Florida A&M University · Cooperative Extension Program · Small Ruminant Program

 

Bulletin II, Vol. II

Managing Business Risks (Financial and Legal)

 

Small Ruminant Program Bulletin II, Vol. III

December 1, 2009

By

Mr. Les Harrison Regional Specialized Sustainable

Agriculture and Extension & Technology Agent

University of Florida/IFAS

Florida A&M University College Sciences, Technology

and Agriculture

Cooperative Extension Program

 

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L To Our Producers

Acknowledgments

Author

Mr. Les Harrison University of Florida IFAS Extension HarrisonG@leoncountyfl.gov

http://leon.ifas.ufl.edu

Edited by Ms. Anne Vuxton

This publication was developed as a joint initiative between Florida A&M University, Cooperative Extension Program and University of Florida, IFAS Extension Service in Leon County

This work is based on work supported by USDA/CSREES under the award number 2007~49200~0389

 

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Production Risk – Financial Considerations

Financial measures are a commonly accepted method of evaluating an enterprise’s progress, and ultimately, the success or failure of that enterprise. Reviewing financial records and considering alternatives for action is rarely the preferred activity for a farmer, however, the task can serve as an early warning system for numerous concealed problems and identify untapped sources of profit. While any business enterprise entails risk, a proactive and comprehensive approach can identify many problems early so action can be taken to correct the situation before it becomes a crisis. This section of the manual will cover some of the financial concepts and tools available to improve your chances for successfully producing goats and being able to continue that enterprise as long as you wish.

Records – Farm records can be simple or very complicated. They may be maintained in a handwritten ledger or in a computer spreadsheet program, but must be complete and accurate to be useful for any of the following purposes:

• Taxes • Forecasting – Expense, Gross Returns (or losses), Net Returns (or

losses) • Identifying Resource Needs – Labor, Capital (Loans), Facilities,

Livestock and Other Real Property • Budgeting

Records are most useful when organized. Entry categories should be applicable to your specific farming operation, but broad enough to allow you to compile similar entries. For example, farm use fuel entries can be grouped together to measure the amount of fuel uses monthly. Entry dates are useful for determining if there are cyclical patterns to expenditures. There are some months when you will use more fuel, such as when marketing your animals or doing tractor work on your farm. Complete and comprehensive records will reflect those trends and indicate that you should be prepared for the additional expense.

 

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Income trends are just as important to track for your farm. Timing planned expenses to conform with scheduled income has many positive benefits. It keeps your farm account in a positive cash position and potentially eliminates the need to borrow money to operate your farm. By not borrowing money, you will eliminate the interest expense borrowed money accrues and improve your profit. It is much easier to accomplish the control of income and expenses with written records.

By thoroughly recording income and expenses, an income statement can be produced. Remember, an income statement covers a specific period of time such as a month or year. A sample farm record ledger page and income: statement follows:

Taxes – IRS Schedule F – The IRS Schedule F is filed to report farm income. The subject of taxes usually brings frowns and groans, but there are some rarely considered benefits to filing that help offset the pain of writing a check to the Internal Revenue Service (IRS).

Billy's Goat Farm Cash Ledger –Jan. 2009 Entry Balance

Date Vendor and items

1/1/2009 December Balance brought forward $2,216.87

1/2/2009 Hired Labor - January share - Ned Capprine -$84.51 $2,132.36

1/3/2009 Sold animals at Madison Livestock Auction $1,576.27 $3,708.63

1/3/2009 Mileage expense to Madison -$57.16 $3,651.47

1/3/2009 Lunch in Madison at Nannies' Bar-B-Q -$12.23 $3,639.24

1/9/2009 Fencing supplies at Farmer's Co-op -$118.39 $3,520.85

1/12/2009 Goat feed - Farmer's Co-op -$133.07 $3,387.78

1/16/2008 Hired Labor - January 5 to 16 - Ned Capprine -$329.15 $3,058.63

1/20/2009 Vaccine - Kidd's Vet Supply -$43.85 $3,014.78  

Billy's Goat Farm - 2008 Income Statement $ Cost $ Income

Gross Income $9,645.39

Hired Labor $816.87

Farm Mileage expense $616.03

Farm Travel Expenses $156.34

Vet Supplies $659.31

Insurance Expenses $2,235.86

Farm Utilities $2,429.76

Goat feed $1,992.96

Gross Expenses $8,907.13

Net Income or Profit $738.26

 

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Depreciation - Filing a Schedule F permits you to depreciate your farm equipment for income reduction purposes as allowed by IRS rules. Farm building, breeding stock, tractors and other production equipment are subject to depreciation expense and can be deducted against gross income. Straight line and accelerated are two frequently used methods of depreciation.

The straight line method takes the value of the asset when put into service and divides it by the life expectancy of the asset. For example, if you paid $500 for an asset on the five year depreciation schedule, you could deduct $100 each year for the usable life of the asset. The IRS has determined the usable life of assets.

Accelerated depreciation utilizes the same usable life schedule, but calculates the deduction differently. While there are several different allowable ways to determine accelerated depreciation, the end effect is the same. The majority of the assets’ value is deducted in the first few years of its usable life at your farming operation. The advantage is that by deducting most of the value early, it will help the cash flow of the farm. It is advisable that you spend the time at your desk trying the different accelerated depreciation formulas to determine which works best for your farm’s financial situation.

Simply put, by purchasing an asset to use on your farm, your tax liability will be lowered when you are employing a qualified asset on your farm by using either depreciation method. More information is available at IRS Publication 4562 that can be reached at: http://www.irs.gov/pub/irs-pdf/i4562.pdf

Another consideration is filing an IRS Schedule F to qualify for many if not all of the United States Department of Agriculture (USDA) programs under the 2007 Farm Bill. New among the USDA programs is the Adjusted Gross Revenue-Lite (AGR-Lite) Crop Insurance program. This crop insurance program covers a wide variety of specialty crops for both weather and market hazards. Small and medium-sized producers can qualify, but one of the requirements is the farmer must file an IRS Schedule F. The IRS Schedule F can be found at http://www.irs.gov/pub/irs-pdf/f1040sf.pdf.

Agriculture Tax Classification (Ag Exemption) – The agriculture tax classification is a legal means of reducing the property tax liability on your farm’s acreage and assets. The following document is an example of the way Florida counties may issue guidelines for agricultural producers. Each

 

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county has the potential to have different acreage requirements within the bounds of the authorizing legislation. The county property appraiser has the right to physically look at your farming operation and request records to support your claim for agricultural tax classification.

Additional information on Florida Statutes is available at the following Web site: http://www.flsenate.gov/Statutes/.

LEON COUNTY, FLORIDA, MINIMUM ACREAGE GUIDELINES FOR A BONA FIDE COMMERCIAL AGRICULTURAL OPERATION FOR 2007

Subject to the restrictions set out in F.S. 193.461 (3)(b):

“… only lands which are used primarily for bona fide agricultural purposes shall be classified agricultural. ‘Bona fide agricultural purposes’ means good faith commercial agricultural use of the land. In determining whether the use of the land for agricultural purposes is bona fide, the following factors may be taken into consideration:

1. The length of time the land has been so utilized; 2. Whether the use has been continuous; 3. The purchase price paid; 4. Size, as it relates to specific agricultural use; 5. Whether an indicated effort has been made to care

sufficiently and adequately for the land in accordance with accepted commercial agricultural practices, including, without limitation, fertilizing, liming, tilling, mowing, reforesting, and other accepted agricultural practices;

6. Whether such land is under lease and, if so, the effective length, terms, and conditions of the lease; and

7. Such other factors as may from time to time become applicable.”

1. LENGTH OF TIME:

A. Was the agricultural operation in effect on 01/01/2007?

B. Is the historic use of this property agricultural?

 

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2. CONTINUOUS USE:

A. Is the agricultural use of the property continuous?

3. SIZE: Minimum*

Pasture Acres

10 cows, breeding age females or equivalent animal units 20

30 goats, sheep or hogs, breeding age females or equivalent animal units 20

Horse farm, 3 regular brood mares and 1 stallion in production annually 20

Hay production 20

Sod 20

Row Crops

Corn, grain sorghum, soy beans, rye, wheat, oats 20

Vegetables, peanuts, tobacco, sunflower 10

Minimum*

Timber Acres

Planted pines planting rate 700/acre 10

Christmas trees planting rate 1100/acre 5

Tree farm-field nursery planting rate 1100/acre 5

Natural pines/mixed 20

Specialty Crops

Grapes 5

Strawberries, blueberries, blackberries 2

Citrus, apples, peaches, pecans, pears, persimmons 10

 

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Fish Farm—Bees INDIVIDUAL BASIS

Nursery INDIVIDUAL BASIS

Feed Lot INDIVIDUAL BASIS

*OR USED IN CONJUNCTION WITH OTHER PARCELS

4. STEWARDSHIP

A. TIMBER

1. A management plan should be implemented and a copy of the plan should be in the Property Appraiser's file (available from the County Forester or Private Forester).

2. Smaller tracts used for Christmas tree production will be considered as nursery land.

3. Merchantability of the timber will be considered as well as other sufficient management plan implementation such as fire lanes, underbrushing, reforesting, etc.

B. PASTURE

1. Property must be fenced.

2. An indicated effort has to have been made to maintain and care sufficiently and adequately for this type of land, i.e.: fertilizing, liming, tilling, mowing, etc.

C. ROW CROPS

1. "Row Crops" is used in reference to those agricultural products referred to as vegetables.

2. Production of crops for own use does not qualify parcel of land for agricultural classification, i.e.: garden.

3. Crop must be marketed commercially.

 

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D. NURSERY

1. Nurseries should have a state agricultural certificate and occupational license.

2. Only areas actually used for the nursery and service area shall be classified.

3. Types of Nurseries: In ground (ornamental), above ground (in pots), tree nursery (Christmas trees).

E. SPECIALTY CROPS

Apples — 145-154 trees per acre

Spacing — 15 x 20

Peaches — 145-154 trees per acre

Spacing — 15 x 20

Pecan — 12-16 trees per acre

Spacing — 60 x 60

Pears — 108-121 trees per acre

Spacing — 20 x 20

Persimmons — 290-294 trees per acre

Spacing — 10 x 15

5. LEASES:

A. The lease must be in effect on 01/01/2007, and a copy should be in the Property Appraiser’s file.

B. Are the lease terms economically compatible with a commercial agricultural operation?

 

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6. ACTUAL use on January 1st will be considered, not the expected use.

7. Timber operations that have clear-cut should notify this office at the time of harvest. Acreage must be replanted by the end of the third year.

8. There should be no deed restrictions that would prohibit commercial agricultural use.

9. If the site plan or plat for lots has been approved by a government agency, the property must have been in active agricultural use on the 1st of January of the previous year, as well as the current year, or the agricultural classification is subject to denial.

10. Hunting or leasing for hunting, in and of itself, is not regarded as an agricultural operation.

11. Provide a copy of receipts related to agricultural operations.

For example:

Schedule “T,” for Timber.

Schedule “F,” for Farm.

12. Provide a site plan or plot of agricultural acreage use, see example below:

 

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*NOTE: Compliance with the above guidelines will not guarantee an agricultural classification.

There is an almost infinite list of factors which can affect the outcome of any business enterprise. A selected few issues having potential to influence your goat enterprise follow. These may give you cause to examine your situation and make changes to your operation and how you do business in the future.

Competitive Advantage (as a strength or weakness) – No matter what the business, everyone knows a competitor with a particular, and sometimes unique, situation that saves money, time, input cost and possibly all of these and more. This “competitive advantage” makes it easier to stay in business by responding to customer demands quicker, being able to lower sale price through a production efficiency, or some other means of conducting business more efficiently.

Example one of a competitive advantage could be: A farm closer to the meat packer to which they are being processed. The advantage is less

 

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transportation expense to the processor for each animal marketed. The net result is a lower marketing cost for each animal.

Example two of a competitive advantage could be: Having family members willing to work on your farm at little or no cost. The advantage is a lower net labor cost per animal marketed.

Both examples permit the producer to either sell at a lower cost and, all other factors being equal, make his goats more financially attractive to buyers, or achieve greater net returns per animal. Business decisions should be made while considering if there is competitive advantage to be gained by the choice. In applied situation, the competitive advantage is not usually obvious without a certain amount of thought and consideration. The farmer who makes the effort to examine the options and consider all potential benefits has the potential for significant gains over time.

If you have a competitive advantage in your current situation, work to maintain or improve it. If your competitors have the advantage, study their situation to determine if you can duplicate their business edge.

Sole source suppliers of needed goods and services (as a strength or weakness) - Dealing with a sole source supplier has numerous advantages. It affords you: the efficiency of “One Stop Shopping”; you can develop a trusted working relationship with the vendor or supplier who can anticipate your needs and respond to them; quantity discounts may be available by working with one vendor or supplier and there are many more advantages.

The weakness of using a sole source supplier of goods and services is it may be fatal to your enterprise. For example: What do you do if your meat processor goes out of business? Have you identified an alternate packer? What happens if your biggest customer suddenly stops purchasing? Do you have another buyer who will pay as much for your animals?

An expedient strategy is to have a backup source for anything you depend upon. Stay aware of your suppliers’ and buyers’ situation. Maintain a written list of alternative sources, suppliers and customers in case the worst happens. Hopefully, you will never need it, but the best alternative is to have it available.

 

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Asset Protection

A prudent business practice is to identify and acquire coverage for farm assets in the event of an unforeseen incident with the potential of damaging or destroying your farm assets, and possibly, forcing the termination of your farm. Several options are available.

Florida Agricultural Dealer’s Licenses -

Any person, except as noted below, who is engaged within Florida in the business of buying, receiving, soliciting, handling, or negotiating agricultural products from or for Florida producers, or their agents, must be licensed and bonded. Producers who buy or handle agricultural products from other producers or their agents for resale must also comply. The Florida Department of Agriculture and Consumer Services, Bureau of Agricultural Dealer's Licenses, is responsible for the licensing of dealers in agricultural products. The purpose of the law is to help assure the producers of products covered by the law receive proper accounting and payment for their products.

Goats are covered under this law and producers have the right to inquire if a buyer has an Agricultural Dealer’s License. You, as a producer, have not committed a statutory violation if you sell to an unlicensed dealer, but there is still the risk of a dispute. In the event of a dispute, the producer can file a complaint with the bureau and activate the resolution process. Be advised that the process will take several months at a minimum.

The following people and groups are exempt from this law:

• Farmers or groups of farmers in the sale of agricultural products grown by themselves.

• A dealer who pays at the time of purchase with U.S. cash currency or cash equivalents, such as money orders, cashier’s checks, wire transfers, electronic funds transfers and debit cards.

• A dealer who purchases less than $1,000 worth of agricultural products from Florida producers or their agents or representatives during the peak month of such purchases within the calendar year.

• A dealer who deals exclusively in tobacco, sugarcane, timber and timber by-products and/or citrus other than limes.

• A dealer who operates as a bonded licensee under the federal Packers and Stockyard Act.

http://www.florida-agriculture.com/marketing/licensing/index.htm. 

 

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USDA Packers and Stockers

USDA Grain Inspectors, Packers and Stockyard Administration (USDA-GIPSA) has a livestock producer protection program that also requires the posting of surety bonds. It covers interstate sales which the Florida Agricultural Dealer’s License does not if the buyer takes possession of the animals outside of the state.

You can reach the USDA-GIPSA with either the following toll free number, 1-800-998-3447, or the following Web site: http://www.gipsa.usda.gov.

Insurance Issues including The AGR-Lite Program

Insurance is a fact of 21st century business. With proper coverage, you protect your assets and minimize the potential for an event or series of events ending your business. As with any business expense, cost has to be evaluated against benefits. Assets you may consider insuring include building, rolling stock such as tractors and other equipment, personnel against injury and death, and your crops.

The USDA’s Risk Management Administration (USDA–RMA) now has a crop insurance program available for small to intermediate goat producers. The Adjusted Gross Revenue–Lite (AGR-Lite) Insurance Program offers whole farm, enterprise revenue insurance. Revenue losses from both natural causes (yield) and market fluctuation (price) are insurable. The policy can be stand-alone coverage or as a supplement to another policy. There is no increase in premium cost for organic crops (including goats). Unlike standard crop insurance, the policy covers the tax year not the crop year.

Goats are coverable in Florida along with many rarely or non-insured crops. Contact your insurance agent for more information and rate quotes.

In Summary

Goat production for profit is a risk filled enterprise. It can, if properly managed, offer the producer financial as well as other rewards. Like other commercial enterprises, the business end of farming has kept pace with the times. Producers who embrace and employ the latest techniques and tools will have the best chance to reap the economic benefits the profession offers. With a firm financial footing, the producer has the advantage to enjoy the independent lifestyle goat production provides.

Written by: Les Harrison Regional Specialized Sustainable Agriculture & Extension Technology Agent UF/IFAS Extension Service

 

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Florida A&M University is an equal employment opportunity institution, and prohibits discrimination in its programs on the basis of race, color, national origin, gender, religion, age, disability, political beliefs, sexual orientation, or marital or family status.

 

 

 

This public document was promulgated at total cost of $805.00 or $ 8.00 per copy, and issued in the Cooperative Extension Work Act of September 29, 1977, in cooperation with the

U.S. Department of Agriculture (USDA). Printed 12/029/09

Dr. Makola Abdullah, Dean and Director of Land Grant Programs College of Engineering Sciences Agriculture and Technology

Florida A&M University Tallahassee, FL.

Dr. Ray Mobley, Extension Director Cooperative Extension Program

College of Engineering Sciences Agriculture and Technology Florida A&M University

Tallahassee, FL.

Ms. Angela McKenzie-Jakes, Small Ruminant Program Leader Cooperative Extension Program

College of Engineering Sciences Agriculture and Technology Florida A&M University

Tallahassee, FL. 850-875-8555

http:www.famu.edu/goats