2012 Agribusiness Update: Illinois

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Find out what's new in agribusiness for 2012 and beyond, and how it could affect your agriculture business.

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  • Fees on Business
  • Water Quality regulations are coming. This will impact any business. Looking at land use issues. Nutrient focus now – N and P. Overall stream quality will be assessed and changes proposed. Likely to impact urban, construction, farming. Vast differences in contribution rates of impurities to stream quality depending on who is doing the study and sampling.
  • 2012 map
  • In a typical election map (top), states are red or blue to indicate whether a majority of their voters voted for the Republican candidate, Mitt Romney, or the Democratic candidate, Barack Obama. Election cartograms by population numbers (middle) or Electoral votes (bottom) give a more accurate visual representation of the election results. Credit: M. Newman, Univ. of Michigan
  • PresThis map, from PersonalLiberty.com, shows the 2008 Presidential Election results by county. Red counties were carried by Sen. John McCain, and blue counties were carried by President Barack Obama
  • Particulate Matter – DustEven in its modified form, S. 1816 remains problematic and authorizes states to issue federal permits under section 402 of the Clean Water Act to nonpoint sources, even sources that are currently exempt from permitting such as agricultural stormwater and irrigation return flows. In addition, if EPA takes the 402 permitting program authority away from a state, S. 1816 authorizes EPA to require nonpoint sources to get 402 permits in those states as well.  Although states are given an option to submit watershed implementations, if a state submits a watershed implementation plan to EPA for approval, it opens up the state, its employees, and its citizens to federal mandates, lawsuits by activist organizations and Total Maximum Daily Load (TMDL) implementation by court order. Once a plan is submitted for approval, all the provisions in the plan are subject to second-guessing by activist groups through citizen suits.  The amended Senate bill gives a state the authority to submit its watershed implementation plan to EPA for approval. However, if the State does so the bill would federalize those plans, making any controls in the plans subject to both EPA and citizen suit enforcement -- leading to federal land use, water supply, and local control problems presented in the original bill.
  • Success Stories
  • Waiver - No adjustment in RFS – Must cause economic harm to state, region or country. DROUGHTThe National Association of Convenience Stores (NACS) and the Society of Independent Gasoline Marketers of America (SIGMA) have asked the Environmental Protection Agency (EPA) to reject requests for a possible waiver of the renewable fuels standard (RFS) in the near term while considering the lowering of volume obligations in the future.22 CEO’s of Food Companies and CEO’s of companies refuting claim. 195 House Members and 25 Senators – What do you do with them? Pump, piping and tank approval E-15 - Who is adapting? GM and Ford Working with Major Auto - Super 95
  • Momentum in House to eliminate the RFS. Some from conservatives who feel it is a mandate, some from oil states who do not want a competitor to petroleum, some from environmental world who feel corn ethanol is bad, some from livestock who feel ethanol uses corn they could have at a better price without ethanol. If house stays R and Senate stays D, we should have a good shot at turning back legislation to remove the RFS. If gasoline prices stay this high it will be difficult to say not to continue developing biofuel. If it becomes a R sweep of House, Senate and President, we could see a change in the RFS. Lots of negativity right now and just like campaign tracking numbers go high and low, so will the numbers on biofuel development. Cellulose ethanol requirements will put some pressure on possible change. Cellulose ethanol production will actually be good. Farms are needed to produce renewable fuel. Demand for ag products will be good. 3 inches of well timed rain from drought/flood or good crops.
  • Farm Bill – What Happens now. Expired Sept 30. Farm programs by crop year. Crop insurance goes on. Food programs go on. Conservation restricted. Foreign market development, research, programs that will not get press and are important. 1949 Act would kick in around the first of the year. Government Price controls on crops, acreage limits on production, opposite of today. Wheat, corn, cotton, rice, oats, barley, rye oops no soybeans. About double the cost of today’s farm bill. January 1 before administrative problems. 16 bills since 1933 - 4 times in year of election, 7 times after the year of the electionBasic disagreement is over food stamps. Budget savings farm bill and could make a play in the fiscal cliff negotiations.
  • Itemized Deductions NOW - Expenses claimed on Schedule A are not limited regardless of taxpayer income.After January 1, 2013 Total amount of a higher-income taxpayer's itemized deductions will be reduced by 3 percent of the amount that the taxpayer's adjusted gross income exceeds an annual threshold.Child tax credit - NOW $1,000 for each qualifying dependent child. Jan 1, 2013 - $500 for each qualifying dependent child.Child and dependent care tax credit NOW - Care expenses of up to $3,000 for one child and $6,000 for two or more dependents are allowed. The credit is between 20 percent and 35 percent of those amounts, based on taxpayer income. January 1, 2013 Allowable care expenses will be reduced to a maximum of $2,400 for one child and $4,800 for two or more dependents. The credit will be between 20 percent and 30 percent of those amounts, based on taxpayer income
  • Howard Brown, John Grandin and the entire team of agronomists make a difference I see it.
  • 2012 Agribusiness Update: Illinois

    1. 1. 2012 Agribusiness Update December 6, 2012
    2. 2. Agenda10:45 a.m. – 11:00 a.m. Welcome Time & Registration11:00 a.m. – 11:05 a.m. Sikich LLP • Introduction11:05 a.m. – 11:35 a.m. Chuck Spencer, Director of Government Affairs, GROWMARK, Inc. • Farm Bill and Legislative Developments in Agriculture11:35 a.m. – 11:50 a.m. Break – Box Lunches11:50 a.m. – 12:20 p.m. James Hedges, Vice President Row Crops Eastern/Coastal Region, Monsanto • Opportunities in a Complex Marketplace12:20 p.m. – 12:50 p.m. Dale Aupperle, President, Heartland Ag Group, Ltd. • Land Values and the 2012 Crop Year12:50 p.m. – 1:20 p.m. Bob Disbrow, Partner, Sikich LLP and Tom Bayer, Partner, Sikich LLP • Perspectives in Agriculture – 2012 Trends and Developments1:20 p.m. – 1:30 p.m. Q&A
    3. 3. Legislative Update• State• Regulatory• National
    4. 4. State Update• Budget 2012 – IA, IN, WI, IL• Election – Veto Proof Majorities – House 71 D 47 R 2010 64 D 54 R – Senate 40 D 19 R 2010 35 D 24 R• Deal watch – Pensions, Gaming, Revenue
    5. 5. State Update• KIC 2025 – Keep it for the Crops – http://www.kic2025.org/• KIC by 2025” establishes goals for reducing nutrient losses from agriculture through adoption of the 4R’s of Nutrient Use: Right Source, Right Rate, Right Time, Right Place.
    6. 6. State Update• NPDES Permit for Pesticide Application• CAFO’s Water Quality• Mississippi River Basin Initiative
    7. 7. Obama 332 Romney 206
    8. 8. President County By County 2008
    9. 9. President County by County 2012
    10. 10. Congressional Districts 2012
    11. 11. Elections Matter• Illinois Election Results: Republicans Win Big In Usually Blue Illinois • Huffington Post 11/2010• Expert: Redistricting A Big Factor in Democrats Wins in Illinois • CBS Chicago Channel 2 2012• 2012 - 12 D 6 R 2010 - 8 D 11R
    12. 12. Elections Matter• White House, Senate, House – Same• 6 Billion total on all U.S. Elections• Taxes, Immigration, Environment, Climate Change, Supreme Court, Appellate Court
    13. 13. Regulations• Green House Gas Emissions• Ozone Rule• Hydraulic Fracturing• EPA Waters of the State Guidance• Storm Water Regulations• New Gasoline Formulation
    14. 14. Regulations• Clean Water Act NPDES Permits• Pesticide Application restrictions - West• Spray Drift• Chesapeake Bay• Florida Water Quality Standards• MRBI• Application testing and training
    15. 15. Success Update• Hours of Service Waiver• Dodd Frank Rules and Cooperatives• Clean Water Act Permits for Pesticides• PRIA
    16. 16. Biofuels
    17. 17. National Policy Update• President supports biofuels development and the RFS.• RFS Waiver Denied• 195 House Members and 25 Senators signed a letter supporting a waiver.
    18. 18. Farm Bill
    19. 19. Fiscal Cliff• Payroll Tax Rate – 4.2% to 6.2%• Capital Gains – 15% to 20%• Dividends taxed at ordinary income 39.6%• Marriage Tax – 167% of two individuals instead of equal to individual deduction• Personal exemption phase out for higher incomes• Estate Tax – 5.12 Million 35% to 1 M 55%
    20. 20. Low Water in Mississippi• Fertilizer for Spring Impacted Now• $20-$40 per Ton Added Cost Over River• Grain Bids Impacted• 7 Million Tons of Ag Products – $2.3 Billion• Senator Durbin is taking a lead on this issue. 15 Senators, 62 Congressmen, 2 Governors
    21. 21. Stewardship• Farmer/Landowner/Tenant Relations• CCA and Agronomic Specialists• Watershed Commitments• On Farm Discovery• 4 R Program – Source, Rate, Place, Time
    22. 22. Participate & Use Our Voice Wisely
    23. 23. Riding the Wave of Illinois Farmland Values!!! December 6, 2012 By: Dale E. Aupperle, AFM, ARA President- Heartland Ag Group Ltd. 1401 Koester Drive, Suite 100 Forsyth, IL 62535 ****** Phone: (217) 876-7700 Fax: (217) 876-7724 E-mail: dale@heartlandaggroup.com Web: www.heartlandaggroup.comSikich LLP & Heartland Ag Group Ltd. - in Springfield and Decatur
    24. 24. Agriculture is the mostbasic industry to our Nation Produces over 15% of GNP Employs 20% of national work force Has well over $1 trillion in assets 75% of agriculture’s assets (real estate) 55% of U. S. land is owned by people whose chief occupation is not farming! Approximately 1% of the population are farmers
    25. 25. Current Ag Trends Note some of the following general observations regarding agricultural conditions throughout our respective agricultural areas: High and Volatile Grain Prices  Low Interest Rates Rising Farming Expenses  Outside Capital Coming In Exploding Farmland Values  Uncertain Global Demand Ongoing Weather Concerns  More Absentee Ownership Leasing Shifts to Cash Rent  Threats of Inflation/Deflation Uncertain Farm Bill Safety Net  Fear of the Future Increasing Sensitivity to Farming Risk
    26. 26. The Latest Farming Equipment New tractors run on GPS guidance and auto-steer.
    27. 27. The Latest Farming Equipment Planters range from 16 rows to 48 rows!
    28. 28. The Latest Farming Equipment Nitrogen applicators for growing corn crops.
    29. 29. The Latest Farming Equipment The new combines are monsters!
    30. 30. Tile Drainage Systems (are becoming prevalent)
    31. 31. The Great Drought of 2012!!(Tracking corn yields on top quality Illinois farmland.) Corn Timeframe Yield Note5-year Average 195 Common on good farmsSpring 2012 (est.) 210 Follows two off yearsMay 2012 (est.) 225 Early planting optimismJune 2012 (est.) 210 Dry and dry forecastJuly 2012 (est.) 190 Dry too longJuly 13, 2012 (est.) 130 Week of excessive heatAugust 2012 (est.) 100 – 120 Zero rain and no forecast
    32. 32. Thoughts on a Sunday EveningAll of us gather our thoughts - - and keep our eyeon the ball in different ways. Here is a collectionof charts I look at every Sunday evening - - the bigpicture is wonderful!
    33. 33. Long term uptrend in tact?
    34. 34. This uptrend isthe gold standard!
    35. 35. Which direction next!
    36. 36. Be careful of an uptrend.
    37. 37. Historically high prices!
    38. 38. Understand the Big Picture Here is what’s happening in the world around us: U.S. Dollar – Most economist predict a declining dollar for the foreseeable future. Worldwide Economic Growth – Middle class growth in developing nations will lead to more food imports. Trade Policies – Trade liberalization will increase as will trade worldwide. Energy Costs – Agriculture is energy intensive so our cost of production will be rising. Biotechnology – The sound science behind biotechnology research will lead to higher yields and wider global acceptance. Global Farmland – Drought tolerant corn could lead to significant acreage increases. Watch Africa, Latin America and other spots on the globe.
    39. 39.  Supply and Demand – We have a very tight balance between world crop production and overall usage. Crop production problems could cause serious problems. The China Factor – An enormous and growing food and feed demand will continue for the expanding population. Soviet Union Countries – Have rising grain production and export capabilities. Water Availability – Agricultural production worldwide will be threatened as population pressures reduce water availability. Meat Consumption – World meat consumption is rising rapidly driving rising export demand for feed grain and protein meal. Summing it up - - This translates into a bullish outlook for the next couple of years for agriculture. Pressure for expanded acreage or enhanced yields will continue. Weather is critical!
    40. 40. Comparing Farmland to other Financial AssetsHere is a quick comparison of how farmland compares in its overall return - -it’s the best! 1970 – 2010 1990 – 2010 Average Average Asset/Index Annual Return Annual Return Farmland 10.77% 10.80% Mtg./REITS 9.09% 9.49% Aaa (Bonds) 8.24% 6.85% 10 yr Treasury 7.20% 5.45% Dow Jones 6.52% 6.84% S & P 500 6.24% 5.75% CPI 4.29% 2.63% PPI 4.03% 2.47% CRB Spot Index 3.25% 2.40% Note – From Bruce J. Sherrick, PhD at the University of Illinois.
    41. 41. Current Illinois Farmland SalesHere are several representative top quality land sales that haveoccurred since August 2012 across the central part of Illinois: Price Per County Date Acres Acre Christian Aug 2012 162.92 $15,600 Macoupin Oct 2012 116.00 $14,100 Moultrie Oct 2012 157.76 $12,000 Macon Nov 2012 80.00 $12,750 McLean Nov 2012 81.21 $12,550 Piatt Nov 2012 160.00 $13,000 Macon Nov 2012 123.19 $14,400
    42. 42. Doubling Illinois Land Values These specific four years show the powerful long-term increase in Illinois farmland values. Prime Land Year Value 1972 $850 Doubled 1976 $1,725 Doubled 1980 $3,300 Doubled 2007 $6,000 Doubled 2012 $12,500 Doubled Again!!Illinois farmland has increased 1235% overall in the lastthirty-nine years. It’s a growth stock - - the compound annualincrease was 6.5% per year. At that rate - - land will be at$28,000 per acre in 20 years!
    43. 43. Heartland Outlook November 2012Agriculture is experiencing incredible forces from every angle. At HeartlandAg Group Ltd., we are watching the following key areas: Commodity Prices – We are using $6.00 corn and $13.00 soybeans as a focal point for our 2013 income projections. We will have volatile trading ranges. Bushels Per Acre – Expect positive yield increases when weather conditions return to normal cycles. Interest Rates – Are at historic lows - - attractive for farmland mortgages. Farmland returns are attractive to alternate investments. However - - interest rates will rise to combat inflation in future years.
    44. 44.  National Politics – A presidential election year has passed - - we survived!. The deficit spending, and Federal Reserve monetary policy will be very inflationary long term. World Population – There are a lot of mouths to feed. The growth trend is slowing but global numbers will pass the 9 billion people mark by 2050 (up from 6 billion today). Weather Trends – Weather has become crucial as we have minimal global stocks of grain available to all of us. Have we left the good weather behind? United States Economy – This big guy could either help us - - or take us down! Our national lack of financial discipline has been alarming - - it’s threatening. Sovereign Debt Crisis – Apparently everyone on the planet is spending more than they are taking in. How do you stop this nonsense?
    45. 45.  U.S. Tax Policy – There will be a giant sucking sound from Washington D.C. as politicians search for money to fill deficits. Income, capital gains, and estate taxes will be threatening. Inflation – Farmland is a wonderful hedge against inflation and perhaps our rapid rise is signaling inflation coming. China has raised interest rates five times this year to offset inflation. Investor Demand – Agriculture is experiencing an acceleration of money moving from soft assets (financial investments) to hard assets (farm real estate). That will become global in scope. Net Farm Income – We see a solid future for net profits from farmland that will drive farmland values upward into the future.
    46. 46. Don’t Forget  Farmland is a growth stock!  Farmland is what it earns!  Farmland is a hedge against inflation!2013 will be a very profitable year - - and the U.S.A. isgoing to continue the role of feeding and fueling theworld with renewable resources. Land values will bestable to rising. Save your money - - Buy a Farm!
    47. 47. One Last Thought:“If you eat - - then you are a part of Agriculture.” Leland Glazebrook Farm Broadcaster WDZQ Radio
    48. 48. Perspectives in Agriculture – 2012 Trends and Developments
    49. 49. Farmer – GAAP? As Farmers and other Agribusinesses continue to grow, stakeholders of those entities enjoy the benefits of their growth through increased demand for goods and services, but they also accept more risk. One of the ways that this risk is managed is through improved financial reporting – or financial information that is presented in accordance with Generally Accepted Accounting Principles, also referred to as GAAP. Many times, a CPA firm is engaged to provide this level of reporting, giving additional assurance to the stakeholder.
    50. 50. Farmer – GAAP?Major differences in current financial reporting that is common inagriculture, which is generally on a cash basis, tax basis, market basis,or some combination of these methods, are as follows:• Recognition of tax liabilities related to appreciated assets, or accelerated deductions that are recognized on the tax return, but not reflected in the financial statement.• Valuation methods for inventory assets, equipment, prepaid expenses and production costs incurred for future crops. Also, recognition of market gains or losses on hedging activities.• Disclosure of commitments, contingencies related to operating leases, or open purchase contracts or sales contracts for inventory to be delivered. Also, disclosure of risks such as concentration or dependency on specific customers or vendors may be required under GAAP.
    51. 51. Farmer – GAAP? Summary on Farmer GAAP • Recognition of tax liabilities related to appreciated assets, or accelerated deductions that are recognized on the tax return, but not reflected in the financial statement.
    52. 52. FFSC Study of Financial Reporting 100,000 75,000 50,000 25,000 0 2002 2003 2004 2005 2006 5 Year Schedule F Income Accrual Income AverageStudy and analysis from 2012 FFSC Annual Conference in Bloomington, IL, and were prepared by the University of Illinois.
    53. 53. FFSC Study of Financial Reporting 80,000 70,000 60,000 50,000 Crop Inventory Change Livestock Inventory Change 40,000 Accts Receivable Change Prepaid Expenses Change 30,000 Accts Payable Change Accrued Interest Change 20,000 Difference in Depreciation 10,000 0 2003 2004 2005 2006 5 Year AverageStudy and analysis from 2012 FFSC Annual Conference in Bloomington, IL, and were prepared by the University of Illinois.
    54. 54. FFSC Study of Financial Reporting SUMMARY • Average annual difference 59% • 52% when 3 or 5 year averages used • Depreciation, crop inventory changes and prepaids • Impacts profitability-based financial ratiosStudy and analysis from 2012 FFSC Annual Conference in Bloomington, IL, and were prepared by the University of Illinois.
    55. 55. Agribusiness Risks for 2013Understanding of risk and development of risk management strategiesis becoming increasing important because of the following:• The amount of dollars at risk are increasing as land values, equipment values, and inventory values grow.• Market volatility for production inventory, input costs, feed costs, energy costs requires more risk management.• Operations are getting bigger and the amount of capital and debt to run operations is expanding
    56. 56. Agribusiness Risks for 2013Risk # 1: Operational Risk• Value of end product - whether its grain, livestock, feed, fertilizer, or processed oil – how do we ensure the product is at a quality grade and standard that the market will demand? o How do we ensure that the product will not be “out of condition” or lose quality grade during the storage period (e.g.: aflatoxin spread)• Contract compliance – How do we ensure compliance with agreements with farmers, vendors, suppliers where delivery of the product or service is critical to our operation?• Regulatory compliance – OSHA, DOL, USDA, IRS, Department of Health, IL DOA, all are agencies which are monitoring our collective activities and requiring us to comply with their specific rules
    57. 57. Agribusiness Risks for 2013Risk # 2: Consolidation Risk• Tenant farmers are growing and the amount of land they control is also growing, creating fewer customers that create concentration in Agribusiness• “Full Circle Farming” is a new concept where the Farmer is now creating a comprehensive approach to farming and reducing the use of other services by bringing these services within their organization o Agronomist and other management services o Marketing and hedging o Trucking o Storage and grain quality management o Other products and services
    58. 58. Agribusiness Risks for 2013Risk # 3: Business Continuation and Succession Risk• Does the current and future management team have experience and knowledge to manage the complexities of the new “Agribusiness”?• Does the ownership group have a succession plan in place that minimizes estate taxes and income taxes to allow for the capital to remain in the operation?• Do we have the appropriate amounts and types of business insurance to protect the operation from the risks that exist o Performance risk from key customers or vendors o Life insurance and disability insurance on owners and possibly key employees o Business risks from product liabilities
    59. 59. Questions?
    60. 60. New 2013 Medicare Tax IncreasesThe new health care law passed by Congress in 2010 has beengradually phasing in health care reform measures each year since itsenactment. Two Medicare tax increases are part of these health carereform measures that will become effective January 1, 2013. The twoMedicare tax increases that will affect farming income for higher-income farmers are:• A 0.9% increase in the existing Medicare tax on "earned" farming income, such as farming wages or self-employment income from farming, and• A new 3.8% Medicare tax on "unearned" or "passive" farming income.
    61. 61. New 2012 Medicare Tax IncreasesThe 0.9% increase represents an increase on the existing Medicare taxthat is part of the payroll tax applicable to farm and non-farm wages orself-employment income. The 3.8% increase is novel because this isthe first time that Medicare tax will apply to "passive" types of income.These Medicare tax increases will only affect farmers in years whencombined farming and non-farming income exceed:• $200,000 (for individual filers) or• $250,000 (for farmers filing jointly with spouses).
    62. 62. Update on Estate Tax PlanningAs of December 31, 2012, many tax provisions will change unlessCongress and the President can agree on a new set of rules.• Federal estate tax rates and exemption• Amount of gifts that can be transferred without tax• Income tax rates on capital gains, dividends, and earned income
    63. 63. Questions?

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