agricultural Land Prices, 2001-2008" / Arlin Brannstrom. University of Wisconsin

Using Farm Records Effectively for Business and Financial Mangement / Arlin Brannstom, UW

The Volatile Ag Economy - Management Matters / Kevin Bernhardt, UW-Platteville, Center for Dairy Profitability, March 2009. POWERPOINT Presentation.

Ag & Applied Economics Staff Papers: http://www.aae.wisc.edu/pubs/sps/

Weather, Growing Conditions & Miscellaneous Notes: Cool spring with normal to above normal moisture. Planting progress is good. Several ethanol plants operating out of bankruptcy which may affect local basis numbers.

MISCELLANEOUS NOTES: Two years of relatively good milk prices have been followed by an extremely severe drop. Milk prices have gone from more than $18.00 to less than $10 in the past six months. We anticipate continued economic stress throughout 2009 and will be scheduling more financial decision making workshops for difficult times this programming season. The structure of the industry continues to change as well. Local new just covered the permitting process for a 7,000 cow dairy near Rosendale, WI (about half way between Madison and Green Bay). We now have more than a bimodal distribution of dairies with 40 % of milk produced on farms with more than 200 cows and 40% produced on farms with less than 100 cows. AJB

1

Outlook For Milk Prices2009 & 2010

By Bob Cropp, Professor EmeritusUniversity of Wisconsin-Madison

May 12, 2009

Market and Support Prices for Milk

19.00

20.00

21.00

22.00

Market Price

Market price is Federal Orderminimum price for milk used tomanufacture cheese

12.00

13.00

14.00

15.00

16.00

17.00

18.00

$/C

wt

8.00

9.00

10.00

11.00

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Support Price

2

Dairy Outlook for 2009

Two years of record milk prices—2007 and y p2008 will now be followed by milk prices not seen since the depressed prices of 2000 -2003.

But, one difference, feed prices are higher than 2000 -2003

Perhaps a quick review on what drives farm milk prices may be helpful in understanding these price changes and what may happen in 2009.

• Minimum milk plant pay prices for milk are regulated monthly by federal milk marketing orders.

• USDA sets monthly plant pay prices for each use of milk:Class IV: butter and nonfat dry milkyClass III: CheeseClass II: Soft products-ice cream, yogurt, creamsClass I: Beverage milk

3

A Product Price Formula is used:

• Price for milk = (Product price – cost to make product) X yield of product per 100 pounds of raw milk.

• For Class IV: the market price of nonfat dry milk and butter.

• For Class III: the market price of cheese, dry whey and butter

• For Class II: $0.70 added to advanced Class IV• For Class I: The higher of an advanced Class IV or

Cl III i diff ti lClass III price + a differentialUSDA, NASS survey of milk plants’ selling prices

for these products is done each Friday and used in these formulas.

Dairy producers actually get paid a price per pound of milk components marketed.

• Protein price per pound: Based off of cheddar p p p ased o o c eddacheese and butter prices

• Butterfat price per pound: Based off of the butter price.

• Other solids price per pound: Based off of dry whey price.

The Class III price is actually the sum of the value of protein, butterfat and other solids price in 100 pounds of standard test milk.

4

Impact of dairy product price change on Class III price:

A 10 cent change per lb. in: Change in Class IIIg p g

Cheese $0.97

Dry whey $0.58

Butter $0.05

Jan. – Jun. 2008 averaged $2.43 higher than 2007; Jul. – Dec. averaged $3.13 lower.Average 2007 = $19.27; average 2008 = $18.92, $0.35 lower.

5

Wisconsin All Milk Price

2008 2009 DifferenceJ $21 10 $13 20 $ 90January $21.10 $13.20 - $7.90

February $19.20 $11.50 - $7.70

March $19.20 $12.30 - $6.90

April $18.40 $12.50 - $5.90

Farm level milk prices have dropped sharply due to:

• Sharp drop in cheese, butter nonfat dry milk and dry whey pricesdry whey prices.

• This drop in dairy product prices due to:- Not because of a lot more milk being produced.- But rather (1)softness of domestic demand

d (2) d li i d i t th lt fand (2) decline in dairy exports; the result of economic problems in the U.S economy and world economy.

6

CME Block Cheddar Cheese Price

2.00

2.10

2.20

2.30

2.40

1.20

1.30

1.40

1.50

1.60

1.70

1.80

1.90

$/Lb

0.80

0.90

1.00

1.10

1/2/03

4/2/03

7/2/03

10/2/

031/2

/044/2

/047/2

/04

10/2/

041/2

/054/2

/057/2

/05

10/2/

051/2

/064/2

/067/2

/06

10/2/

061/2

/074/2

/077/2

/07

10/2/

071/2

/084/2

/087/2

/08

10/2/

081/2

/09

Source: USDA-AMS

High of $2.285 May 2008; low of $1.04 Jan.2009, Mar. 20th $1.29, May 4th $1.15

High of $1.758 in Oct. and low of $1.11 in Dec., May 4th $1.23

7

Dry whey prices have been running $0.15 to $0.17, less than the $0.1991 toMake it, resulting in a negative “other solids price” being paid; May 1st. $0.21 - $0.23

Central Nonfat Dry Milk Price

2.00

2.20

2.40

1.00

1.20

1.40

1.60

1.80

$/Lb

Source: USDA-AMS

0.60

0.80

May 1st. $0.85 - $0.87

8

CCC support price vs. market price

Market Price/Lb

CCC Support Price/Lb

Product Market Price/Lb

CCC Support Price/Lb

Product

$1.085$1.10Cheddar barrels

$1.$1.1340# cheddar cheese

Price/Lb. 03/09/09

Price/Lb.

$1.$1.10Cheddar barrels

$1.1500$1.1340# cheddar cheese

Price/Lb. 05/04/09

Price/Lb.

$0.85 - $0.87$0.80Nonfat dry milk

$1.2300$1.05Butter

$0. - $0.$0.80Nonfat dry milk

$1.$1.05Butter

CCC Purchases:

• CCC purchasing nonfat dry milk from the W t i O t b 2008West since October 2008

• CCC purchasing butter from West January & February 2009, however, no purchases since thensince then.

9

- 0.1%

2007 9.189 million head, +0.5%; 2008 9.315 million head, + 1.4%

Dairy cow slaughter

January – April 11th up 11.4

Recent weeks up 5% toDown 5%

7Th round of CWT will kick in June/July

10

2006, 19,895#, +1.8%; 2007, 20,204#, +1.6%; 2008, 20,340# adjusted, +0.7%

2006, 181.782 B#, +2.7%; 2007, 185.654 B#, +2.1%; 2008, 189.469 adjusted, +2.1%

11

2009 Milk ProductionPercent Change From 2008

January March

Milk cows 9.314 million+0.4%

9.287 million-0.1%

Milk per cow 1,732 pounds+0 6%

1,768 pounds0 2%+0.6% -0.2%

Total milk production

16.135 billion pounds, +1.0%

16.416 billion pounds, -0.3%

Milk Production: March 2009 vs. March 2008 State Milk Cows Milk Per Cow Total Milk Iowa -0.5% 0.0% -0.5% Minnesota +1.1% +0.9% +2.0% Wisconsin +0.4% +1.5% +1.9% New York -0 5% -1 2% -1 7%New York -0.5% -1.2% -1.7%Pennsylvania -2.0% -0.6% -0.3% Michigan +2.6% +1.1% +3.7% Idaho +1.7% -4.0% -2.4% California -1.1% -2.8% -3.8% New Mexico -2.0% +6.0% +3.8% Arizona +2.2% -4.7% -2.5% Texas +5 4% +2 8% +8 4%Texas +5.4% +2.8% +8.4%Kansas +6.1% +1.7% +7.8% Florida -3.3% +1.5% -2.0% Missouri -1.8% +1.5% 0.0% Of 23 states: 13 had fewer or no more cows; 10 had no increase or less milk per cow; and 13 had no increase or less total milk.

12

Dairy Product Sales Percent Change From Previous Year

Product Dec. – Feb. 2008/09 Jan. – Dec. 2008 Butter

+1.6% +12.6%

American Cheese

+1.0% +2.6%

Other Cheese

-4.3% -2.0%

Nonfat Dry Milk

+4.4% +12.3%

Fl id Milk 1 1% 0 2%Fluid Milk

-1.1% -0.2%

Commercial disap.

-0.9% +2.3%

Source: USDA, AMS

U.S. Sales of Fluid Milk Products: 2009 Percent Change From Previous Year

Product January Sales February Sales Whole Milk

-1.3% +1.1%

Organic Whole -2.6% +0.0%gMilk 2% Milk

+3.2% +1.1%

1% Milk

+4.2% +1.1%

Skim Milk

+1.3% -1.1%

Organic Fat-reduced Milk

-4.7% +1.4%

Total Fluid Products +0.3% +2.1% For all of 2008: Organic Whole Milk +23.0%, and Reduced-fat +19.7% Source: USDA, AMS

13

Retail Prices of Dairy Products Month/year All

Food Dairy

ProductsWhole Milk

Cheese Butter

Dec 2008 +5 9% +2 7% 4 4% +8 4% +8 1%Dec 2008

+5.9% +2.7% -4.4% +8.4% +8.1%

Jan 2009

+5.3% +1.3% -5.9% +5.5% +4.9%

Feb 2009 +4.8% -1.7% -11.7% +2.7% -0.6% Mar 2009 +4.4% -3.1% -14.7% +1.3% +1.9% Source: CPI and BLS

Restaurant and Food Service important to cheese & butter

• Consider: Cheddar biscuits at Red Lobster; grated parmesan mixed with chicken castellinagrated parmesan mixed with chicken castellina at Olive Garden; cheese chili toppings at Texas Roadhouse.

• About 60% of cheese sold in restaurants and food service and majority of butter.

• Restaurant Performance Index compiled by• Restaurant Performance Index, compiled by National Restaurant Association, fell to a record low in November 2009

14

U.S. dairy exports were growing in 2006 through the 3rd quarter of 2008: Reasons:

1. Weak U.S. dollar2 G i ld2. Growing world economy3. Growing world demand for dairy products and

milk proteins.4. Milk production problems in Australia and New

Zealand.5. EU ceased export subsidies

Why the slow down in dairy exports?

1. Some strengthening of the U.S. dollar2 I l ld k t b A t li2. Increase supply on world market by Australia,

New Zealand, Argentina, Brazil and EU3. EU re-instated export subsidies4. Weakening of world economy5. Melamine issue in China6. Credit issues7. World prices too low for commercial exports

15

U.S. Cheese Exports, 2007 and 2008

12

13

14

7

8

9

10

11

1,00

0 M

etric

Ton

s

2008

2007

4

5

6

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Source: USDA-FAS

U.S. Nonfat Dry Milk/SMP Exports, 2007 and 2008

40

45

50

2008

15

20

25

30

35

1,00

0 M

etric

Ton

s

2007

0

5

10

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Source: USDA-FAS

16

4th quarter 2008 dairy exports vs. 4th quarter 2007

Nonfat dry milk -14.5%yDry whey -19.2%

Cheese -6.1%Butter -37.4%

17

World and U.S. product pricesDollars Per Pound

U.S. PriceWorld Price* U.S. PriceWorld Price*

$1.2300

$1.1500

$2.04 (July) $1.17

$2.49 (Jan.) $1.11

Butter

Cheddar cheese

May 4, 20092008 High Apr. 18, 2009Product

$1.

$1.

$2.04 (July) $1.

$2.49 (Jan.) $1.11

Butter

Cheddar cheese

May 2008 HighProduct

$0.85 - $0.87

$0. - $0.27

$1.76 (Feb.) $0.97

$0.45 (May) $0.24

Nonfat dry milk

Dry whey

$0. - $0.8

$0.21 - $0.

$1.76 (Feb.) $0.9

$0.45 (May) $

Nonfat dry milk

Dry whey•EU price for butter, nonfat dry milk and dry whey; Oceania price for cheese•Source: USDA-FAS

U.S. Dairy Exports: Pounds, percent of production and percent change from 2007

Product Million Lbs.2008

Change from 2007

Percent of production

NDM/SMP 863 +52% 46%NDM/SMP 863 +52% 46%

Cheese 290 +32% 3%

Butterfat 197 +125% 12%

Whey protein 737 20% 28%Whey protein 737 -20% 28%

Lactose 409 +2% 55%

18

Percent of US Milk Production Exported(Total Solids Basis)

1997= 4 5%1997 4.5%2005 = 8.3%2006 = 9.3%2007 = 9.5%2008 = 10.8%

Major U.S. Customers 2008:

Mexico $925 millionSE A i $741 illiSE Asia $741 millionCanada $487 million

Middle East/North Africa $447 millionJapan $208 million

China/Hong Kong $196 milliong g $Caribbean $163 million

South Korea $101 million

19

U.S. Dairy Exports: February 2009 vs 2008 Product Tons % Change Nonfat dry milk/skim milk powder

12,629 - 66%

Cheese 8,411 - 22% Dry whey 15,961 + 15% Whey protein isolate 1,014 + 8% Whey protein concentrate 10,029 - 4% Total whey proteins 27,003 + 7% Butterfat 2,003 - 73% Lactose 14,625 -16% ,Food preps 5,826 - 11% Whole milk powder 639 - 79% Ice cream 1,667 - 6% Value of shipments= $156.9 million, down 57%, lowest in two years. Value down 70% to SE Asia, down 76% to Middle east/North Africa, down 59% to Mexico

January & February Exports: 2009

As a percentage of product production:NDM/SMP = 24%NDM/SMP 24%

Whey proteins = 44%

Lactose = 56%

Cheese = 2.3%

Butter = 2.6%

20

Estimate U.S. Dairy Exports for 2009

• U.S. Dairy Export Council: D 27% t 40%Down 27% to 40%

• USDADown 53% on milk fat basisDown 29% on a skim milk basis

Impact of dairy trade

Percent Increases in

Equaled to Billion Pounds

Decrease in dairy trade

Percent Increases in

Equaled to Billion Pounds

Decrease in dairy trade

3 0%5 730%

2.5%4.7525%

Increases in domestic milk

supply

Billion Pounds of Milk

dairy trade

3 0%5 730%

2.5%4.7525%

Increases in domestic milk

supply

Billion Pounds of Milk

dairy trade

5.0%9.550%

3.0%5.730%

5.0%9.550%

3.0%5.730%

21

Dairy Product Production: Mar. 2009 vs. 2008

• Butter -4.4%• American cheese +5 9%• American cheese +5.9%• Cheddar cheese +3.1%

• Mozzarella -1.5%• Total cheese +4.3%

• Nonfat dry milk +0.2%Ski ilk d 29 0%• Skim milk powder -29.0%

• Dry whey -5.7%• WPC -5.6%

24

What is the outlook for milk prices the remainder of 2009 and for 2010?

• There is a 100% probability milk prices will improve as the year progresses and further price improvement in 2010 as2010 as:

- Dairy producers adjust to low milk prices, decreasing cows and total milk production.

- Domestic demand slowly grows and dairy exports improve slowly, especially in 2010.

• But there are major disagreements as to how much prices will improve.p p

• History tells us that dairy product prices and farm level milk prices can change a lot with relatively small changes in either and/or both milk production and sales

2009 OutlookMilk cow numbers:

• Started the year with 9 330 million head 0 5%• Started the year with 9.330 million head, 0.5% higher

• Low milk prices and relatively high feed prices will encourage dairy cow slaughter—01/09 – 04/11/09+ 11.4% above year ago.

• Adequate supply of replacement—Jan 1st 4.41 million head; 2.91 million to calve within 12

USDA has cows down 1.3% to 9.194 million head

;months; 47.3 per 100 milk cows

• 7th round of CWT • My estimate: average number for year down 1.0%

to 9.222 million head.

25

2009 Outlook continued

Milk per cow:- Relatively high feed prices and poor returns- Relatively high feed prices and poor returns over feed costs will continue to dampen milk per cow; also further decline in use of rBST.

- My estimate: +1.0% to 20,543; +0.7% not adjusted for leap year.

- USDA has production at 20,396, up 0.5%

2009 Outlook continued:

Total milk Production:Total milk Production:- My estimate:20,545# per cow X 9,222,000 cows = 189.5 Billion Lbs.

-0.2% adjusted for leap year-0.3% not adjusted

USDA has 187.8 Billion Lbs. , -1.2% not adjusted

27

But, prices will continue to receive downward pressure from domestic sales and exports.Domestic sales:

- Economy will remain sluggishRestaurant sales sluggish negative for butter and cheese- Restaurant sales sluggish—negative for butter and cheese

- More home meals could help beverage milk sales- Lower wholesale and retail prices a positive- Credit crunch—carry less inventory

Dairy exports:- Estimated to decrease as much as 25% to 35% from 2008- Weak global economy- Increases world supply from Australia New Zealand ArgentinaIncreases world supply from Australia, New Zealand, Argentina, Brazil, EU—EU exports subsidies reinstated- Impact of China’s melamine crisis- Stronger dollar- NMPF CWT export assistance will be active.- Credit crunch to finance imports

Retail Dairy Product Prices

• Will continue to decline in 2009Average 5% to 6% lower than 2008

• Plus retail specials and promotions will help sales.

• Plus lower prices will encourage restaurants to use more dairy products

28

Wholesale Dairy Product Prices: 2009 Dollars Per Pound: Monthly& Quarterly Averages

Quarter 40# Cheddar cheese

Butter Dry whey Nonfat dry milk

Jan. – Mar. $1.833 to $1 2455

$1.1096 to $1 1770

$0.1578 to $0 1705

$0.8313 to $0 8504 $1.2455

Aver. $1.1820

$1.1770Aver. $1.1321

$0.1705Aver. $0.1648

$0.8504 Aver. $0.8412

Apr. – Jun.

$1.18 to $1.30 Aver. $1.23

$1.20 to $1.25 Aver. $1.23

$0.21 to $0.23 Aver. $0.22

$0.86 to $0.87 Aver. $0.87

Jul. – Sept .

$1.35 to $1.50 Aver. $1.43

$1.30 to $1.35 Aver. $1.32

$0.24 to $0.29 Aver. $0.27

$0.89 to $0.94 Aver. $0.92

Oct. – Dec.

$1.55 to $1.68 Aver. $1.63

$1.36 to $1.40 Aver. $1.39

$0.30 to $0.32 Aver. $0.31

$0.95 to $0.95 Aver. $0.95

Year Average $1.37 $1.27 $0.24 $0.89 2008 averages: Cheese = $1.8558; Butter = $1.4631; Dry Whey = $0.2454;

Nonfat Dry Milk = $1.2995

Class III, Class IV and U.S. Average All Milk Prices for 2009: Dollars Per Hundredweight

Quarter Class III Price Class IV Price U.S. All Milk Price

Jan.-Mar. $9.31 to $10.78

$9.45 to $9.64 Aver. $9.56

$$11.60 to $13.30$10.78

Aver. $10.18 Aver. $9.56 $13.30

Aver. $12.23 Apr. – Jun. $10.00 to

$11.25 Aver. $10.60

$9.80 to $10.60 Aver. $10.30

$11.70 to $12.45 Aver. $12.00

Jul. – Aug. $11.80 to $13.55 Aver. $12.50

$11.00 to $11.65 Aver. $11.30

$13.00 to $14.75 Aver. $13.95

Sept.- Dec. $14.10 to $15.45 Aver. $14.90

$11.75 to $11.95 Aver. $11.85

$15.30 to $16.65 Aver. $16.10

Yearly Average

$12.80 $9.60 $13.50

2008 averages: Class III = $17.44; Class IV = $14.65; U.S. All Milk = $18.32

29

Cropp’s forecast & USDA’s forecast for 2009Dollars Per Hundredweight

Cropp’s USDA’s

Class III Price: $12.80 $10.65 to $11.15

Class IV Price: $9.60 $9.95 to $10.55

U.S. All Milk Price: $13.50 $11.85 to $12.35

MILC Payments in 2009

February $1.51y

March $2.01

April estimate $1.60p $

Payments will decline here out

30

Could actual dairy product prices and milk prices turn out higher or lower?Absolutely—we know that prices change with relatively

small changes in either and/or both milk production and salessales.

Critical factors will be milk per cow (weather can play a roll here), number of cows, domestic sales and exports.

It seems each year we have surprises—in 2007& 2008 higher than expected prices; in 2009 thus far lower thanhigher than expected prices; in 2009 thus far lower than expected prices.

As a result, managing price risk is an absolute.

32

Looking a head to 2010• Dairy product prices and milk prices will average higher

than 2009.• The number of milk cows may stabilize; milk per cow

increase 1% plus; total milk production increase 1% toincrease 1% plus; total milk production increase 1% to 1.5%

• Not major changes in feed costs; possibly lower hay prices—thus, cost of production slightly lower.

• Domestic sales increase 1% to 1.5%• Some recovery in dairy exports, especially nonfat dry

milk and milk proteins.• But, so much can happen between now and end of 2010

Wholesale Dairy Product Prices: 2010 Dollars Per Pound

Quarter 40# cheddar cheese

Butter Non dry milk

Dry whey

Jan. – Mar.

$1.60 $1.35 $0.95 $0.23

Apr. – Jun.

$1.65 $1.45 $0.98 $0.25

Jul. – Sept.

$1.75 $1.50 $1.05 $0.35

Oct. – Dec.

$1.80 $1.60 $1.00 $0.32

Yearly Average

$1.70 $1.48 $1.00 $0.29

33

Class III, Class IV & U.S. All Milk Prices: 2010 Dollars Per Hundredweight

Quarter Class III Price

Class IV Price

U.S. Average All Milk

Price Jan. – Mar.

$14.20 $11.75 $15.40

Apr. – Jun.

$14.85 $12.40 $16.00

Jul. – Sept.

$16.35 $13.25 $17.55

Oct. – Dec.

$16.75 $13.20 $17.95

Yearly Average

$15.60 $12.65 $16.75

Probability of 2010 forecasted prices:• With the degree of financial stress on dairy

producers in 2009 and the level of domestic sales and some improvement in exports thesales and some improvement in exports, the probability is very high prices will be at least this high.

• The probability is also quite high that prices could turn out higher.

• Could we see $20 milk in 2010? It is definitely a possibility.

Development of Bioenergy Feedstocks:A Case Study of Switchgrass

Michael CaslerUSDA-ARS

Dairy Forage Research CenterMadison, WI

U.S. Dept. of Energy, 1992

• “… to identify the best varieties and managementpractices to optimize productivity, whiledeveloping an understanding of the basis for long-term improvement through breeding andsustainable production in conventionalecosystems.”

• Two model species– Switchgrass, Panicum virgatum (herbaceous)– Popular, Populus (woody)

Switchgrass Publications inAGRICOLA Database, 1980-2006AGRICOLA Database, 1980-2006

Initiation of DOEFeedstock Program

Renewal; Addition ofNew Collaborators

DOE FeedstockProgram Killed

Initiation of USDA-ARSFeedstock Program

Sanderson et al. (2007)

Research Accomplishments

• Harvest management and timing• Nitrogen fertilization rates• Cultivar evaluations, classification, and

geographic adaptation• Genetic improvements and new cultivar

development• Genetic diversity and gene pools• Production economics

Broad Adaptation:Geography, Habitats, Climate

Common HabitatsTallgrass prairie

SavannaOak/pine barrensForest margins

Marginal wetlands

Native plant with broad public and commercial appeal.

Multifunctional plant:High biomass yieldsLivestock grazingSoil conservationPrairie restoration

Gulf CoastremnantDryland

remnantLowland Plains

remnant

The Spread ofSwitchgrass FollowingRecession of thePleistocene Glaciation~11,000 years ago.McMillan (1959, 1962)

Switchgrass Diversity• Upland type

– Found from Texas to Canada– Reported chromosome numbers from 2n=2x=18

(diploid) to 2n=12x=108; 2n=4x=36 and 2n=8x=72are most common. Is this really true?

• Lowland type– Typically found from Mexico to Nebraska.– Chromosome number: 2n=4x=36 (no known variants)

Lowland vs. Upland Types• Lowland cytotypes…

– Greater plant height and biomass yield.– Fewer tillers, greater tiller diameter, more phytomers.– Lower cold/freezing tolerance.– Greater heat tolerance.– Up to 2-3 weeks later in heading, anthesis, mature seed.– Adapted to longer growing season with reduced photoperiod.

• Moving southern populations north provides a “quick fix”to boost biomass yields, provided that they survive.

Biomass yield: Types & Origins

Degrees North Latitude

Rel

ativ

e B

iom

ass Y

ield

,D

evia

tion

from

the

mea

n(M

g/ha

)

USDA Hardiness Zones

Temperature (5oC increments)Daylength

Bailey’s Ecoregions

Soil typePrecipitationHistorical native vegetation

Plant AdaptationRegions of the USA

USDA Hardiness Zones

Bailey’s Ecoregions

Vogel et al., 2005

TemperaturePhotoperiod

Soil typePrecipitation

ZAPS Study

SwitchgrassAdaptation Zones

Rainfall

Temp.Daylength

Survival vs. Latitude of OriginNorthern populations are best at northern locations.

Southern populations are best at southern locations.

Ecoregions (East vs. West):Ground Cover (% Survival)

Evaluation LocationsPrairie Eastern

Population origin Parkland Forest

------- % -------Prairie Parkland (West) 89** 87**Eastern Forest (East) 80 83

(10.6%) (4.8%)

34 Remnant Prairie Sites (6 Regions)

11 Cultivarsrepresenting 6 PlantAdaptation Regions

DNA Marker DiversityDNA Marker Diversity

34 Prairie-Remnant Populations

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

-0.6 -0.4 -0.2 0 0.2 0.4 0.6Dimension 1

Dim

ensio

n2

Gulf CoastremnantDryland

remnantLowland Plains

remnant

Prevailing Westerly Winds

Mixingzones

Mixingzones

Effective Gene Pools of Switchgrass

Conservationand restoration

Cultivardeployment

Target regionsfor breeding

Harvest ManagementVogel et al. (2002)

Harvest interval (late June to late August)

Bio

mas

s Yie

ld (M

g/ha

)

Nitrogen FertilizationVogel et al. (2002)

Nitrogen Applied (kg/ha)

Bio

mas

s Yie

ld (M

g/ha

)

Mead, NE

Ames, IA

Above this point, N application rate exceededN removal rate, increasing NO3-N in the soil.

Northern Plains Switchgrass Field ScaleProduction & Economic Trials 2000-2005

31”-33”AnnualPrecipitation

15”-17”AnnualPrecipitation

15-20 acre(6-9 ha)fields

Cooperatingfarmers paidto managefields asbiomassenergy crops.

Schmer et al. (2008); Perrin et al. (2008)

Energy Production in the Great PlainsOn-farm Economic Analysis

• Field shown at right had a 5-yraverage cost of $30/U.S. tonswitchgrass biomass includingland costs.

• Average costs for 10 farms was$49/ton; two experiencedfarmer’s costs were $36/ton.

• Each big bale (right) represents a50 gallon barrel of ethanol at 80gal/ton & farm gate cost of$0.45/gallon.

• Bottom line – switchgrasseconomically feasible bioenergycrop.

Switchgrass field in NE South Dakota in2005. Yields averaged 4 tons/acre (9 Mg/ha).

Ethanol Yield of Managed Switchgrassvs. Low-input Prairies (LIHD, LI-SW)

Tilman et al., 2006Tilman et al., 2006

Net Energy Yield of Managed Switchgrassvs. Low-input Prairies (LIHD, LI-SW)

Tilman et al., 2006Tilman et al., 2006

New “Biofeedstock” CultivarsCultivar South North North

Blackwell 9.28 8.93 8.39Cave-in-Rock 9.26 9.13 9.22Pathfinder 8.12 8.51 8.39Sunburst 8.31 9.20 10.44St. Croix 9.30 9.40 (2%)Hiawatha - - 11.18 (7%)

Hybrid Vigor & Heterotic Groups

Group Biomass yield (Mg/ha)

Lowland parent 7.1Upland parent 6.1Lowland x Lowland 7.3Upland x Upland 6.2Lowland x Upland 9.4 (32% heterosis)

Self-sterileCross-fertile


Controlled hybridization

Production of F1 Hybrid Grass Cultivars

Clonal Propagation Clonal Propagation

Progeny exhibit heterosis

Seed Production Field

A B A BA B A BA B A BA B A BA B A B

Plants intermated by natural wind pollinationBulk combine harvest, all seed F1 seed

F1 Hybrid Cultivar

A BF1

Vogel et al., 2007

TransgenicCross-fertileMale-sterile


Controlled hybridization

Production of F1 Transgenic Grass Cultivars

Clonal Propagation Clonal Propagation

Progeny exhibit heterosis

Seed Production Field

A B A BA B A BA B A BA B A BA B A B

Plants intermated by natural wind pollinationBulk combine harvest, all seed F1 seed

F1 Hybrid Cultivar

A BF1

Vogel et al., 2007

Herbage/Cellulosic Fermentation SystemsHay, Silage, or Fresh Herbage

Consumption by Ruminants

Mastication & Rumination

Fermentation by bacteria

Manure

Grinding/Pelleting/Processing

Pretreatment

Fermentation by yeast

Unfermentable residue

Lignified cell walls

VFAs EtOH

Animal Products Energy

The Value of New Cultivars:‘Trailblazer’ Switchgrass

• Genetic increase in IVDMD: 40 g/kg• Increase in beef production: 67 kg/ha• Increased profit: $ 100 US/ha

• Potential translation to bioenergy conversion– Increased ethanol yield/ha– Reduced need for expensive pretreatments– More rapid throughput/processing for pretreatment and

fermentation steps

Natural Genetic Variation forLignin and DigestibilityLignin and Digestibility

Vogel et al. (2005); Casler et al. (2002)

Adjacent dots representsuccessive cycles of selection

for increased IVDMD

-1 g/kg Lignin

+6.4 g/kg IVDMD

Predicting IVDMD and EtOH from Lignin

Stem Anatomy of High-lignin vs.Low-lignin Switchgrass

Stem Lignin = 6.3%IVDMD = 49%

Ethanol yield = 70 g/kg DM

Stem Lignin = 5.1%IVDMD = 56%

Ethanol yield = 77 g/kg DM

Vogel et al. (2005)

CollaboratorsK.P. Vogel, USDA-ARS, Lincoln, NEH.G. Jung, USDA-ARS, St. Paul, MNR.B. Mitchell , USDA-ARS, Lincoln, NEJ.D. Berdahl, USDA-ARS, Mandan, NDA.R. Boe, SDSU, Brookings, SDN.J. Ehlke, U of MN, St. Paul, MNR. Kallenbach, U of MO, Columbia, MOC.P. West, U of AR, Fayetteville, ARE.C. Brummer, U of GA, Athens, GAC.M. Taliaferro, OSU, Stillwater, OKR. Wynia, NRCS, Manhattan, KS

J.H. Cherney, Cornell U, Ithaca, NYE. Buckler, USDA-ARS, Ithaca, NYD. Costich, USDA-ARS, Ithaca, NYS.M. Kaeppler, U of WI, Madison, WIN. de Leon , U of WI, Madison, WIC. Weil, Purdue U, West Lafayette, INL. Paul, U of IL, DeKalb, ILS. Bonos, Rutgers U, New Brunswick, NJC. Ernst, Ersnt Cons Seeds, Meadville, PAP. Adler, USDA-ARS, University Park, PAJ. Armstrong, OSIA, Dublin, OHM. McCaslin, Forage Genetics, Prior Lake,

MN

1

BIOMASS FEEDSTOCK LOGISTICS –

ENGINEERING CHALLANGES

Prof. Kevin J. ShinnersBiological Systems EngineeringUniversity of Wisconsin - Madison

North Central Farm Management CommitteeMadison, WI

May 13th, 2009

What are Major Logistics Issues?

Yield

Operations

Moisture

Storage

Density

Cost

Potential Biomass Logistic Schemes

Biorefinery

Regional Pretreatment

TransportTransport

Anaerobic StorageStanding Crop Harvest

After – Searcy – AETC – 2009

Field Wilt

Potential Biomass Logistic SchemesStanding Crop

After – Searcy – AETC – 2009

Mobile Pyrolysis

Transport Oil

Field Drying

Aerobic Storage

Harvest

Biorefinery

Yield

Improves Economics

Dilutes costs

Shipping

Challenges Equipment

Fractional Cob Harvest

2

Fractional Harvest

1,310263kStover

2.0 ton DM/ac @ 40% MC

Transportation cost

$ x 1000

Area needed

ac

1,418585kCob

0.8 ton DM/ac @ 20% MC

Operations

Fewest Possible

Add Value

Harvest Methods

Multi-pass

Single-pass

Single-pass Harvesting

Corn Stover

Switchgrass Willow

Wheat Straw

Single-Pass Harvesting

4

3

Regional Biomass Processing Center2*

1*


5* 6

Biorefinery


Advantages

Fewer operations, reduced cost

Chopped product – no bale handling

Less weather risk

No soil contamination

3


Disadvantages

High moisture

Must be stored anaerobically

Ship water

Low density

Ship air

Multi-Pass Harvesting

1

2

3*

5

4

Multi-Pass Harvesting

7

8*

6


9* 10

Multi-pass Harvesting

Advantages

Equipment legacy

Dry product

Storage & transport

High density

Transport

Multi-pass Harvesting

Disadvantages

Many operations

Costs!

Weather delays

Soil contamination

4

Potential Corn Stover Logistic Schemes

Regional Pretreatment

Windrow Stover @ Grain Harvest

Regional Biorefinery

Field Wilt

Manipulate Moisture

Merge Windrows

High Capacity Chopping

Anaerobic Storage & Pretreatment

High Density Transport

Moisture

High > 50%

Avoid

Moist 25 – 50%

Chopped & anaerobic storage

Dry < 25%

Bales

Crop Moisture Issues

$439k

Don’t always have to “fear” water

Wet Storage – Fermentation Acids Wet Storage – DM Loss

1 – 340 – 50Perennial grasses 2

30 – 50

% w.b.

Moisture

% of total

2 – 5Stover 1

DM loss

1 – Shinners et al., 2007b

2 – Shinners et al., 2006b

Adding Value in Storage

Pre-treating

5

Dry Bale Storage

10

20

30

Moisture Content … % w.b.

14 – 16

18 – 25

Grasses

14 – 19

24 – 59

Stover

Inside

Outdoor

Dry Bale Storage Dry Bale Storage

Dry matter loss … % of total

3

8 – 15

Grasses

3

11 – 37

Stover

Inside

Outdoor

Dry Bale Storage Transport Issues

What factors affect transport costs?

1. Size of bio-refinery

2. Biomass yield – DM & ethanol

3. Tillable area

4. Number of farmers participating

5. Biomass moisture and density

6. Cost per loaded mile

7. Handling costs

Assumptions

Biorefinery capacity – 50 MGY

Transport cost – $4.00/loaded mile

Assumptions:

Tillable land – 65% and Participation – 70%

Transport Example

6

Density – lbs WM / ft3

14.614.6Ideal

2.52.0Yield – ton DM / ac

4520Moisture – % w.b.

Chopped and ensiledDry bales

8.010.0Today

70 80Conversion – gal / ton

Stover Transport Example

TodayIdeal

5.63.3Chopped and ensiled

2.8

Transport costs … $ / ton DM

4.1Dry bales

Stover Transport Example Future Feedstock Marketing

Biomass won’t be a commodity

Too risky for all involved

Biomass production will be contracted

Insures income

Insures feedstock

Cost Example – Switchgrass

$6Gathering & handling

$17Storage

$9Transportation

$114

$82

$ per ton DM

Total

Establishment & production

Duffy – ISU – 2008

$ per acre

–610Corn on corn (175 bu/ac)

–55

100

45

615

90

705

Corn on corn (160 bu/ac)

320

Costs

-20

Net Income

Switchgrass

Assumes $3.5/bu and $75/ton prices, yield of stover at 2.5 ton/ac at $35/ton cost and yield of switchgrass at 4.0 ton/ac.

Total Costs and Returns

BIOMASS FEEDSTOCK LOGISTICS –

ENGINEERING CHALLANGES

Prof. Kevin J. ShinnersBiological Systems EngineeringUniversity of Wisconsin - Madison

North Central Farm Management CommitteeMadison, WI

May 13th, 2009

1

Legal and Tax Updates for the Farm Management Educator

Philip E. HarrisUniversity of Wisconsin-

Madison/Extension

Zero percent capital gain ratep. 1

0% and 15% capital rates are in effect for 2009 and 2010 Postponing ordinary income

can increase 0% bracket for capital gains

Farm Bill p. 1

Farm programs, environmental initiatives, nutrition, credit, commodity markets, and trade Also includes tax provisions

CRP payments p. 1

Conservation Reserve Program payments to taxpayers who are receiving social security benefits are treated as rents that are excluded from self-employment (SE) tax.

Examples p. 2

1—Landowner’s CRP payments are not subject to SE tax because she is receiving disability benefits.

2—Active farmer’s CRP payments are not subject to SE tax because he is receiving retirement benefits.

Effect on Other CRP Recipientspp. 2-4

Does law change imply that all CRP payments are rent that is excluded from SE tax? In Examples 3 and 4, is

nonparticipating landowner exempt from SE tax on CRP?

2

Optional method for calculating SE tax p. 4

Farmer with little net income can receive more quarters of social security coverage. 40 quarters needed to be fully

insured for life (retirement benefits). 20 quarters needed in most recent

10 years to be currently insured (disability benefits).

Prior law p. 4

If gross farm income < $2,400, pay SE tax on 2/3 of gross farm income. If gross farm income > $2,400, and

net farm income < $1,733, pay SE tax on $1,600. $1,090 of SE income in 2009 yields

one quarter of coverage.

Law change p. 5

$1,600 replaced by lower limit(earnings for 4 quarters of coverage—$4,360 for 2009) $2,400 replaced by upper limit

(150% of lower limit—$6,540 for 2009)

Gross < upper limit pp. 5-6

If gross farm income is less than upper limit, pay SE tax on 2/3 of gross farm income. Example 7—$4,500 of gross farm

income; loss on Schedule F; pay SE tax on $3,000 and earn two quarters of coverage.

Gross > upper limit p. 6

If gross farm income > upper limit, and 92.35% of net income < lower limit, pay SE tax on lower limit. Example 8—$6,500 gross farm

income; $2,000 net farm income; elect to pay SE tax on $4,360 to receive four quarters of coverage.

Conservation Easementspp. 6-7

Enhanced charitable deduction extended through 2009. Farmers and ranchers can take

deduction up to 100% of AGI with 15-year carryforward.

3

Equine depreciationp. 7

Cost-recovery period is 3 years for all race horses placed in service in 2009-2013. Cost-recovery periods for work

horses and breeding horses are not changed (Figure 1).

CCC loans p. 8

CCC is required to report market gain from repayment of a loan on Form CCC-1099-G, whether the taxpayer repays the loan with cash or uses CCC certificates. Be careful not to double-report

if farmer included loan in income.

Aggie bonds p. 8

Low-interest loans for first-time farmers and ranchers Loan limit raised to $450,000 Substantial farmland is parcel of

land > 30% of median size of farm in same county; no minimum FMV

Limitation on Farming Lossesp. 9

Begins in 2010 Affects recipients of CCC loans or direct

or countercyclical payments Farm loss deduction limited to > of: $300,000, or 5-year aggregate net farm income

Farm business includes processing of commodities

Examples pp. 9-10

9—$350,000 farm loss but no government payments or loans

10—$350,000 farm loss reduced by $100,000 profit from processing activity

11—$500,000 loss with $550,000 net income during prior 5 years

Exclusions p. 10

C corporations (limit is applied at partner or shareholder level for partnerships and S corporations) Casualty, disease, drought losses Example 12—subtract drought loss

before applying limit Example 13—each owner’s share is

less than deduction limit

4

Agricultural chemicalssecurity credit pp. 11-12 Businesses that sell specified agricultural

chemicals at retail predominantly to farmers and ranchers Businesses that manufacture, formulate,

distribute, or aerially apply specified agricultural chemicals 30% credit for security expenditures $100,000 annual and 6-year cap per facility

Endangered species recovery deduction p. 13

Site-specific measures included in Endangered Species Act plans are deductible conservation expenses under I.R.C. § 175. Total deduction is still limited to

25% of gross income from farming.

Fuel credits pp. 13-14

Cellulosic biofuels credit will be up to $1.01 per gallon (reduced for alcohol) for 2009-2012 production. Ethanol incentive reduced from

51¢ per gallon to 45¢ per gallon in 2009 and later if 7.5 billion gallons are produced or imported in 2008.

Reduced Exclusion on Sale of Home pp. 14-16

I.R.C. § 121 exclusionOwned for at least 2 of 5 years

before date of saleOccupied as main home for 2 of 5

years before date of sale No other exclusion within 2 yearsGain up to $250,000 excluded

($500,000 for some MFJ filers)

Explanation of Changepp. 14-15

Effective in 2009 for residences converted to main home No exclusion for portion of gain on

sale allocated to nonqualified use Nonqualified use excludes: Other use after last use as main home Temporary absence due to employment,

health, or unforeseen circumstances

Example 15 p. 15

Farm 2009-2010; main home 2011-2013Meets I.R.C. § 121 requirements $214,308 gain ($14,308 because

of depreciation; $200,000 appreciation) 2009-2010 is nonqualified use

5

Example 15 p. 15

Total gain $214,308Unrecaptured § 1250 - 10,000§ 1250 recapture - 4,308Remaining gain $200,000Excludable (36/60) $120,000Not Excluded (24/60) $ 80,000

Refundable AMT creditpp. 16-17

For 2008 and later years: 20% rate increased to 50% $5,000 minimum and AGI

phase-out are eliminated.

State and Local Sales Taxesp. 17

Election to deduct sales taxesin lieu of state income taxesis extended through 2009

Property tax deduction p. 17

Effective for 2008 and 2009 Additional standard deduction is

available for property tax paid $500 cap ($1,000 if MFJ) Not limited to main home, but no

double-dipping for above-the-line deductions

Foreclosure debt reliefp. 17

Home mortgage debt exclusionis extended through 2012

Casualty Loss Reductionp. 18

The $100 per-casualty floor is increased to $500 for tax years beginning in 2009. Apparently not applicable to

disaster losses (Extenders Act § 712)

6

Depreciation of New Farm Equipment pp. 18-19

5-year GDS recovery period for any equipment (some exceptions) that are used in a farming business Original use of the machinery or

equipment begins with the taxpayer after 2008 and before 2010 ADS recovery period is 10 years.

Environmental Remediation Costs p. 19

Election to deductcertain remediation expenses

is extended through 2009

Required Minimum Distributions pp. 21-23

No minimum distribution is required in 2009 for: Individual retirement accounts Defined contribution plans

Penalty Provisions pp. 23-24

Failure to file partnership return is $89 per partner beginning in 2009 Failure to file S corporation

return is $89 per shareholder beginning in 2009

Additional first-year depreciation p. 24

Extended through 2009 Farmers who elect out of

UNICAP cannot claim AFYD

I.R.C. § 179 p. 24

Extended to tax years beginning in 2009: Dollar limit is $250,000 Investment limit is $800,000

(Not indexed for inflation)

7

Qualified Small Business Stock p. 24

Exclusion of gain is increased to 75% (still taxed at 28%) Effective tax rate is 7% for

regular tax and 12.88% for AMT

Built-in Gains p. 25

For tax years beginningin 2009 and 2010,

holding period afterS corporation election

is 7 years.

Making work pay credit p. 25

Refundable income tax credit for 2009 and 2010, lesser of:

1. 6.2% of earned income2. $400 ($800 MFJ)Phased out for AGI > $75,000

($150,000 MFJ)

Economic recovery paymentp. 26

$250 payment Not gross income for income

tax purposes

First-time homebuyer creditp. 26

Homebuyer credit extended to purchases through 11/30/2009 Increased to $8,000 (10% of

purchase price) No recapture unless no longer

personal residence within 36 months

Deduction for sales tax on purchase of vehicles p. 27

Limit to $49,500 purchase price Phased out for MAGI >

$125,000 ($250,000 MFJ)

8

American opportunity tax creditp. 27-28

For tax years beginning in 2009 and 2010 $2,500 per student (100% of

$2,000 and 25% of $2,000) Available for four years of post-

secondary education Phase-out for MAGI > $80,000

($160,000 MFJ)

Refundable child creditpp. 28-29

The refundable portionof the child tax credit

is increased to15% of earned income > $3,000

for 2009 and 2010.

Earned income credit p. 29

For 2009 and 2010 Credit for 3 or more children is

45% Increase in threshold phaseouts

for MFJ

Alternative minimum tax p. 30

Exemption amounts for 2009MFJ and survivor $70,950 Single $46,500MFS $35,475

Personal credits are not limited

Estimated taxes p. 30

Required estimated tax paymentis reduced to 90%

(from 100% or 110%)of prior year tax

for qualified individuals.(For tax years beginning in 2009)

Notice 2008-86 pp. 30-31

The IRS issued a list of counties that had exceptional, extreme, or severe drought during the 12-month period ending August 31, 2008. The period for replacing livestock sold

because of drought is extended at least until the end of 2009 for these counties.

9

Nelson v. Commissionerp. 31

Farmers who normally report65% of sugar beet income inthe harvest year cannot defer

recognition of sugar beet insurance proceeds.

Frahm v. Commissioner p. 32

A sole proprietor who employs his spouse can deduct reimbursements made to her for the cost of health insurance she purchased for herself and him under an I.R.C. § 105 plan.

Questions?

ASFMRA Spring MeetingMay 19, 2009

Outlook for Ag Finance

This was funny a couple of months ago…

Three messages ABA staff and volunteer bankershave delivered to producers and agribusiness.

.

1. Banks have sufficient funds to make farm and agribusiness loans in 2009 and beyond.

2. Banks want farm and agribusiness loans and will compete with anybody to get your business.

3. It is not business as usual for the banking industry (or for your business) so get over it and get done what you need to get done.

98% of Over 8,400 Banks Are Considered “Well Capitalized”

Source: FDIC

Industry Stability

Bank Capital and Reserves

$ Trillions $1.47 trillion total

Capital

Loss Reserves

Source: FDIC

Source: USDA Economic

Research Service

Farm Assets, Debt and Equity at Record High Nominal Levels

Farm Business Debt by LenderDecember 31, 2007


Research Service

Cash Income Projected to Establish New Record of $96.6 Billion


Research Service

With a debt –to equity ratio of >10%Farmers own 90% of their business free and clear.

Debt to Equity Ratio of Farmers


Research Service

Déjà vu – 1980’s?

SimilaritiesRapid increase – commoditiesRapid increase – land values (rents)Boom in trade (exports)New entrants at the farm

Déjà vu – 1980’s?

DifferencesLand purchased with cash or modest debtInterest ratesLending on cash flow/profits vs. equity/appreciationRisk management programs and usage

d

The governmentWild Card.

Government Payments

Source: FSA, NRCS, CCC

So- Everything is Great, Right?

Not Exactly…

'Awful' Month for CarmakersBuyers Ignored November's Discounts, and Auto Sales

Plummeted 37%Washington Post, Dec 3

(December , January, and February

were even worse)

What Goes Up…Case-Shiller Housing Index

Source: Case-Shiller

Housing Index

10-City CompositeYear-over-Year Percent Change

Dec 2008:-19.2%

C-S 20-city: -18.6%

Case-Shiller House Price ChangeDecember 2008 (Case-Shiller for 20 metros)

-13.1

-13.4

-7.2

-18.4

-34.0

-4.3-12.1

-4.0-14.3

-33.0-19.2

-9.2

-24.8

-28.8

-7.0

-26.4

-21.7-6.1

-31.2

AppreciationDepreciation

-22.0

Real GDP GrowthWith and Without Trade Component

Source: Bureau of

Economic Analysis

2009Forecast

Personal Income GrowthSeasonally Adjusted Year-Over-Year Growth Rate

Source: Bureau of Economic

Analysis

2001 2002 2003 2004 2005 2006 2007

Nominal IncomeReal Income

2008

0.8%

1.4%

2008Stimulus Checks

Auto Sales Forecast

Source:GM

Millions

12.5 million: replacement demand

Above 20%

10% - 20%

0% - 10%

No Data

Percent of Homes with Negative Equity

Source:CoreLogic

National Rate, 19.8%December 2008

55%

30%

32%

30%

40%

Risk Spreads Increased

AIG & WaMu

Basis Points

Source: Federal Reserve and

British Bankers’Association

EESA & TARP

CPP

Jan. 1496 b.p.

Inflation Adjusted, Base = 2008 3Q

Financial Institution Credit

$ Tr

illio

nsTotal Credit From Financial Institutions(Left Axis)

Banking Credit(Left Axis)

Banking Credit as % of Total(Right Axis)

Source: Flow of Funds

Trillions Worth of Government Involvement

• Federal Reserve Programs - $5.75 Trillion

• March 19, 2009 – Fed $1.1 Trillion

• FDIC Programs - $1.55 Trillion

• Treasury Programs - $1.22 Trillion

• FHA Programs - $300 Billion

• Economic Stimulus - $787 Billion

Source: WSJ

Which Way are Commodity Prices Headed?

Farmland Values Are Setting RecordsAverage Farm Real Estate Value (Dollars per Acre)

$2,350$2,350

This rate of increase seema little aggressive to you?


Research Service

Professor Mike Duffy, Iowa State UniversityNote: They have been looking at this stuff since 1941

Iowa Farmland Values

$4,468 in 2008

STUCK?

Demand Drivers• Demographics – China and India• Increased protein demand• Bio fuels• Weak U.S. dollar• Trade Policy

Supply Drivers

• Tight carryover stocks• Weather adversity (drought in Australia/New

Zealand, South America)• Reduced acres – corn/wheat/soybeans• Reduced livestock – (cattle on feed, egg

placements, etc…)• CWT Program, potato acreage allotments

Outlook - Near Term

Government PolicyTradeThe EconomyCurrency Rates

What can Farm and Agribusiness clients do?

• Communicate with your banker, understand buyers

• Know who you are buying from and selling to• Understand terms of sale• Establish clear expectations of performance• Have a plan with contingencies• Keep financial reporting up to date

Volatility Opportunity

Risk ManagementEducationMonitoring SystemsPlanning

Stability

Ag Marketplace

Three messages ABA staff and volunteer bankershave delivered to producers and agribusiness.

1. Banks have sufficient funds to make farm and agribusiness loans in 2009 and beyond.

2. Banks want farm and agribusiness loans and will compete with anybody to get your business.

3. It is not business as usual for the banking industry (or for your business) so get over it and get done what you need to get done.

Thank you very much!

Sam [email protected]

Legal and Tax Updates for the Farm Management Educator

Philip E. Harris Center For Dairy Profitability

Department of Agricultural and Applied Economics University of Wisconsin-Madison/Extension

Table of Contents I. Prior Legislation

A. Zero Percent capital gains rate............................................................................ 1 II. Farm Bill

A...Conservation Reserve Program......................................................................... 1 B...Optional Method for SE Tax ............................................................................... 4 C...Conservation Easements ................................................................................... 6 D...Equine Depreciation ........................................................................................... 7 E...Commodity Credit Corporation Transactions ..................................................... 7 F. ..Agricultural Bonds .............................................................................................. 8 G. .Limitation on Farming Losses ............................................................................ 8 H...Agricultural Chemicals Security Credit ............................................................. 11 I. ...Like-Kind Exchange of Shares ......................................................................... 12 J. ..Endangered-Species Recovery Deduction ...................................................... 13 K...Alternative and Renewable Fuels..................................................................... 13

III. Housing Assistance Tax Act of 2008 A. Reduced Exclusion of Gain from a Personal Residence.................................. 14

IV. Emergency Economic Stabilization Act of 2008 A. Refundable AMT Credit.................................................................................... 16 B. Individual Tax Relief ......................................................................................... 17 C. Business Tax Benefits...................................................................................... 18

V. Energy Improvement and Extension Act of 2008 A. Fuel Credits ...................................................................................................... 19

VI. The Worker, Retiree, and Employer Recovery Act of 2008 A. Required Minimum Distributions ...................................................................... 21 B. Penalty Provisions............................................................................................ 23

VII. American Recovery and Reinvestment Act of 2009 A. Additional First-Year Depreciation for property acquired during 2009 ............. 24 B. Temporary increase in I.R.C. § 179 limitations ............................................... 24 C. Qualified small business stock for 2009 and 2010 ........................................... 24 D. Temporary reduction in recognition period for built-in gains tax....................... 25 E. Making work pay credit..................................................................................... 25 F. Economic recovery payments ......................................................................... 26 G. First-time homebuyer credit.............................................................................. 26 H. State sales tax and excise tax on the purchase of certain motor vehicles ....... 27 I. American opportunity tax credit........................................................................ 27 J. Temporary increase of refundable portion of child credit ................................. 28 K. Temporary increase in earned income tax credit ............................................. 29 L. Alternative minimum tax relief .......................................................................... 30 M. Estimated tax payments in 2009 for certain small businesses......................... 30

VIII. Rulings and Cases A. Notice 2008-86 ................................................................................................. 30 B. Nelson v. Commissioner .................................................................................. 31 C. Frahm v. Commissioner ................................................................................... 32

1 (of 32)

I. PRIOR LEGISLATION A. Zero Percent capital gains rate

Before 2003, the lowest tax rates on net long-term capital gains were 10% and 20%. The 10% rate applied to the extent that the taxpayer’s total taxable income did not exceed the upper limit of the 15% ordinary income tax bracket for the applicable filing status. The Jobs and Growth Tax Reconciliation Act of 2003 (2003 Jobs Act), Pub. L. No. 108-27, reduced those rates to 5% and 15%, respectively, for tax years beginning before 2009. These lower rates applied to both the regular tax and the alternative minimum tax. The 2003 Jobs Act also provided that for tax years beginning in 2008, the 5% rate was reduced to zero. The Tax Increase Prevention and Reconciliation Act of 2005, Pub. L. No. 109-222, extended the lower capital gains rates, including the 0% rate, to years beginning in 2009 and 2010.

Therefore, lower-income taxpayers can realize long-term capital gains in 2008 and pay no income tax on the gains to the extent that their total taxable income (including the capital gain) does not exceed the upper limit of the applicable 15% tax bracket.

The 2003 Jobs Act also provided that dividends received by an individual shareholder from domestic and qualified foreign corporations generally are taxed at the same rates that apply to capital gains. This treatment also applies for purposes of both the regular tax and the alternative minimum tax. Thus, the 0% tax rate also applies to qualifying dividends received in 2008, 2009, and 2010.

II. FARM BILL The Heartland, Habitat, Harvest, and Horticulture Act of 2008 (Farm Bill, Pub. L. No. 110-246) includes several tax provisions that affect farmers. The Farm Bill (also called the Farm Act) addresses a wide range of issues that affect agriculture, including farm programs, environmental initiatives, nutrition, credit, commodity markets, and trade. It also includes some tax provisions, which are discussed below.

A. Conservation Reserve Program

Farm Bill § 15301; I.R.C. § 1402(a)(1) Effective for CRP payments made after December 31, 2007

Background

Farmers enrolling their land in the Conservation Reserve Program (CRP) receive payments for refraining from farming their property and for engaging in certain conservation practices mandated by the United States Department of Agriculture (USDA). These payments are described as rental payments in the USDA contract. In 2006, the IRS issued a proposed revenue ruling in Notice 2006-108, 2006-51 I.R.B 1118, that viewed all CRP payments as subject to self-employment (SE) tax regardless of whether the taxpayer is actively farming. The notice concluded that the CRP payments are not excluded from net income under I.R.C. § 1402(a)(1) because they are not rental payments. The notice is consistent with C.C.A. 2003-25-002 (May 29, 2003) and with the appellate court decision in Wuebker v. Commissioner, 205 F.3d 897 (6th Cir., 2000) rev’g 110 T.C. 431 (1998), which also held that CRP payments are not rental income and

2

therefore are not excluded from SE income by the I.R.C. § 1402(a)(1) exception for rent from real estate. The IRS has not issued the revenue ruling that was proposed in 2006.

Explanation of Change

The Farm Bill amends I.R.C. § 1402(a)(1) by adding CRP payments made to individuals who are receiving social security retirement, survivor, or disability payments to the exclusion for rent from real estate. I.R.C. § 1402(a)(1) now reads as follows (the new language is in italics):

[T]here shall be excluded [from net earnings from self-employment] rentals from real estate and from personal property leased with the real estate (including such rentals paid in crop shares, and including payments under section 1233(2) of the Food Security Act of 1985 (16 U.S.C. 3833(2)) to individuals receiving benefits under section 202 or 223 of the Social Security Act). . . . Under the new provision, CRP payments to taxpayers who are receiving specified social

security payments are not included in net earnings from self employment. The taxpayer’s participation in the maintenance of the CRP land or a farming business is not considered. Practitioner Note Specified Payments Social Security Act (SSA) § 202 provides for old-age and survivor payments, while SSA § 223 provides for disability payments.

Example 1 Disabled Landowner In 2005, Apple Blossom bought a farm that was already enrolled in the CRP, and she agreed to leave it in the CRP. Apple is totally disabled and has been drawing social security disability payments since 2000. She pays a neighboring farmer to maintain her CRP land.

Notice 2006-108 and the Wuebker decision required Apple to include her CRP payments from 2005 through 2007 in her net earnings from self-employment and pay SE tax on them. Beginning in 2008, her CRP payments are not subject to SE tax.

____________________

Example 2 Active Farmer Pete Bogg owns and operates 750 acres as a crop farm. In 2000, he enrolled 120 acres in the CRP program. Pete turned age 65 on January 22, 2005. He began receiving social security retirement payments in August, but he continued to farm full-time.

Notice 2006-108 and the Wuebker decision required Pete to include his CRP payments from 2000 through 2007 in his net earnings from self-employment and pay SE tax on them. Beginning in 2008, his CRP payments are not subject to SE tax.

____________________

Effect on Other CRP Recipients

CRP recipients who are not receiving social security payments are not protected by the new legislation from paying SE tax on their CRP payments. However, the new legislation could affect the treatment of their CRP payments by implication.

3

Potential IRS Argument The IRS could argue that the new legislation confirms that the position taken in Notice 2006-108 and the holding of Wuebker are correct. That is, if Notice 2006-108 and Wuebker were incorrect, the new legislation was not needed because the CRP payments would not be subject to SE tax. By specifically excluding certain CRP payments from SE tax, those that are not specifically excluded are implicitly included. If there was an SE tax problem that Congress fixed for certain taxpayers, that problem remains for others.

Example 3 Nonparticipating Landowner—IRS Argument Rose Petal is a full-time engineer. In 2005, she bought a 640-acre farm. The previous owner had enrolled 160 acres in the CRP and rented the remaining 480 acres to a neighbor under a cash lease that requires the neighbor to maintain the CRP land. Rose kept the 160 acres in the CRP and continued to lease the 480 acres on the same terms to the neighbor.

Rose could argue that Notice 2006-108 is incorrect in holding that a nonparticipating landowner is subject to SE tax on the CRP payments. If she is outside the jurisdiction of the Sixth Circuit Court of Appeals (Kentucky, Michigan, Ohio, and Tennessee) she could cite the Tax Court holding in the Wuebker case, which concluded that the CRP payments are rent paid for land not used in agricultural production and therefore are excluded from SE income.

The IRS could argue that if CRP payments were excluded from SE income, Congress would not have needed to specifically exclude CRP payments made to recipients of social security retirement and disability payments. Consequently, the IRS could argue that Rose’s CRP payments are subject to SE tax both before and after the effective date of the Farm Bill provision.

____________________

Potential Taxpayer Argument Taxpayers could argue that by including certain CRP payments in the SE tax exclusion for rentals from real estate, Congress implicitly overturned the holding in Wuebker, supra, that CRP payments are not rental income. Taxpayers could argue that Congress labeled the CRP payments as rent because I.R.C. § 1402(a)(1), as amended by the Farm Bill, can be paraphrased as saying, “rentals from real estate are excluded from SE tax, including CRP payments to recipients of social security retirement and disability payments.” If CRP payments are rent, then the exclusion for rent from real property applies because the CRP land is not used in agricultural production.

Example 4 Nonparticipating Landowner’s Argument Rose, from Example 3, could counter the IRS argument by arguing that Congress, by including the CRP exclusion in the rental real estate exception, labeled CRP payments as rental income and stated that for recipients of social security retirement and disability benefits it does not matter whether the land is used in agricultural production or whether the landowner materially participates in the agricultural production. For all other CRP recipients, the CRP payment is rental income, but it may be subject to SE tax if three criteria are met: The land is used in agricultural production, there is an arrangement that requires the landowner’s material participation, and the landowner materially participates [I.R.C. § 1402(a)(1)].

Therefore, Rose could argue that her CRP payments (both before and after the effective date of the Farm Bill provision) are not subject to SE tax for three reasons:

1. Rose’s CRP land is not used in agricultural production. 2. Even if her CRP land were used in agricultural production, there is no agreement

requiring her to materially participate.

4

3. Even if her land was used in agricultural production and there is an agreement requiring her to materially participate, she does not materially participate in maintaining her CRP land.

____________________

Practitioner Note Land Used in Agricultural Production I.R.C. § 1402(a)(1) states [T]he preceding provisions of this paragraph [the rental of real property exception] shall not apply to any income derived by the owner . . . of land if (A) such income is derived under an arrangement, between the owner . . . and another individual, which provides that such other individual shall produce agricultural or horticultural commodities (including livestock, bees, poultry, and fur-bearing animals and wildlife) on such land, and that there shall be material participation by the owner . . . (as determined without regard to any activities of an agent of such owner . . .) in the production or the management of the production of such agricultural or horticultural commodities, and (B) there is material participation by the owner . . . (as determined without regard to any activities of an agent of such owner . . .) with respect to any such agricultural or horticultural commodity.

B. Optional Method for SE Tax

Farm Bill § 15352; I.R.C. § 1402(a) Effective for tax years beginning after December 31, 2007

Background

Qualifying for social security benefits can be difficult for self-employed farmers and ranchers because they do not always have a steady income stream. When there are no net earnings, no social security taxes are paid and no quarters of coverage are accrued. Through farm optional methods, farmers and ranchers may voluntarily pay social security taxes to earn quarters of credit so that they can receive social security benefits. However, the optional method payment thresholds were outdated and no longer allowed farmers and ranchers to earn four quarters of credit per year.

For tax years beginning before 2008, I.R.C. § 1402(a) allowed farmers to elect the optional method of paying SE tax in two circumstances: 1. If their gross farm income was not more than $2,400, they could elect to pay SE tax on two-

thirds of their gross farm income. 2. If their gross farm income was greater than $2,400 and their net farm profits were less than

$1,733, they could elect to pay SE tax on $1,600 of net earnings. To be eligible for disability benefits from social security, a farmer who is age 31 or older

must be fully insured (40 quarters of coverage) or currently insured (20 quarters of coverage in the 10 years immediately preceding the disability). For 2007, $1,000 of net earnings from self-employment was needed to receive a quarter of coverage. For 2009, $1,090 of net earnings is needed to earn each quarter of coverage.

Example 5 Gross Farm Income Not More Than $2,400 Ima Peach had $2,100 of gross farm income and a negative net farm income in 2007. The regular method of computing SE tax results in no SE tax liability and no quarters of coverage. Ima was

5

allowed to elect to report $1,400 (2/3 × $2,100) as her net earnings from self-employment. She owed $214 ($1,400 × 0.153) of SE tax on that income and earned one quarter of coverage.

____________________

Example 6 Gross Farm Income More Than $2,400 Ura Peach had $2,500 of gross farm income in 2007 and a $1,000 farm profit. The regular method of computing SE tax resulted in $141 ($1,000 × 0.9235 × 0.153) of SE tax liability, without earning even one quarter of coverage, because her net earnings from self-employment were less than $1,000. Ura elected to report $1,600 as her net earnings. She owed $245 ($1,600 × 0.153) of SE tax on that income and earned one quarter of coverage.

____________________

Because the deemed $1,600 of income has not changed since 1956, farmers were increasingly at risk of not being eligible for social security disability benefits. Before 1985, the $1,600 of deemed SE earnings under the farm optional method resulted in four quarters of coverage. In 1985, the amount needed for a quarter of social security coverage increased to $410, so that the deemed $1,600 of income provided only three quarters of coverage. The amount of earnings required for a quarter of coverage is adjusted annually, and in 1991, it increased to $540, so the deemed $1,600 of income yielded only two quarters of coverage. In 2001, a quarter of coverage increased to $830, so that only one quarter of coverage was obtained from the deemed $1,600 of income. Planning Pointer Earned Income Credit Another incentive for using the optional method is to increase income for purposes of the earned income credit (EIC). From a planning perspective, the EIC will cover a good portion of the resulting SE tax for a taxpayer with no qualifying child, and it is likely to more than cover the entire tax for a taxpayer with one or more qualifying children.


The Farm Bill amended I.R.C. § 1402(a) by replacing $1,600 each place it appears with the term the lower limit. The lower limit is defined as the amount required to earn four quarters of coverage under the Social Security Act ($4,360 in 2009). The bill also replaces $2,400 each place it appears in I.R.C. § 1402(a) with the term the upper limit and defines that as 150% of the lower limit. Consequently, as the amount required for one quarter of coverage increases, taxpayers who elect the optional method of paying self-employment tax will acquire four quarters of coverage.

Therefore, beginning in 2008, the two circumstances in which farmers can elect the optional method of paying SE tax are 1. If their gross farm income is not more than the upper limit ($6,540 for 2009), they can elect

to pay SE tax on two-thirds of their gross farm income. 2. If their gross farm income is greater than the upper limit ($6,540 for 2009) and their net farm

profit is less than the result of dividing the lower limit by 0.9235 [$4,721 for 2009 ($4,360 ÷ 0.9235)], they can elect to pay SE tax on net earnings equal to the lower limit ($4,360 for 2009).

Example 7 Gross Farm Income Not More Than Upper Limit Red Budd had $4,500 of gross farm income and a net farm loss in 2008. The regular method of computing SE tax results in no SE tax liability and no quarters of coverage. Red can elect to

6

report $3,000 (2/3 × $4,500) as his net earnings from self-employment. He owes $459 ($3,000 × 0.153) of SE tax on that income and earns two quarters of coverage.

If Red is otherwise eligible for the EIC, has no other income, and no qualifying child, his EIC is $231. With no other earned income, and one qualifying child, the EIC is $1,029; and with two or more qualifying children, it is $1,210, whether Red is married or single. Additional earned income or adjusted gross income could increase (or decrease) these EIC amounts.

____________________

Practitioner Note Benefit of Change Increases with Income Ima Peach’s SE tax liability and quarter of coverage (from Example 5) do not change if she has the same income in 2008, because that income is less than the prior limit. Red Budd benefits from the change, however, because in 2007 he could have used only the second option (the $1,600 deemed income used by Ura Peach in Example 6).

Example 8 Gross Farm Income More Than the Upper Limit Blue Budd had $6,500 of gross farm income in 2009, and his net farm profit was $2,000. The regular method of computing SE tax results in $284 ($2,000 × 0.9235 × 0.153) of SE tax liability, and Blue would earn one quarter of coverage. Blue can elect to report $4,360 (the lower limit) as his 2009 net earnings from self-employment. He owes $667 ($4,360 × 0.153) of SE tax on that income and earns four quarters of social security coverage.

____________________

C. Conservation Easements

Farm Bill § 15302; I.R.C. § 170(b)(1)(E)(vi) and (2)(B)(iii) Effective for contributions in tax years beginning after December 31, 2007, and before January 1, 2010

Background

The Pension Protection Act of 2006 (PPA), Pub. L. No. 109-280, included an enhanced tax deduction for contributions of conservation easements to qualified conservation organizations or state or local governments. Prior to the PPA, the annual deduction for donations of conservation easements by taxpayers other than corporations was limited to 30% of their adjusted gross income (AGI). The annual limitation for corporations was 10% of their taxable income for the year. [Taxable income for this purpose is computed without the deductions for charitable contributions, dividends received, and domestic production activities, and without net operating loss (NOL) or capital loss carrybacks to the year.] Excess deductions could carry forward for up to 5 years and be deducted in those years subject to the income limitations, but taxpayers were often unable to realize the maximum benefit from their easement donations.

The enhanced deduction provision in the PPA allowed all taxpayers other than corporations to deduct donations of conservation easements up to 50% of their AGI, and it allowed ranchers and farmers (defined for this purpose as receiving more than 50% of their gross income from farm or ranch business activities) to deduct donations of conservation easements up to 100% of their AGI. Corporate farmers and ranchers could deduct up to 100% of their taxable income. An excess charitable contribution deduction generated by an easement donation could be carried forward for up to 15 years and be deducted in those years subject to the applicable 50% or 100% of AGI or 100% of taxable income limit. The enhanced deduction provision expired at the end of 2007.

7


The Farm Bill changes the expiration date of the enhanced deduction from the end of 2007 to the end of 2009. Therefore, taxpayers can claim the enhanced deduction for easements granted in 2008 and 2009 as well as in 2006 and 2007.

D. Equine Depreciation

Farm Bill § 15344; I.R.C. § 168(e)(3)(A) Effective for property placed in service after December 31, 2008, and before January 1, 2014

Background

The cost-recovery period for horses is either 3 years or 7 years, depending on the use of the horse and the age of the horse when it is placed in service, as shown in Figure XAG.1.


The Farm Bill creates a uniform recovery period of 3 years for all race horses that are placed in service in calendar years 2009–2013. It does not change the recovery period for work or breeding horses. Figure XAG.1 shows the recovery periods for horses that are placed in service before 2009, after 2008 and before 2014, and after 2013.

FIGURE XAG.1 Recovery Period for Horses

Placed in Service Use of Horse and Age When Placed in Service Before

2009 After 2008 and

Before 2014 After 2013

Race horse 2 years old or younger 7 years 3 years 7 years Race horse more than 2 years old 3 years 3 years 3 years Work or breeding horse 12 years old or

younger 7 years 7 years 7 years

Work or breeding horse more than 12 years old

3 years 3 years 3 years

E. Commodity Credit Corporation Transactions

Farm Bill § 15353; new I.R.C. § 6039J Effective for loans repaid after December 31, 2007

Background

The Commodity Credit Corporation (CCC) makes market assistance loans to farmers producing eligible commodities. A farmer receiving a CCC loan can repay it with cash, purchase CCC certificates to repay it, or deliver the pledged collateral as full payment for the loan at maturity. If a farmer uses cash to repay the loan, the farmer receives a Form CCC-1099-G information return showing the market gain realized. However, for transactions prior to January 1, 2007, if a farmer used CCC certificates to repay a CCC loan, the farmer did not receive an information return. For transactions after January 1, 2007, IRS Notice 2007-63, 2007-33 I.R.B. 353, requires the CCC to

8

use Form 1099-G to report market gain associated with the repayment of a CCC loan whether the taxpayer repays the loan with cash or uses CCC certificates.

Explanation of Provision

The Farm Bill codifies the Form 1099-G reporting requirement of IRS Notice 2007-63. Practitioner Note Don’t Double Report Taxpayers who elected to report the loan as income under I.R.C. § 77 have already reported the full loan amount as income. Because market gain does not result in additional income for them, they should report the gain on line 6a of Schedule F (Form 1040), Profit or Loss From Farming, but not on line 6b. The market gain reduces their basis in the commodity that secures the loan, which increases the gain or decreases the loss on sale of the commodity. That gain or loss is included in the amount reported on line 3 of Schedule F (Form 1040) by reporting the sale proceeds on line 1 and the basis of the commodity on line 2.

F. Agricultural Bonds

Farm Bill § 15341; I.R.C. § 147(c)(2) Effective for bonds issued after May 22, 2008

Background

Agricultural Bonds (Aggie Bonds) are tax-exempt bonds issued by state and local governments to provide low-interest loans for first-time ranchers and farmers. A first-time rancher or farmer is any individual who has never had a direct ownership interest in substantial farmland. Substantial farmland is a parcel of land that is larger than 30% of the median size of a farm in the county in which the parcel is located and that has a fair market value (FMV) greater than $125,000. Aggie Bonds have not been updated in more than 26 years.


The Farm Bill improves Aggie Bonds by 1. Increasing the loan limit from $250,000 to $450,000 and indexing that limit amount for

inflation 2. Eliminating the dollar limitation in the definition of substantial farmland

G. Limitation on Farming Losses

Farm Bill § 15351; new I.R.C. § 461(j) Effective for tax years beginning after December 31, 2009

Background

Except for passive-activity rules in I.R.C. § 469, the amount of farming losses that a taxpayer may use to reduce nonfarm income is not limited.

9


Beginning in 2010, the Farm Bill limits the amount of farming losses that some taxpayers may use to offset nonfarm income to the greater of two amounts: 1. $300,000 ($150,000 for married individuals filing a separate return) 2. The total net farm income received over the last 5 years Observation First Year of Farming A taxpayer who has no farming income in the prior 5 years because the current year is the first year of farming or because the prior five year’s income is negative can still deduct $300,000 of farm losses.

Losses that are limited in a particular year may be carried forward to subsequent years and treated as a deduction attributable to farming businesses that year.

This provision applies only to taxpayers other than C corporations who receive CCC loans or direct or countercyclical payments under Title 1 of the Food and Energy Security Act of 2008. For purposes of this provision, the Farm Bill broadens the definition of farming business to include the processing of commodities without regard to whether the activity is incidental for a taxpayer who is otherwise engaged in a farming business with respect to the commodities.

This loss limitation is applied before the passive loss rules under I.R.C. § 469.

Example 9 No Program Payments Barry Cran raises cranberries and does not receive any direct payments, countercyclical payments, average crop revenue election (ACRE) payments, or CCC loans. His annual nonfarm income is about $500,000 from investments. In 2010, he realized a $350,000 loss from his cranberry production.

Barry is not subject to the loss limitation provision because he is not receiving any program payments that subject him to those limits. Therefore, he can deduct the full $350,000 loss against his $500,000 of nonfarm income.

If Barry had only $100,000 of nonfarm income, the excess loss would create an NOL that Barry could carry back 5 years and forward 20 years to offset both farm and nonfarm income [I.R.C § 172(b)(1)].

____________________

Example 10 Processing Activity Income Cray Raisin raises cranberries, corn, and soybeans and processes her cranberries into dried

berries that are similar to Craisins®. She receives direct and countercyclical payments for her corn and soybean acreage. In 2010, she realized a $350,000 loss from her farming business and a $100,000 profit from her cranberry-processing business. Cray can net the $350,000 loss with her $100,000 profit for purposes of the I.R.C. § 461(j) limit on deducting farm losses. Because the resulting $250,000 loss is less than $300,000, she can deduct the full loss.

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Example 11 Prior 5-Year Income Derry Heir owns and operates a dairy farm and annually receives CCC loans for his corn crop. Figure XAG.2 shows his 2005–2009 records for net income from his farming business.

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Figure XAG.2 Derry’s Net Income

Year Income 2005 $ 300,000 2006 ( 200,000 ) 2007 250,000 2008 300,000 2009 ( 100,000 ) Total $ 550,000

In 2010, Derry realized a $500,000 loss from his farming business. Derry can deduct the

entire $500,000 loss because it is less than his $550,000 net income from farming over the previous 5 years.

If Derry’s net income from the previous 5 years totaled only $400,000, he could deduct only $400,000 of his 2010 farm loss on his 2010 income tax return. The remaining $100,000 is carried forward to 2011 and treated as a farm business deduction [presumably on line 34, Other Expenses, of Schedule F (Form 1040)].

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Casualty, Disease, and Drought Exclusions Losses caused by fire, storm, or other casualty, or by disease or drought, are not included in the net loss that is subject to the farm loss limitation.

Example 12 Drought Loss Excluded Paige Turner realized a $400,000 loss from her farming business in 2010, with $150,000 of the loss resulting from the loss of her corn crop due to drought. Paige can deduct her entire $400,000 loss because the $250,000 loss that did not result from the drought is less than $300,000.

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Partnerships and S Corporations The farm loss limitation is applied at the partner, member, or shareholder level for farming activities conducted by a partnership (including an LLC treated as a partnership) or an S corporation.

Example 13 S Corporation Loss Winter and Durham Wheat each own 50% of High Plains, Inc., an S corporation that raises wheat and barley. High Plains receives CCC loans each year. In 2010, High Plains realized a $500,000 loss. Winter and Durham can each deduct $250,000 on their individual income tax returns because the amount allocable to each shareholder is less than $300,000.

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H. Agricultural Chemicals Security Credit

Farm Bill § 15343; new I.R.C. § 45O Effective for expenses paid or incurred after May 22, 2008, and before January 1, 2013

Background

Prior to the Farm Bill, there was no provision for a credit for protecting agricultural chemicals.


Eligible agricultural businesses may take a 30% credit for qualified chemical security expenditures as a component of the general business credit. Eligible expenditures are those incurred by an eligible agricultural business for protecting specified agricultural chemicals.

Eligible Agricultural Businesses Eligible agricultural businesses are businesses that • Sell agricultural products, including specified agricultural chemicals, at retail predominantly

to farmers and ranchers • Manufacture, formulate, distribute, or aerially apply specified agricultural chemicals

Specified Agricultural Chemicals Specified agricultural chemicals include 1. Any fertilizer commonly used in agricultural operations that is listed under § 302(a)(2) of the

Emergency Planning and Community Right-to-Know Act of 1986, 49 C.F.R. pt. 172 § 101, or 33 C.F.R. pts.126, 127, and 154

2. Any pesticide [as defined in § 2(u) of the Federal Insecticide, Fungicide, and Rodenticide Act] including all active and inert ingredients that are used on crops grown for food, feed, or fiber

Qualified Security Expenditures Qualified chemical security expenditures are amounts paid for • Employee security training and background checks • Limiting and preventing access to controls of specific agricultural chemicals stored at a

facility • Tagging, locking tank valves, and securing chemical additives to prevent the theft of specific

agricultural chemicals or to render such chemicals unfit for illegal use • Protecting the perimeter of areas where specified agricultural chemicals are stored • Installing security lighting, cameras, recording equipment, and intrusion detection sensors • Implementing measures to increase computer or computer network security • Conducting security vulnerability assessments • Implementing a site security plan • Other measures provided for by regulation

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Credit Limits The credit is limited to $100,000 per facility during a 6-year period ($100,000 per year, reduced by the total credit taken in the prior 5 years). In addition, each taxpayer’s annual credit is limited to $2,000,000. Members of a controlled group are treated as one taxpayer. Observation Effect of 6-Year Period By limiting the credit to $100,000 per facility in a 6-year period and limiting it to expenditures after May 22, 2008, and before January 1, 2013, the provision effectively limits the lifetime credit for a facility to $100,000. If the end of the eligibility period is extended in future legislation, taxpayers may be able to claim more than $100,000 per facility.

Basis Reduction The deductible expense for qualified expenditures is reduced by the amount of the credit claimed.

Example 14 Agricultural Chemicals Security Credit On June 1, 2008, Agricultural Chemicals, Inc., a fertilizer retailer, paid $100,000 for a security fence around its fertilizer storage facility and for security cameras. It can claim a $30,000 credit on its 2008 income tax return. It must also reduce its bases in the fence and cameras by 30%.

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I. Like-Kind Exchange of Shares

Farm Bill § 15342; I.R.C. § 1031 Effective for transfers after May 22, 2008

Background

An exchange of property, like a sale, generally is a taxable event. However, no gain or loss is recognized if property held for productive use in a trade or business or for investment is exchanged for like-kind property that is held for productive use in a trade or business or for investment. In general, the following assets do not qualify for a like-kind exchange: stock in trade or other property held primarily for sale; stocks, bonds or notes; other securities or evidences of indebtedness or interest; interests in a partnership; certificates of trust or beneficial interests; or choses in action.


The Farm Bill provides that the general exclusion from I.R.C. § 1031 treatment for stock does not apply to shares in a mutual ditch, reservoir, or irrigation company, if at the time of the exchange both of the following criteria are met: 1. The company is an organization described in I.R.C. § 501(c)(12)(A), determined without

regard to the percentage of its income that is collected from its members for the purpose of meeting losses and expenses.

2. The shares in the company are recognized by the highest court of the state in which the company was organized, or by applicable state statute, as constituting or representing real property or an interest in real property.

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Practitioner Note Real Property under State Law Congress indicated that the stock of mutual ditch, reservoir, and irrigation companies in Colorado that are used to manage joint water distribution rights are recognized as real property. Stock from mutual companies in other states qualify for this provision if the state statutes or the highest state court recognize the stock as constituting or representing an interest in real property.

J. Endangered-Species Recovery Deduction

Farm Bill § 15303; I.R.C. § 175 Effective for expenditures paid or incurred after December 31, 2008

Background

A taxpayer engaged in the business of farming may treat soil and water conservation expenditures paid or incurred in respect of land used in farming, or expenditures to prevent the erosion loss of land used in farming, as expenses that are not chargeable to a capital account. The deduction is limited to 25% of the taxpayer’s gross income derived from farming during the tax year. Any excess expense is deductible for succeeding tax years, subject to that year’s limit of 25% of gross income from farming.


The Farm Bill expands I.R.C. § 175 to allow a tax deduction for costs incurred in 2009 and later years to implement site-specific management measures included in recovery plans under the Endangered Species Act. The total deduction is still limited to 25% of gross income from farming.

K. Alternative and Renewable Fuels

Cellulosic Biofuels Credit

Farm Bill § 15321; I.R.C. § 40 Effective for fuel produced after December 31, 2008 Cellulosic biofuels can be produced from agricultural waste, wood chips, switch grass, and other nonfood feedstocks. Because an abundant and diverse source of feedstocks is available, cellulosic biofuels could be a homegrown alternative to fossil-based fuels. Because cellulosic biofuels are very expensive to produce, government assistance is believed to be needed to spur these fuels to commercial viability. The Farm Bill includes a new, temporary cellulosic biofuels production tax credit for up to $1.01 per gallon, available through December 31, 2012.

Ethanol Excise Tax Credit

Farm Bill § 15331; I.R.C. §§ 40, 6426 Effective after May 22, 2008 The Farm Bill reduces the 51¢ per-gallon incentive for ethanol to 45¢ per gallon for calendar year 2009 and thereafter. If the Treasury Department determines (in consultation with the Environmental Protection Agency) that 7.5 billion gallons of ethanol (including cellulosic

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ethanol) were not produced in or imported into the United States in 2008, the reduction in the credit amount will be delayed. If the threshold was not reached in 2008, the reduction for 2010 also will be delayed if the Treasury Department determines that 7.5 billion gallons were not produced or imported in 2009.

In the absence of a determination, the reduction will take effect. If the determination is made after the start of a calendar year, taxpayers claiming the reduced amount prior to the determination will be entitled to the 6¢ (51¢ − 45¢) difference per gallon.

Volume of Alcohol for Fuel Credits

Farm Bill § 15332; I.R.C. § 40 Effective for fuel sold or used after December 31, 2008 I.R.C. § 40(d)(4) provides a per-gallon credit for the volume of alcohol used as a fuel or in a qualified mixture. In determining the number of gallons of alcohol for which the credit is allowable, the volume of alcohol includes any denaturant, including gasoline. The denaturant must be added under a formula approved by the Treasury Department, and the denaturant cannot exceed 5% of the alcohol’s volume (including denaturants) for 2008 and earlier years.

The Farm Bill reduces the amount of allowable denaturants to 2% of the volume of the alcohol, as regulated by the Alcohol and Tobacco Tax and Trade Bureau, for 2009 and future years.

III. HOUSING ASSISTANCE TAX ACT OF 2008 A. Reduced Exclusion of Gain from a Personal Residence

HAT § 3092; I.R.C. § 121 Effective January 1, 2009

Background An individual taxpayer may exclude up to $250,000 ($500,000 if married filing a joint return) of gain realized on the sale or exchange of a principal residence. To be eligible for the exclusion, the taxpayer must have owned and used the residence as a principal residence for at least 2 of the 5 years ending on the date of the sale or exchange, and must not have excluded gain on sale of another main home within the prior 2 years.

The maximum exclusion is prorated for a taxpayer who does not meet the 2-year requirements because of a change in job location, health, or unforeseen circumstances. Members of the uniformed (military) services, the U.S. Foreign Service, and certain employees of the intelligence community can suspend the 5-year period for up to 10 years of service on qualified official extended duty.

The exclusion does not apply to the portion of gain that is equal to depreciation allowable during rental or business use of a principal residence for periods after May 6, 1997.

Explanation of Change Gain from the sale or exchange of a principal residence that is allocated to periods of nonqualified use is not excluded from gross income by I.R.C. § 121. The overall gain is allocated to periods of nonqualified use by applying a ratio of the aggregate periods of nonqualified use to the total period the property was owned by the taxpayer. A period of nonqualified use is any period

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beginning on or after January 1, 2009 when the property is not used by the taxpayer (or the taxpayer's spouse or former spouse) as a principal residence.

Nonqualified use does not include (1) any part of the 5-year period that is after the last date the taxpayer or spouse used it as a principal residence or (2) any period (not to exceed 2 years) that the taxpayer is temporarily absent by reason of a change in place of employment, health, or unforeseen circumstances. The actual use of the property during these periods does not matter.

The present-law election for members of the uniformed services, the U.S. Foreign Service, and employees of the intelligence community is unchanged.

As under present law, gain equal to post-May 6, 1997, depreciation is not eligible for the exclusion, and that gain is not taken into account in determining the gain allocated to nonqualified use. Planning Pointer Farm Conversion The new law foils a tax-planning technique that allowed a taxpayer to turn a farm into a principal residence for at least 2 years and exclude all of the gain on a subsequent sale.

Example 15 Conversion to Main Home Cherry Blossom bought a farm on December 31, 2008, for $1,000,000 that included a personal residence valued at $200,000 and farm buildings valued at $100,000. She farmed the land for 2 years, claiming $14,308 of 150% declining balance depreciation deductions on the farm buildings. (Straight-line depreciation for those 2 years is $10,000 ($100,000 × 10%.) On December 31, 2010, she converted the entire farm to her principal residence. On December 31, 2013, she sold it for $1,200,000. She did not exclude gain on sale of another main home after 2010.

Question 1. How much of Cherry’s $214,308 [$1,200,000 – ($1,000,000 - $14,308)] gain is taxable?

Answer 1. The $10,000 of gain equal to straight line depreciation is unrecaptured I.R.C. § 1250 gain, as under present law, which is subject to the 25% capital gains rate. The $4,308 ($14,308 - $10,000) of gain in excess of straight-line depreciation is ordinary income under the I.R.C. § 1250 recapture rules. Cherry had 24 months (2 years) of nonqualified use in 2009 and 2010, and her total ownership period was 60 months (5 years). She cannot exclude 40% (2/5) of the remaining $200,000 ($210,969 - $10,969) of gain, so she must report $80,000 ($200,000 × 40%) of long-term capital gain that is subject to the 15% capital gain rate. Her total taxable gain is $94,308 ($10,000 + $4,308 + $80,000).

Question 2. How much gain can Cherry exclude?

Answer 2. She meets the 2-year ownership and use tests, so she can exclude the remaining $120,000 ($200,000 × 60%) of gain, because it is less than the $250,000 maximum gain that may be excluded under I.R.C. § 121.

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Observation Farm Use Before 2009 If Cherry purchased the farm on December 31, 2006, converted it to a principal residence on December 31, 2008 and sold it on December 31, 2011, she could exclude all of the gain other than the gain equal to the depreciation she claimed because none of the nonqualified use was after December 31, 2008.

IV. EMERGENCY ECONOMIC STABILIZATION ACT OF 2008 A. Refundable AMT Credit

Extenders Act § 103; I.R.C. § 53 Effective for 2008 and later tax years

Background An individual’s taxable income is modified for AMTI by adding preference items and adjusting other items to negate the deferral of income that results from the regular tax treatment of those items. AMT attributable to deferral adjustments generates a minimum tax credit that is allowable to the extent the regular tax (reduced by other nonrefundable credits) exceeds the tentative minimum tax in a future tax year. Unused minimum tax credits are carried forward indefinitely.

One adjustment in computing AMTI is taxation at exercise of an incentive stock option (ISO). No regular tax is imposed on a qualified ISO until there is a disposition of the stock acquired through the ISO. For AMTI, an individual who exercises an ISO must include the excess of the fair market value (FMV) of the stock at the date of exercise over the amount paid for the stock. When the stock is sold in a later year, the individual has different bases for computing capital gain or loss for regular tax and for AMTI. The ISO adjustment is a deferral adjustment and therefore generates an AMT credit.

A refundable AMT credit is available for tax years beginning after December 31, 2006, and before January 1, 2013, based on the taxpayer’s long-term unused minimum tax credit (LUMTC). The LUMTC is the portion of the minimum tax credit that is attributable to AMT that arose more than 3 tax years before the current tax year (treating credits as used on a first-in, first-out basis). The refundable credit is the greatest of three amounts: The lesser of $5,000 or the LUMTC 20% of the LUMTC The prior-year AMT refundable credit before any reduction for adjusted gross income (AGI)

The refundable credit was phased out if the individual’s AGI exceeded the threshold amount for the full allowance of personal and dependency exemption deductions.

Explanation of Change Generally, 50% of the LUMTC can be claimed over each of 2 years (rather than 20% over each of 5 years) and the AGI phaseout is eliminated. Any unpaid tax on October 3, 2008 (the date of enactment), that is attributable to AMT resulting from an ISO exercise is abated, along with any related interest or penalty. The abated tax cannot be taken into account in determining the minimum tax credit. The AMT refundable credit amount and the AMT credit for each of the first 2 tax years beginning after December 31, 2007, are increased by 50% of any interest and penalty paid before October 3, 2008, that is related to AMT imposed on ISO exercises.

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B. Individual Tax Relief

Extenders Act §§ 201, 202, 203, 204, and 205; I.R.C. §§ 62, 63, 164, 222, and 408 Effective for 2008 and 2009

Several deduction provisions for individuals that expired December 31, 2007, are extended through 2009.

State and Local Sales Taxes

Individuals may claim an itemized deduction for certain state and local taxes paid, including individual income taxes, real property taxes, and personal property taxes. The deduction is not permitted for determining AMTI. For tax years beginning in 2004–2007, a taxpayer could elect to take an itemized deduction for state and local general sales taxes in lieu of the itemized deduction for state and local income taxes.

This provision is extended for 2 years, through December 31, 2009.

Real Property Taxes

An individual taxpayer’s taxable income is computed by reducing AGI by either a standard deduction or itemized deductions. The deduction for taxes (including state, local, and foreign income taxes, real property taxes, and personal property taxes) generally is an itemized deduction. For tax years beginning in 2008, an individual’s standard deduction is increased by the lesser of the taxpayer’s allowable itemized deductions for state and local real property taxes or $500 ($1,000 in the case of a married individual filing jointly).

The additional standard deduction for state and local real property taxes is extended for tax years beginning in 2009.

Foreclosure Debt Relief

Economic Stabilization Act § 303; I.R.C. § 108 Effective for 2010–2012

Background Gross income includes income that is realized by a debtor from the cancellation of debt, with exceptions for debtors in bankruptcy cases, insolvent debtors, some student loans, some farm debts, and some real property business debt. Cancellation of debt income (CODI) generally is the difference between the amount of debt being canceled and the amount used to satisfy the debt.

An exception for discharged qualified home mortgage debt applies for 2008 and 2009. Qualified home mortgage debt is mortgage debt up to $2,000,000 that was incurred for acquisition, construction, or substantial improvement of the taxpayer’s principal residence. It includes refinancing of the original debt but not additional debt incurred for other purposes during the refinancing.

Explanation of Change The Emergency Economic Stabilization Act extends the gross income exclusion for discharge of home mortgage debt for 3 years, through 2012.

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Casualty Loss Reduction

Extenders Act § 706; I.R.C. § 165 Effective for tax years beginning in 2009

Background A deduction is allowed for a loss of property that arises from fire, storm, shipwreck, or other casualty, or from theft if it is not compensated by insurance or otherwise. Personal casualty or theft losses are deductible only if they exceed a $100 floor per casualty or theft. In addition, aggregate net casualty and theft losses are deductible only to the extent they exceed 10% of an individual taxpayer’s AGI.

Explanation of Change The $100-per-casualty floor is increased to $500 for tax years beginning in 2009. It is scheduled to revert to $100 after 2009.

C. Business Tax Benefits

Tax breaks for businesses include provisions for depreciation and expensing of capital expenditures, extensions of several charitable contribution enhancements, and extensions of several credits. Businesses that include mental health benefits in group health plans must generally provide equal benefits for physical and mental health care.

Depreciation

Several recovery periods for specific types of assets that expired in 2007 were extended, and some new provisions will take effect in 2009.

New Farm Equipment Extenders Act § 505; I.R.C. § 168 Effective for property placed in service during 2009

Background Using the MACRS general depreciation system (GDS), most machinery and equipment used in a farming business is depreciated over a 7-year period, based on a class life of 10 years. Taxpayers may elect to depreciate MACRS property under the alternative depreciation system (ADS) instead of GDS. ADS generally requires use of straight-line depreciation over a recovery period equal to the property’s class life. Use of ADS is required in some situations.

Explanation of Change The GDS recovery period is 5 years for any machinery or equipment (other than grain bins, cotton ginning assets, fences, or other land improvements) that are used in a farming business, if the original use of the machinery or equipment begins with the taxpayer after December 31, 2008, and before January 1, 2010. The ADS recovery period is 10 years.

The trade or business of farming for this purpose involves the cultivation of land or raising or harvesting any agricultural or horticultural commodity, including operating a nursery or sod farm, and raising or harvesting trees bearing fruit, nuts, or other crops, or ornamental trees [I.R.C. § 263A(e)(4)].

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Expensing Provisions

Environmental Remediation Costs Extenders Act § 318; I.R.C. § 198 Effective for 2008 and 2009

Background A deduction is allowed for ordinary and necessary expenses paid or incurred in carrying on any trade or business, but a current deduction is generally prohibited for capital expenditures (i.e., amounts paid or incurred to materially add to the value or substantially prolong the useful life of property owned by the taxpayer, or to adapt property to a new or different use). Amounts paid for repairs and maintenance are not capital expenditures. The determination of whether an expense is deductible or capitalizable is based on the facts and circumstances of each case.

Taxpayers may elect to deduct certain environmental remediation expenditures paid or incurred before January 1, 2008, that would otherwise be capitalized. The deduction applies for both regular tax and AMT purposes. The expenditure must be incurred in connection with abatement or control of hazardous substances at a qualified contaminated site. A qualified contaminated site (often called a brownfield) is property held for use in a trade or business, for the production of income, or as inventory, that is certified by a state environmental agency to be an area at or on which there was a release (or threat of release) or disposal of a hazardous substance. Deductions for qualified environmental remediation expenditures are treated as depreciation for I.R.C. § 1245 recapture.

Explanation of Change The expensing provision is extended for 2 years, through December 31, 2009.

V. ENERGY IMPROVEMENT AND EXTENSION ACT OF 2008 A. Fuel Credits

Credits are extended and expanded, and a carbon capture requirement is imposed on liquid fuel derived from coal.

Alternative-Fuel Credit

Energy Act § 204; I.R.C. § 6426 Effective October 3, 2008

Background A 50¢ per gallon (or equivalent for nonliquid fuel) excise tax credit is allowed against the I.R.C. § 4041 retail fuel excise tax liability for alternative fuel that is sold for use, or used, by the taxpayer as a fuel in a motor vehicle or motorboat and the I.R.C. § 4081 removal-at-terminal excise tax liability for alternative fuel used by a taxpayer to produce an alternative-fuel mixture for sale or use in the taxpayer’s trade or business.

Alternative fuels qualifying for the incentives include liquefied petroleum gas, P series fuels defined under 42 U.S.C. § 13211, compressed or liquefied natural gas, liquefied hydrogen, any liquid fuel derived from coal (including peat) through the Fisher-Tropsch process, and liquid fuel

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derived from biomass. Fuel that is ethanol, methanol, biodiesel, or renewable diesel does not qualify as an alternative fuel.

The alternative fuel and alternative fuel mixture excise tax credit and refund rules for all fuels other than liquefied hydrogen were scheduled to terminate for any sale or use after September 30, 2009. For any sale or use involving liquefied hydrogen, the credits and refunds terminate after September 30, 2014.

Explanation of Change The alternative-fuel and alternative-fuel mixture excise tax credits and refunds are extended through December 31, 2009, for all fuels except liquefied hydrogen. Alternative fuel used in aviation qualifies for credit against the I.R.C. § 4041 tax, and compressed or liquefied gas derived from biomass is added to the list of fuels eligible for credit or refund.

A carbon capture requirement is imposed for liquid fuel derived from coal (including peat) through the Fischer-Tropsch process. The fuel must be certified as derived from coal produced at a gasification facility that separates and sequesters not less than a specified percentage of the facility’s total CO2 emissions. The applicable percentage is 50% for fuel produced from October 1, 2009, through December 30, 2009, and 75% in the case of fuel produced after December 30, 2009.

Biodiesel and Renewable Diesel

Energy Act § 202; I.R.C. §§ 40A, 6426, and 6427 Effective in 2009

Background The income tax credit for biodiesel fuels is the sum of three credits: the biodiesel mixture credit, the biodiesel credit, and the small agribiodiesel producer credit. The credit does not apply to fuel sold or used after December 31, 2008. (See page 109 of the 2008 National Income Tax Workbook for an explanation of the credit components.) These income and excise tax credits for biodiesel are coordinated so that credit for the same biodiesel cannot be claimed for both income and excise tax purposes.

IRS Notice 2007-37, 2007-17 I.R.B. 1002, provided that co-produced fuel (fuel produced as a result of co-processing biomass and petroleum feedstock) qualified for the renewable diesel incentives to the extent of the fuel attributable to the biomass in the mixture. In co-produced fuel, the fuel attributable to the biomass does not exist as a distinct separate quantity prior to mixing.

Explanation of Changes The income tax and excise tax credits, and payment provisions, for biodiesel (including agribiodiesel) and renewable diesel are extended for an additional year, through December 31, 2009, and both biodiesel and agribiodiesel are entitled to the $1 per gallon credit.

The definition of renewable diesel is modified to eliminate the requirement that the fuel be made using a thermal depolymerization process, and the Treasury secretary is authorized to identify standards for renewable diesel equivalent to ASTM D975 and ASTM D396. Thus, renewable diesel is liquid fuel derived from biomass that meets EPA registration requirements and the standard approved by the Treasury secretary. Renewable diesel also includes biomass fuel that meets a Department of Defense military specification for jet fuel or an ASTM for aviation turbine fuel. Kerosene is treated as diesel fuel when it is in a mixture with renewable jet fuel.

IRS Notice 2007-37 is overridden with respect to co-produced fuel that is produced, and sold or used, after December 31, 2008. Renewable diesel does not include any fuel derived from co-

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processing biomass with a feedstock that is not biomass. The de minimis use of catalysts, such as hydrogen, is permitted.

U.S. Production and Use

Energy Act § 203; I.R.C. §§ 40, 40A, 6426, and 6427 Effective for claims and payments made on or after May 15, 2008

Per-gallon tax incentives are provided for several qualified fuels. Except for cellulosic biofuel, which must be produced and sold in the United States, the tax law is silent as to the geographic limitations on where the fuel must be produced, used, or sold.

Fuel that is produced outside the United States for use as a fuel outside the United States is ineligible for the per-gallon tax incentives relating to alcohol, biodiesel, renewable diesel, and alternative fuels.

VI. THE WORKER, RETIREE, AND EMPLOYER RECOVERY ACT OF 2008

The Worker, Retiree, and Employer Recovery Act of 2008 (Recovery Act, Pub. L. No. 110-458) made more than 130 changes to the Internal Revenue Code. This chapter focuses on the changes directly affecting individual taxpayers, rather than on the employer plan funding and administration provisions. The Joint Committee on Taxation’s Technical Explanation of H.R. 7327 (JCX-85-08, December 11, 2008) is the primary resource, along with the act itself, for preparation of this summary.

A. Required Minimum Distributions

Act § 201; I.R.C. § 401(a)(9) Effective for calendar year 2009

Background Employer-provided qualified retirement plans and individual retirement accounts and annuities (IRAs) are subject to required minimum distribution (RMD) rules. Qualified retirement plans for this purpose are tax-qualified plans described in I.R.C. § 401(a), employee retirement annuities described in I.R.C. § 403(a), tax-sheltered annuities described in I.R.C. § 403(b), and plans described in I.R.C. § 457(b) that are maintained by a governmental employer.

Required minimum distributions from IRAs must begin by April 1 of the calendar year following the calendar year in which the IRA owner reaches age 70½. However, the required beginning date (RBD) for distributions from an employer-provided qualified retirement plan generally can be delayed to April 1 of the year following the year the individual retires unless the individual is a 5% owner of the employer maintaining the plan.

For IRAs and employer plans that are defined contribution plans, the RMD for each year generally is determined by dividing the account balance as of the end of the prior year by a distribution period, generally a number in the uniform lifetime table. Special rules apply to annuity payments from an insurance contract.

Failure to take an RMD triggers a 50% excise tax. The tax may be waived if the failure resulted from a reasonable error and reasonable steps were taken to remedy the violation.

The value of many retirement accounts has decreased substantially in the past year, and retirees are concerned about depleting their remaining balances through RMDs.

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Explanation of Change No minimum distribution is required for calendar year 2009 from individual retirement accounts and employer-provided qualified retirement plans that are defined contribution plans A defined contribution plan is a plan that provides an individual account for each participant, with benefits based on the amount contributed to the participant’s account and on any income, expenses, gains, losses, and forfeitures of accounts of other participants that may be allocated to the participant’s account [I.R.C. § 414(i)].

The relief provision means that the annual RMD for 2009 that is otherwise required by federal tax law for these plans (a distribution determined by dividing the 2008 year-end account balance by a distribution period) is not required to be made, whether this is the individual’s first distribution or a subsequent distribution. The next RMD will be for calendar year 2010.

If an individual’s required beginning date (RBD) is April 1, 2010 (e.g., the individual attains age 70½ in 2009), the first year for which an RMD is otherwise required is 2009. The new law change suspends this requirement, so that no distribution need be taken for 2009. Thus, no distribution is required to be taken by April 1, 2010. However, the provision does not change the individual’s RBD for determining the RMD for calendar years after 2009. An individual whose RBD is April 1, 2010, must take an RMD for 2010 no later than the last day of calendar year 2010. Practitioner Note Deferred Distributions for 2008 The relief does not apply to distributions required for the 2008 tax year, including distributions for 2008 that were delayed until the first 3 months of 2009 by individuals who attained age 70½ during 2008. These distributions must still be taken by April 1, 2009, and will be taxable income for 2009. However, the second distribution for the calendar year 2009 is not required—the next RMD will be during 2010 for the year 2010.

Effect on Beneficiaries The relief does apply to after-death distributions to beneficiaries. If an individual whose RBD is April 1, 2010, dies on or after that date, the RMD for the individual’s beneficiary will be determined using the rule for death on or after the individual’s RBD.

Under the 5-year rule that applies to some beneficiaries, no distributions are required for the 4 years immediately following the owner’s death. However, the entire account balance must be distributed no later than December 31 of the calendar year containing the fifth anniversary of the individual’s death. If the 5-year rule applies, the 5-year period will be determined without regard to calendar year 2009. Thus, for example, if the owner died in 2007, the 5-year period will end in 2013 instead of 2012. Practitioner Note Early Distribution Penalty Exception Not Changed RMDs generally begin at age 70½. A 10% early distribution penalty generally applies to distributions taken before age 59½ unless an exception provided by I.R.C. § 72(t) applies. The new law did not amend I.R.C. § 72(t) with regard to the early distribution penalty exception for substantially equal payments. This exception requires substantially equal payments to be taken over a minimum of 5 years or until the recipient is age 59½, if longer. Thus, the new law suspending RMDs does not permit individuals using this exception to skip their required distributions for 2009.

Rollover Is Permitted If all or part of a distribution during 2009 becomes an eligible rollover distribution (because under the new law it is no longer an RMD), that portion is exempt from the rules for eligible rollover distributions. These include requirements for a written explanation of the direct rollover

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requirements and the mandatory 20% income tax withholding for eligible rollover distributions. If a defined contribution plan distributes an amount that would have been an RMD for 2009, the plan is permitted but not required to offer the employee a direct rollover of that amount and provide the employee with a written explanation. If the employee receives the distribution, the distribution is not subject to mandatory 20% income tax withholding, and the employee can roll over the distribution by contributing it to an eligible retirement plan within 60 days of the distribution.

B. Penalty Provisions

Penalties for failure to file timely partnership and S corporation returns are increased.

Partnership Returns

Act § 127; I.R.C. § 6698 Effective for returns required to be filed after 2008

Background A partnership is treated as a pass-through entity, and income earned by a partnership, whether distributed or not, is taxed to the partners. A partnership is required to file a tax return for each tax year that includes the names and addresses of the partners who are entitled to share in the partnership’s taxable income and the amount of each partner’s distributive share.

In addition to criminal penalties, a civil penalty applies for failure to timely file a partnership return. The penalty of $85 per partner is assessable for each month (or fraction of a month) that the failure continues, up to a maximum of 12 months, for returns required to be filed after December 20, 2007.

Explanation of Change The civil penalty for failure to file partnership returns is increased by $4 per partner, to $89 per partner per month, for returns required to be filed after December 31, 2008.

S Corporation Returns

Act § 128; I.R.C. § 6699 Effective for returns required to be filed after 2008

Background In general, an S corporation is not subject to corporate-level income tax on its items of income and loss. Instead, an S corporation passes through its items of income and loss to its shareholders, who take their shares of these items into account on their individual income tax returns.

S corporations are required to file a tax return for each tax year that includes the names and addresses of all persons owning stock in the corporation at any time during the tax year; the number of shares of stock owned by each shareholder at all times during the tax year; the amount of money and other property distributed by the corporation during the tax year to each shareholder (and the date of the distributions); and each shareholder’s pro rata share of each item of the corporation for the taxable year.

A civil penalty is assessable for failure to timely file an S corporation return or to provide the information required to be shown on the return. The monthly penalty is $85 times the number of shareholders in the S corporation during any part of the tax year for which the return was

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required. It is assessable for the number of months (including a fraction of a month) the failure continues, up to a maximum of 12 months.

Explanation of Change The penalty for failure to file S corporation returns timely is increased by $4 per shareholder, to $89 a month, for up to 12 months, for returns required to be filed after December 31, 2008.

VII. AMERICAN RECOVERY AND REINVESTMENT ACT OF 2009

A. Additional First-Year Depreciation for certain property acquired during 2009

I.R.C. § 168 Effective for taxable years beginning after December 31, 2008 The provision extends the additional first-year depreciation deduction for one year, generally through 2009 (through 2010 for certain longer-lived and transportation property). Practitioner Note Election out of UNICAP Farmers who elect out of uniform capitalization (UNICAP) are required to use straight-line ADS depreciation for property placed in service while the UNICAP election is in place. Thus they are not eligible to take additional first-year depreciation.

B. Temporary increase in limitations on expensing of certain depreciable business assets

I.R.C. § 179 Effective for taxable years beginning after December 31, 2008 The provision extends the $250,000 and $800,000 amounts to taxable years beginning in 2009.

C. Special rules applicable to qualified small business stock for 2009 and 2010

I.R.C. § 1202 Effective for stock issued after February 14, 2009 and before January 1, 2011. Under the provision, the percentage exclusion for qualified small business stock sold by an individual is increased from 50 percent (60 percent for certain empowerment zone businesses) to 75 percent.

As a result of the increased exclusion, gain from the sale of qualified small business stock to which the provision applies is taxed at effective rates of seven percent under the regular tax and 12.88 percent under the alternative minimum tax.

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D. Temporary reduction in recognition period for built-in gains tax

I.R.C. § 1374 Effective for stock issued after February 14, 2009 and before January 1, 2011. The Act provides that, for any taxable year beginning in 2009 and 2010, no tax is imposed on an S corporation under section 1374 if the seventh taxable year in the corporation's recognition period preceded such taxable year. Thus, with respect to gain that arose prior to the conversion of a C corporation to an S corporation, no tax will be imposed under section 1374 after the seventh taxable year the S corporation election is in effect. In the case of built-in gain attributable to an asset received by an S corporation from a C corporation in a carryover basis transaction, no tax will be imposed under section 1374 if such gain is recognized after the date that is seven years following the date on which such asset was acquired.

E. Making work pay credit

I.R.C. § 36A The provision provides eligible individuals a refundable income tax credit for two years (taxable years beginning in 2009 and 2010).

The credit is the lesser of: (1) 6.2 percent of an individual's earned income or (2) $400 ($800 in the case of a joint return). For these purposes, the earned income definition is the same as for the earned income tax

credit with two modifications. First, earned income for these purposes does not include net earnings from self-employment which are not taken into account in computing taxable income. Second, earned income for these purposes includes combat pay excluded from gross income under section 112.

The credit is phased out at a rate of two percent of the eligible individual's modified adjusted gross income above $75,000 ($150,000 in the case of a joint return). For these purposes an eligible individual's modified adjusted gross income is the eligible individual's adjusted gross income increased by any amount excluded from gross income under sections 911 , 931 , or 933 . An eligible individual means any individual other than: (1) a nonresident alien; (2) an individual with respect to whom another individual may claim a dependency deduction for a taxable year beginning in a calendar year in which the eligible individual's taxable year begins; and (3) an estate or trust.

Also, the otherwise allowable making work pay credit allowed under the provision is reduced by the amount of any payment received by the taxpayer pursuant to the provisions of the Act providing economic recovery payments under the Veterans Administration, Railroad Retirement Board, and the Social Security Administration and a temporary refundable tax credit for certain government retirees. The provision treats the failure to reduce the making work pay credit by the amount of such payments or credit, and the omission of the correct TIN, as clerical errors. This allows the IRS to assess any tax, resulting from such failure or omission without the requirement to send the taxpayer a notice of deficiency allowing the taxpayer the right to file a petition with the Tax Court.

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F. Economic recovery payment to recipients of social security, supplemental security income, railroad retirement benefits, and veterans disability compensation or pension benefits

The Act provides for a one-time economic recovery payment of $250 to adults who were eligible for Social Security benefits, Railroad Retirement benefits, or veteran's compensation or pension benefits; or individuals who were eligible for Supplemental Security Income (SSI) benefits (excluding individuals who receive SSI while in a Medicaid institution). Only individuals who were eligible for one of the four programs for any of the three months prior to February 2009 shall receive an Economic Recovery Payment.

To be eligible for the economic recovery payment. a person must have been during the three month period prior February 2009: an adult Social Security Old Age and Survivors Insurance (OASI) or Disability Insurance (DI) beneficiary (including adults eligible for child's benefits on the basis of as disability that began before the age of 22, persons eligible under transitional insured status, and persons eligible under special rules for uninsured persons over the age of 72), an adult Railroad Retirement or disability beneficiary (including dependents, survivors, and disabled adult children), a veterans pension or compensation beneficiary, or an SSI recipient (excluding persons who only receive a personal needs allowance).

An individual shall receive only one $250 Economic Recovery Payment under this section regardless of whether the individual is eligible for a benefit from more than one of the four federal programs. If the individual is also eligible for the “Making Work Pay” credit from Section 1001, that credit shall be reduced by the Economic Recovery Payment made under this section.

The provision provides that Economic Recovery Payments shall not be considered gross income for income tax purposes and that the payments are protected by the assignment and garnishment provisions of the four federal benefit programs. The payments will be subject to the Treasury Offset Program.

The Secretary of the Treasury shall commence making payments as soon as possible, but no later than 120 days after February 17, 2009. No Economic Recovery Payments shall be made after December 31, 2010.

G. Extension of and increase in first-time homebuyer credit; waiver of requirement to repay

I.R.C. §§ 36 and 1400C Effective for residences purchased after December 31, 2008.

The provision extends the existing homebuyer credit for qualifying home purchases before December 1, 2009. In addition, it increases the maximum credit amount to $8,000 ($4,000 for a married individual filing separately) and waives the recapture of the credit for qualifying home purchases after December 31, 2008 and before December 1, 2009. This waiver of recapture applies without regard to whether the taxpayer elects to treat the purchase in 2009 as occurring on December 31, 2008. If the taxpayer disposes of the home or the home otherwise ceases to be the principal residence of the taxpayer within 36 months from the date of purchase, the present law rules for recapture of the credit will apply.

The provision removes the prohibition on claiming the credit if the residence is financed by the proceeds of a mortgage revenue bond, a qualified mortgage issue the interest on which is exempt from tax under section 103.

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H. Additional deduction for State sales tax and excise tax on the purchase of certain motor vehicles

I.R.C. §§ 63 and 164 Effective for purchases on or after February 17, 2009 and before January 1, 2010.

The Act provides a deduction for qualified motor vehicle taxes. It expands the definition of taxes allowed as a deduction to include qualified motor vehicle taxes paid or accrued within the taxable year. A taxpayer who itemizes and makes an election to deduct State and local sales taxes for qualified motor vehicles for the taxable year shall not be allowed the increased standard deduction for qualified motor vehicle taxes.

Qualified motor vehicle taxes include any State or local sales or excise tax imposed on the purchase of a qualified motor vehicle. A qualified motor vehicle means a passenger automobile, light truck, or motorcycle which has a gross vehicle weight rating of not more than 8,500 pounds, or a motor home acquired for use by the taxpayer after February 17, 2009 and before January 1, 2010, the original use of which commences with the taxpayer.

The deduction is limited to the tax on up to $49,500 of the purchase price of a qualified motor vehicle. The deduction is phased out for taxpayers with modified adjusted gross income between $125,000 and $135,000 ($250,000 and $260,000 in the case of a joint return).

I. American opportunity tax credit

I.R.C. § 25A Effective with respect to taxable years beginning after December 31, 2008.

Prior Law

Individual taxpayers are allowed to claim a nonrefundable credit, the Hope credit, against Federal income taxes of up to $1,800 (for 2009) per eligible student per year for qualified tuition and related expenses paid for the first two years of the student's post-secondary education in a degree or certificate program. The Hope credit rate is 100 percent on the first $1,200 of qualified tuition and related expenses, and 50 percent on the next $1,200 of qualified tuition and related expenses; these dollar amounts are indexed for inflation, with the amount rounded down to the next lowest multiple of $100. Thus, for example, a taxpayer who incurs $1,200 of qualified tuition and related expenses for an eligible student is eligible (subject to the adjusted gross income phaseout described below) for a $1,200 Hope credit. If a taxpayer incurs $2,400 of qualified tuition and related expenses for an eligible student, then he or she is eligible for a $1,800 Hope credit.

New Law

The provision modifies the Hope credit for taxable years beginning in 2009 or 2010. The modified credit is referred to as the American Opportunity Tax credit. The allowable modified credit is up to $2,500 per eligible student per year for qualified tuition and related expenses paid for each of the first four years of the student's post-secondary education in a degree or certificate program. The modified credit rate is 100 percent on the first $2,000 of qualified tuition and related expenses, and 25 percent on the next $2,000 of qualified tuition and related expenses. For purposes of the modified credit, the definition of qualified tuition and related expenses is expanded to include course materials.

Under the provision, the modified credit is available with respect to an individual student for four years, provided that the student has not completed the first four years of post-secondary

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education before the beginning of the fourth taxable year. Thus, the modified credit, in addition to other modifications, extends the application of the Hope credit to two more years of post-secondary education.

The modified credit that a taxpayer may otherwise claim is phased out ratably for taxpayers with modified adjusted gross income between $80,000 and $90,000 ($160,000 and $180,000 for married taxpayers filing a joint return). The modified credit may be claimed against a taxpayer's alternative minimum tax liability.

Forty percent of a taxpayer's otherwise allowable modified credit is refundable. However, no portion of the modified credit is refundable if the taxpayer claiming the credit is a child to whom section 1(g) applies for such taxable year (generally, any child under age 18 or any child under age 24 who is a student providing less than one-half of his or her own support, who has at least one living parent and does not file a joint return).

J. Temporary increase of refundable portion of child credit

I.R.C. § 24 Effective for taxable years beginning after December 31, 2008.

Prior Law

An individual may claim a tax credit for each qualifying child under the age of 17. The amount of the credit per child is $1,000 through 2010, and $500 thereafter. A child who is not a citizen, national, or resident of the United States cannot be a qualifying child.

The credit is phased out for individuals with income over certain threshold amounts. Specifically, the otherwise allowable child tax credit is reduced by $50 for each $1,000 (or fraction thereof) of modified adjusted gross income over $75,000 for single individuals or heads of households, $110,000 for married individuals filing joint returns, and $55,000 for married individuals filing separate returns. For purposes of this limitation, modified adjusted gross income includes certain otherwise excludable income earned by U.S. citizens or residents living abroad or in certain U.S. territories.

The credit is allowable against the regular tax and the alternative minimum tax. To the extent the child credit exceeds the taxpayer's tax liability, the taxpayer is eligible for a refundable credit (the additional child tax credit) equal to 15 percent of earned income in excess of a threshold dollar amount (the “earned income” formula). The threshold dollar amount is $12,550 (for 2009), and is indexed for inflation.

Families with three or more children may determine the additional child tax credit using the “alternative formula,” if this results in a larger credit than determined under the earned income formula. Under the alternative formula, the additional child tax credit equals the amount by which the taxpayer's social security taxes exceed the taxpayer's earned income tax credit (“EITC”).

Earned income is defined as the sum of wages, salaries, tips, and other taxable employee compensation plus net self-employment earnings. Unlike the EITC, which also includes the preceding items in its definition of earned income, the additional child tax credit is based only on earned income to the extent it is included in computing taxable income. For example, some ministers' parsonage allowances are considered self-employment income and thus, are considered earned income for purposes of computing the EITC, but the allowances are excluded from gross income for individual income tax purposes and thus, are not considered earned income for purposes of the additional child tax credit.

Any credit or refund allowed or made to an individual under this provision (including to any resident of a U.S. possession) is not taken into account as income and shall not be taken into account as resources for the month of receipt and the following two months for purposes of

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determining eligibility of such individual or any other individual for benefits or assistance, or the amount or extent of benefits or assistance, under any Federal program or under any State or local program financed in whole or in part with Federal funds.

New Law

The provision modifies the earned income formula for the determination of the refundable child credit to apply to 15 percent of earned income in excess of $3,000 for taxable years beginning in 2009 and 2010.

K. Temporary increase in earned income tax credit

I.R.C. § 32 Effective for taxable years beginning after December 31, 2008.

Prior Law

Low- and moderate-income workers may be eligible for the refundable earned income tax credit (“EITC”). Eligibility for the EITC is based on earned income, adjusted gross income, investment income, filing status, and immigration and work status in the United States. The amount of the EITC is based on the presence and number of qualifying children in the worker's family, as well as on adjusted gross income and earned income.

The EITC generally equals a specified percentage of earned income up to a maximum dollar amount. The maximum amount applies over a certain income range and then diminishes to zero over a specified phaseout range. For taxpayers with earned income (or adjusted gross income (AGI), if greater) in excess of the beginning of the phaseout range, the maximum EITC amount is reduced by the phaseout rate multiplied by the amount of earned income (or AGI, if greater) in excess of the beginning of the phaseout range. For taxpayers with earned income (or AGI, if greater) in excess of the end of the phaseout range, no credit is allowed.

New Law

Three or more qualifying children

The provision increases the EITC credit percentage for families with three or more qualifying children to 45 percent for 2009 and 2010. For example, in 2009 taxpayers with three or more qualifying children may claim a credit of 45 percent of earnings up to $12,570, resulting in a maximum credit of $5,656.50.

Provide additional marriage penalty relief through higher threshold phase-out amounts for married couples filing joint returns

The provision increases the threshold phase-out amounts for married couples filing joint returns to $5,000 above the threshold phase-out amounts for singles, surviving spouses, and heads of households) for 2009 and 2010. For example, in 2009 the maximum credit of $3,043 for one qualifying child is available for those with earnings between $8,950 and $16,420 ($21,420 if married filing jointly). The credit begins to phase down at a rate of 15.98 percent of earnings above $16,420 ($21,420 if married filing jointly). The credit is phased down to $0 at $35,463 of earnings ($40,463 if married filing jointly).

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L. Extension of increased alternative minimum tax exemption amount; Extension of alternative minimum tax relief for nonrefundable personal credits

I.R.C. §§ 26 and 55 Effective for taxable years beginning in 2009.

The Act provides that the individual AMT exemption amount for taxable years beginning in 2009 is: (1) $70,950, in the case of married individuals filing a joint return and surviving spouses; (2) $46,700 in the case of other unmarried individuals; and (3) $35,475 in the case of married individuals filing separate returns.

For taxable years beginning in 2009, the provision allows an individual to offset the entire regular tax liability and alternative minimum tax liability by the nonrefundable personal credits.

M. Decreased required estimated tax payments in 2009 for certain small businesses

I.R.C. § 6654 Effective for tax years beginning in 2009 The Act provides that the required annual estimated tax payments of a qualified individual for taxable years beginning in 2009 is not greater than 90 percent of the tax liability shown on the tax return for the preceding taxable year. A qualified individual means any individual if the adjusted gross income shown on the tax return for the preceding taxable year is less than $500,000 ($250,000 if married filing separately) and the individual certifies that at least 50 percent of the gross income shown on the return for the preceding taxable year was income from a small trade or business. For purposes of this provision, a small trade or business means any trade or business that employed no more than 500 persons, on average, during the calendar year ending in or with the preceding taxable year.

VIII. RULINGS AND CASES Notice 2008-86 I.R.C. § 1033

The IRS issued a list of counties that had exceptional, extreme, or severe drought during the 12-month period ending August 31, 2008. The period for replacing livestock sold because of drought is extended at least until the end of 2009 for these counties.

Background I.R.C. § 1033(a) generally provides for nonrecognition of gain when property is involuntarily converted and replaced timely with property that is similar or related in service or use. I.R.C. § 1033(e)(1) provides that a sale or exchange of livestock (other than poultry) held for draft, breeding, or dairy purposes is treated as an involuntary conversion if the livestock is sold or exchanged solely on account of drought, flood, or other weather-related conditions and the sale is in excess of the number that would be sold following the taxpayer’s usual business practices.

I.R.C. § 1033(a)(2)(A) generally provides that gain from an involuntary conversion is recognized only to the extent the amount realized exceeds the cost of replacement property purchased during the replacement period. If the weather-related conditions causing the

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involuntary conversion of livestock result in the area being designated as eligible for assistance by the federal government, I.R.C. § 1033(e)(2)(A) provides that the replacement period ends 4 years after the close of the first tax year in which any part of the gain from the conversion is realized. However, I.R.C. § 1033(e)(2)(B) allows the IRS to extend this replacement period on a regional basis if the weather-related conditions that resulted in the area being designated as eligible for assistance by the federal government continue for more than 3 years.

If a sale or exchange of livestock is treated as an involuntary conversion on account of drought, Notice 2006-82 extends the replacement period under I.R.C. § 1033(e)(2)(B) until the end of the taxpayer’s first tax year ending after the first drought-free year for the applicable region. For this purpose, the first drought-free year for the applicable region is the first 12-month period that ends on August 31 in or after the last year of the taxpayer’s 4-year replacement period determined under I.R.C. § 1033(e)(2)(A). The 12-month drought-free period cannot include any weekly period for which exceptional, extreme, or severe drought is reported for any location in the applicable region. The applicable region is the county that experienced the drought conditions on account of which the livestock was sold or exchanged and all counties that are contiguous to that county.

Extension for 2009 The Appendix to Notice 2008-36 lists the counties for which exceptional, extreme, or severe drought was reported during the 12-month period ending August 31, 2008. Under Notice 2006-82, the 12-month period ending on August 31, 2008, is not a drought-free year for an applicable region that includes any county on this list.

Accordingly, the replacement period for a taxpayer whose 4-year replacement period was scheduled to expire at the end of 2008 (or, in the case of a fiscal year taxpayer, at the end of the tax year that includes August 31, 2008) is extended under I.R.C. § 1033(e)(2) and Notice 2006-82 if the applicable region includes any county on this list. This extension will continue until the end of the taxpayer’s first tax year ending after a drought-free year for the applicable region. [Notice 2008-86, 2008-42 IRB 925]

Nelson v. Commissioner I.R.C. § 451

Farmers who normally report 65% of sugar beet income in the harvest year cannot defer recognition of sugar beet insurance proceeds.

Two related family-farming partnerships generally use the cash method of accounting but they report income from the harvest and sale of sugar beet crops using a formula that includes 65% of the income in the year of harvest, and the remaining 35% in the year following harvest. They use a similar formula to report income from other farm crops and typically defer until the following year over 50% of total income relating to all crops grown in the current year. In 2001, the sugar beet crops were destroyed by excess moisture and the two partnerships received $201,919 from federal crop insurance. The taxpayers filed elections under I.R.C. § 451(d) to defer reporting the entire $201,919 until 2002. The IRS treated the entire $201,919 as income for 2001.

Issue Whether the partnerships may defer reporting crop insurance proceeds until the following year

Analysis A cash-basis taxpayer generally reports income in the year of receipt. I.R.C. § 451(d) permits a cash-method farmer who normally reports income from the sale of crops in the year following

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their production to defer income recognition of crop insurance proceeds received during the production year until the following year. Rev. Rul. 77-145, 1974-1 C.B. 113, addresses whether a normal practice of deferring all crop income is required by I.R.C. § 451(d), or whether a deferral of a substantial percentage qualifies. The ruling concluded that the deferral is available to a farmer who normally defers more than 50% of his crop income, and if the deferral is elected, all of the crop insurance proceeds must be deferred. The partnerships argued that their 35% normal deferral is substantial and supports the deferral of all of the crop insurance proceeds they received in 2001.

Holding The Tax Court held that farmers were meant to report crop insurance proceeds in the year that most of their crop income would be reported if the crops had not been destroyed. Thus, the partnerships were required to report all $201,919 of their crop insurance proceeds as income for 2001. [Nelson v. Commissioner, 130 T.C. No. 5 (2008)]

Frahm v. Commissioner I.R.C. §§ 105 and 162

A sole proprietor who employs his spouse can deduct reimbursements made to her for the cost of health insurance she purchased for herself and him under an I.R.C. § 105 plan.

A business owner may deduct ordinary and necessary expenses paid or incurred in carrying on a trade or business, including amounts paid to an employee pursuant to an employee benefit plan for expenses the employee pays or incurs. However, a taxpayer who owns an unincorporated business is not entitled to deduct health insurance costs that he pays or incurs for himself, his spouse, and his dependents from self-employment income. I.R.C. § 162(l) permits a deduction as an adjustment to gross income if all of its criteria are satisfied.

The taxpayers filed a joint return reporting the husband’s income from farming and the wife’s wages paid by him. They argue that their health insurance premiums and other medical expenses are deductible under I.R.C. § 162(a) as ordinary and necessary business expenses because the husband, as his wife’s employer, reimbursed her pursuant to a health plan within the meaning of I.R.C. § 105(b) for insurance premiums and other medical expenses that she paid from her separate checking account.

The IRS does not dispute that an agreement between employer and employee provided that the employer would provide health benefits to the employee. The IRS also did not dispute the employer-employee relationship or that the wife worked enough hours at a sufficient wage rate to qualify for health insurance benefits.

The IRS did dispute whether the health insurance policy purchased in the husband’s name that also provided coverage for the wife was an ordinary and necessary business expense, and whether a long-term care policy that covered only the husband was an excludable fringe benefit if the wife paid the premiums. The IRS argued that purchasing the policies in the husband’s name made the premiums his expense, from which she benefited as a spouse rather than as an employee.

The Tax Court disagreed, and held that the reimbursements were ordinary and necessary business expenses deductible by the husband’s farming business. [Frahm v. Commissioner, T.C. Memo 2007-351]

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