2012 Agribusiness Update: Illinois

2012 Agribusiness Update

December 6, 2012

Agenda10:45 a.m. – 11:00 a.m. Welcome Time & Registration

11:00 a.m. – 11:05 a.m. Sikich LLP• Introduction

11:05 a.m. – 11:35 a.m. Chuck Spencer, Director of Government Affairs, GROWMARK, Inc.• Farm Bill and Legislative Developments in Agriculture

11:35 a.m. – 11:50 a.m. Break – Box Lunches

11:50 a.m. – 12:20 p.m. James Hedges, Vice President Row Crops Eastern/Coastal Region, Monsanto• Opportunities in a Complex Marketplace

12:20 p.m. – 12:50 p.m. Dale Aupperle, President, Heartland Ag Group, Ltd. • Land Values and the 2012 Crop Year

12:50 p.m. – 1:20 p.m. Bob Disbrow, Partner, Sikich LLP and Tom Bayer, Partner, Sikich LLP• Perspectives in Agriculture – 2012 Trends and Developments

1:20 p.m. – 1:30 p.m. Q & A

Legislative Update

• State

• Regulatory

• National

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

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.

http://www.kic2025.org/

State Update

• NPDES Permit for Pesticide Application

• CAFO’s Water Quality

• Mississippi River Basin Initiative

Obama 332 Romney 206

President County By County 2008

President County by County 2012

Congressional Districts 2012

http://elections.nytimes.com/2012/results/house

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


Elections Matter

• White House, Senate, House – Same

• 6 Billion total on all U.S. Elections

• Taxes, Immigration, Environment, Climate Change, Supreme Court, Appellate Court


Regulations

• Green House Gas Emissions• Ozone Rule• Hydraulic Fracturing • EPA Waters of the State Guidance • Storm Water Regulations• New Gasoline Formulation


Regulations

• Clean Water Act NPDES Permits• Pesticide Application restrictions - West• Spray Drift• Chesapeake Bay• Florida Water Quality Standards• MRBI• Application testing and training


Success Update

• Hours of Service Waiver

• Dodd Frank Rules and Cooperatives

• Clean Water Act Permits for Pesticides

• PRIA


Biofuels

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.

Farm Bill

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%

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

Stewardship

• Farmer/Landowner/Tenant Relations

• CCA and Agronomic Specialists

• Watershed Commitments

• On Farm Discovery

• 4 R Program – Source, Rate, Place, Time

Participate & Use Our Voice Wisely

Riding the Wave ofIllinois Farmland Values!!!

December 6, 2012

By:Dale E. Aupperle, AFM, ARAPresident- Heartland Ag Group Ltd.1401 Koester Drive, Suite 100Forsyth, IL 62535 ****** Phone: (217) 876-7700 Fax: (217) 876-7724 E-mail: [email protected] Web: www.heartlandaggroup.com

Sikich LLP & Heartland Ag Group Ltd. - in Springfield and Decatur

Agriculture is the most basic 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

Current Ag Trends

Note some of the following general observations regarding agricultural conditions throughout our respective agricultural areas:

High and Volatile Grain Prices Rising Farming Expenses Exploding Farmland Values Ongoing Weather Concerns Leasing Shifts to Cash Rent Uncertain Farm Bill Safety Net Increasing Sensitivity to Farming

Risk

Low Interest Rates Outside Capital Coming In Uncertain Global Demand More Absentee Ownership Threats of Inflation/Deflation Fear of the Future

The Latest Farming Equipment

New tractors run on GPS guidance and auto-steer.


Planters range from 16 rows to 48 rows!


Nitrogen applicators for growing corn crops.


The new combines are monsters!

Tile Drainage Systems(are becoming prevalent)

The Great Drought of 2012!!(Tracking corn yields on top quality Illinois farmland.)

TimeframeCornYield Note

5-year Average 195 Common on good farms

Spring 2012 (est.) 210 Follows two off years

May 2012 (est.) 225 Early planting optimism

June 2012 (est.) 210 Dry and dry forecast

July 2012 (est.) 190 Dry too long

July 13, 2012 (est.)

130 Week of excessive heat

August 2012 (est.) 100 – 120 Zero rain and no forecast

Thoughts on a Sunday Evening

All of us gather our thoughts - - and keep our eye on the ball in different ways. Here is a collection of charts I look at every Sunday evening - - the big picture is wonderful!

Long term uptrendin tact?

This uptrend isthe gold standard!

Which direction next!

Be careful of an uptrend.

Historically high prices!

Understand the Big PictureHere 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.

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!

Comparing Farmland to other Financial Assets

Asset/Index

1970 – 2010Average

Annual Return

1990 – 2010Average

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.

Here is a quick comparison of how farmland compares in its overall return - - it’s the best!

Current Illinois Farmland SalesHere are several representative top quality land sales that have occurred since August 2012 across the central part of Illinois:

County Date Acres Price Per

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

Doubling Illinois Land Values

These specific four years show the powerful long-term increase in Illinois farmland values.

YearPrime Land

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 last thirty-nine years. It’s a growth stock - - the compound annual increase was 6.5% per year. At that rate - - land will be at $28,000 per acre in 20 years!

Heartland OutlookNovember 2012

Agriculture is experiencing incredible forces from every angle. At Heartland Ag 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.

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?

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.

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. is going to continue the role of feeding and fueling the world with renewable resources. Land values will be stable to rising.

Save your money - - Buy a Farm!

One Last Thought:

“If you eat - - then youare a part of

Agriculture.”

Leland Glazebrook Farm Broadcaster WDZQ Radio

Perspectives in Agriculture – 2012 Trends and Developments

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.

Farmer – GAAP?Major differences in current financial reporting that is common in agriculture, 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.

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.

FFSC Study of Financial Reporting

20022003

20042005

20065 Year

Average

0

25,000

50,000

75,000

100,000

Schedule F Income Accrual Income

Study and analysis from 2012 FFSC Annual Conference in Bloomington, IL, and were prepared by the University of Illinois.



2003 2004 2005 2006 5 Year Average

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

Crop Inventory ChangeLivestock Inventory ChangeAccts Receivable ChangePrepaid Expenses ChangeAccts Payable ChangeAccrued Interest ChangeDifference in Depreciation


SUMMARY

• Average annual difference 59%

• 52% when 3 or 5 year averages used

• Depreciation, crop inventory changes and prepaids

• Impacts profitability-based financial ratios


Agribusiness Risks for 2013

Understanding of risk and development of risk management strategies is 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


Risk # 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


Risk # 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 organizationo Agronomist and other management serviceso Marketing and hedgingo Truckingo Storage and grain quality managemento Other products and services


Risk # 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 existo Performance risk from key customers or vendorso Life insurance and disability insurance on owners and possibly

key employeeso Business risks from product liabilities

Questions?

New 2013 Medicare Tax Increases

The new health care law passed by Congress in 2010 has been gradually phasing in health care reform measures each year since its enactment. Two Medicare tax increases are part of these health care reform measures that will become effective January 1, 2013. The two Medicare 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.

New 2012 Medicare Tax Increases

The 0.9% increase represents an increase on the existing Medicare tax that is part of the payroll tax applicable to farm and non-farm wages or self-employment income. The 3.8% increase is novel because this is the first time that Medicare tax will apply to "passive" types of income. These Medicare tax increases will only affect farmers in years when combined farming and non-farming income exceed:

• $200,000 (for individual filers) or• $250,000 (for farmers filing jointly with spouses).

Update on Estate Tax Planning

As of December 31, 2012, many tax provisions will change unless Congress 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

Questions?

2012 Agribusiness Update: Illinois

Documents

Transcript of 2012 Agribusiness Update: Illinois