Ohio State Extension Hosting the N.A.C.A.A. National Meetings

Over 1,300 Agricultural Extension Agents/Educators and their families will be traveling to Cincinnati this month to participate in the 91st Annual Meeting and Professional Improvement Conference for the National Association of County Agricultural Agents (NACAA). This conference will be held on July 23-27, 2006 at the Duke Energy Convention Center in Cincinnati, Ohio.

The 2006 conference theme is “Agriculture-A River of Diverse Opportunities” and is being planned and conducted by the agricultural extension agents/educators from Ohio and Kentucky. This year’s conference will highlight the extension programming and agricultural industry in both of these fine states.

NACAA is the professional organization for County Extension Agents who work with individuals, families, businesses, and communities across the United States to conduct educational programming on issues relating to agriculture, food safety, farm management, water quality, pest management, natural resources, horticulture, community development and forestry. Extension Agents are major players in changing the face of agricultural production and management practices. These practices have and continue to keep American agriculture strong and globally competitive.

NACAA leadership promotes a nationwide effort to facilitate excellence in Extension programming through high standards of professional improvement. NACAA members gather at their annual conference to share ideas, recognize achievements, attend professional workshops and plan future programs.

During the conference, extension personnel will have the opportunity to attend over a hundred professional improvements sessions, an industry trade show, and participate in professional improvement tours across Ohio and Kentucky. These professional improvement sessions are geared to increasing the professional skills of educators in the areas of agronomy, public relations, educational technologies, pest management, agricultural economics, animal sciences, forestry, natural resources, aquaculture, horticulture, public policy and communications.

This conference is pleased that 255 businesses, farm organizations, Extension offices, and individuals have donated money or supplies for this year’s conference. A special thank you is extended to Kroger, Ohio Farm Bureau Federation, USDA-SARE, Ohio Extension Agents Association, Ag Credit, Bob Evans Inc, Cargill, Farm Credit Services of Mid-America, Ohio Beef Council, OSU Extension Agronomics Crops Team, OSU Extension Sustainable Ag Team, The Dannon Company, OSU Extension, and The Ohio State University College of Food, Agricultural and Environmental Sciences for their remarkable support of this conference. A complete list of the supporters of this conference can be found at:
http://putnam.osu.edu/natural_resources_environment/nacaa-2006/nacaa

Planning for the Future – Is It Worth It?

Planning is one of the most critical functions of management. Planning decisions can range from the short term of addressing the everyday “fires” of the farm business to long range planning for retirement, transition and estate planning. Ohio farmers have always been very proactive in planning to meet the production needs of their operation. They can juggle 100 different tasks simultaneously and are always working to find the best corn to plant for silage, the best weed control to utilize, or the best young dairy sire to use.


One area in which many farmers feel uncomfortable planning for is the future of the farm without them. After all, Mother Nature has taught us well that we must take farming day by day and planning for the future can take place when it rains. But then the rainy day comes and the tractor needs fixed or a well deserved nap takes precedence.


As farmers plan for the long term success of their business, there are a myriad of decisions to be asked. Some of the questions that often arise include: Who will manage the business in the future? How much money will I need to make it through retirement? How do I treat each offspring fairly when it comes to dividing up our farm? How will I know if my kids are ready to take over the farm? What are the legal hoops that need to be jumped through to pass the farm on without hurting the financial standing of the farm? How can we plan so the farm will be profitable for multiple generations? Is there enough equity in the farm that I can retire without selling out?


Decades ago, there was not much planning that needed to go into the farm transfer process. Bottom line was the kids would finish school and then all join their parents in the farm partnership. With more and more of the “next” generation living and working off the farm, it is crucial that planning take place to ensure a smooth transition to the members of the next generation who want to be part of the operation.


So what is holding you back from planning for the future? Lack of time? Are you worried the farm will crumble without you? Are you scared to examine the financial aspect of the farm? A few years ago, Robert Fetsch, Extension Specialist from Colorado State University, shared in the Journal of Extension ten ways to sabotage family estate transfer plans. While some of these ways will make you chuckle, there are some striking cords to them as well.


10 Ways to Sabotage Family Estate Transfer Plans
1. Procrastinate. Don’t write a will or transfer plan. Let the children worry about it after you’re gone.
2. Avoid planning or making decisions.
3. Don’t discuss the subject of estate transfer. Keep information from younger family members. This is a sure way to increase family conflict.
4. Blame others for problems. Stay angry.
5. Do all you can to block the younger generation from any involvement in goal setting or decision making until they are middle aged.
6. Refuse to listen to other family members’ viewpoints.
7. Hold on to total control of the family business.
8. Assume others know what you want. Avoid discussing your wishes about transfer with family members.
9. Make sure all your sense of worth, your identity, and life’s meaning come solely from the business. Resist transferring to the next generation. This way they have the least influence and the most stress.
10. Pay no attention to wake-up calls like a farm/ranch accident, illness, death, or major decision by an offspring.


OSU Extension’s Ohio Ag Manager Team was initiated in 2004 to help increase the Ohio State’s farm management programming across the state. Our team recently learned that we have received a national risk management grant to develop educational materials and programs that will help farm families plan for the future success of their business. This grant will allow our team to conduct transition planning programs across the state in the winter of 2007. Four two-day transition planning seminars will be held. These sessions will be spread out geographically across the state to limit the travel time by participants.


We are very pleased to be teaming up with two Ohio State Emeriti, Dr. Bernie Erven and Dr. Paul Wright, to conduct these seminars. Both of these gentlemen have a national reputation for helping farmers with farm transition planning. The sessions will challenge you to examine your business to the core and to actively plan for the future. These sessions will help farm families come together to develop a plan for the farm’s future, discover ways to increase family communication, plan for retirement, and learn strategies for transferring management skills and the farm’s assets from one generation to the next.


Working together, we can build a farm legacy that will carry Ohio agriculture into the future with the same sense of conviction and purpose our forefathers possessed. Make sure to take time this summer to begin those discussions on the future of your farm business. Be watching for future issues of the Ohio Ag Manager for registration details on the transition planning seminars.

Impacts of Recent Legislation on 2006 Taxes

The Tax Increase Prevention and Reconciliation Act of 2005 was signed into law on May 1, 2006 by President Bush, (it started out as a 2005 bill). Some changes of interest to many include:


-A temporary patch to give some middle class taxpayers (about 15 million) relief from the Alternative Minimum Tax (AMT). For 2006 only, the AMT exemption for a married couple filing jointly is increased to $62,550, single taxpayers to $42,500. In 2007 it drops back to $45,000 for joint filers and $33,750 for single taxpayers.

-Lower capital gain and dividend tax rates were extended two years, until December 31, 2010. The rates for taxpayers in 10 and 15% tax brackets is 5% until 2008, then the rate goes to zero. For taxpayers in ordinary tax brackets above 15%, the capital gains rate is a maximum of 15%.

-The age for the “kiddie tax” goes to 18. For 2006, the unearned income of a minor child that exceeds $1700 is taxed at the parent’s highest marginal tax rate if that rate gives a higher tax.

-Expensing or IRC Section 179 was scheduled to fall back to $25,000 in 2008. The current $100,000 (indexed to inflation) limit has been extended two more years, 2008 and 2009. In 2006, the inflation indexed limit is $108,000 on the expensing election, with an investment cap at $430,000.

-The Roth IRA earnings are tax free, but those with adjusted gross income above the limits were unable to convert Traditional IRA’s into a Roth. In 2009, the $100,000 limitation will be gone.

-A loop-hole with the Domestic Production Deduction was fixed. The new rules make it clear that when calculating the IRC Section 199 deduction, you may only use the W-2 wages that are properly allocable to the domestic production gross receipts.

OSU Extension offers tax education opportunities, beginning this fall. A special thanks goes to one of our Ohio Income Tax School instructors, Trenna Grabowski, CPA and Editor of the Farm Tax Saver newsletter, for this update information.

Designing Effective Pay-For Performance Systems for Employees and Suppliers-Part 2

Before a manager undertakes to design a pay-for-performance plan, he/she should carefully think about the objectives that he/she wants her employees to pursue. Because pay-for-performance works so well, the manager needs to carefully identify the objectives that she or her organization wants to achieve or he/she may be rewarding employees to pursue the “wrong” objectives. Remember, you get what you pay for.

To illustrate how things can go wrong when one does not specify objectives carefully before implementing a pay-for-performance program, consider the example of Sears Auto in the early 90s. In June 1992, the State of California filed charges against Sears Auto for charging customers for unneeded or unperformed repairs. This imposed significant legal and financial costs on Sears as it had to pay a settlement of $20 million and its stock fell by 6%. According to Brickley, Smith and Zimmerman, a significant contributor to Sears’ problems was the way Sears defined its objectives in structuring its pay-for-performance program. Sears essentially paid a commission to its salespeople based on total sales. In addition, there were sales quotas implemented for certain goods so that a failure to meet the quotas could result in job loss. An unintended consequence of basing pay and tenure decisions on maximizing sales was that many of the salespeople attempted to maximize sales by any means possible without regard for overall customer satisfaction.

Presumably, Sears’ overall objective is to maximize shareholder value. But the designer of the compensation program failed to account for the various secondary objectives that might increase shareholder value. Very few people will argue with Sears’ objective of increasing sales is “wrong” because increased revenue certainly is an important factor in determining shareholder value. However, another important determinant of any company’s share price is its long term reputation. Firms with solid reputations for conducting good business practices tend to be upgraded on the stock market as it is a signal of longevity and long term profitability because customers become loyal to honest businesses. The Sears compensation plan failed to account for a second important objective which is to reward salespeople for honesty and correct diagnoses. Therefore, before designing an incentive system, the manager ought to examine the overall objective of an organization and identify all the activities that might contribute to that objective as opposed to just rewarding one or a subset of relevant activities.

To illustrate a scenario where appropriate steps were taken to avoid dysfunctional behavior, let’s revisit our Safelite Glass example again (see Part I of this series). A potential problem with Safelite Glass’ switch to pay-for-performance is that installers could put all their efforts into installing as many auto glass units as possible per day without regard to quality. One can imagine that poorly installed glass can, over time, adversely impact Safelite’s reputation as a quality installer. However, Safelite wisely foresaw this potential problem and structured its pay-for-performance scheme to account for this. Whenever quality problems were encountered (e.g. broken windshields), Safelite required the original installer to reinstall the windshield on his own time and the installer was not paid for the re-do. The net effect of Safelite’s program is that it increased both quality and productivity; indeed the customer satisfaction index rose from slightly under 90% prior to the pay-for-performance program to around 94% afterwards (Lazear).

The above examples teaches us some basic lessons. Here are some general points to consider when designing a pay-for-performance scheme (Based on the study by Holmstrom and Milgrom):

  • Do you want your employee to devote time to a single task or multiple tasks?
  • If multiple tasks are desired tasks complements or substitutes?
  • If tasks are substitutes, you need to ensure that incentives for all substitute tasks are balanced. If incentives are stronger for any one task, the employee will devote more time to that task at the expense of others (e.g. emphasize quantity over quality). Balance can be achieved in the following ways:
    • If task A and task B are substitutes, and you are having problems motivating task B, either reduce incentives for task A or increase incentives for task B.
    • You may have a good way to measure performance based on task A but not on task B. For example, task A might be number of letters typed per day by an office assistant and task B might be the quality of coaching that this assistant gives to other assistants who are less experienced. In this case, if you want to stimulate teamwork in the office and expect your office assistants to help each other out, you may want to reduce the intensity of incentives for task A.
  • If tasks are complements, then your problem is much easier as rewarding one task will also increase incentives for other tasks. For example, if you are a high school principal, you may want your teachers to help students score well on the SAT test. But you also want to place a lot of students into four-year colleges. However, because high SAT scores are highly correlated with college admissions, there is little incentive conflict here if you provide strong incentives for only one of the activities.

Note that if incentive plans do improve productivity, they can be self-funded in that profit gains or cost savings can be used for bonus payouts.

Legal Liability Issues for Pick-Your-Own Operators

Any business endeavor that brings visitors onto agricultural property increases the risk of legal liability for harm that might occur on the property. Operators of pick-your-own businesses need to be aware of this increased risk. An understanding of the law, including recent immunity protections for certain circumstances, should help operators reduce legal liability risk.

What is Legal Liability?
Legal liability is the legal responsibility for actions that harm another, violate a law or otherwise fall beneath societal standards of behavior. It is liability that is enforceable through the legal system.

Landowner Liability under Ohio Law

“Negligence” is the legal basis for many liability situations—the cause of action that would be alleged by a harmed party. Negligence is the failure to use the degree of care that a reasonably prudent and careful person would use under similar circumstances. To allocate liability based upon negligence in a situation where injury occurs on an agricultural property, the harmed party must prove that the property owner or tenant had a legal duty of care to the harmed party that he or she breached, and that the breach of the legal duty caused the party’s harm.

Ohio law establishes different legal duties for property owners or tenants. The degree of the legal duty is dependent upon the type of visitor. A visitor who is on the property for the property owner’s financial or business benefit is considered an “invitee”, and the legal duty of care for this type of visitor is the most demanding. A pick-your-own customer falls into the invitee category. The property owner’s legal duty to an invitee is to protect the invitee from harm by either taking steps to discover and eliminate all known and unknown dangerous conditions on the property, or by warning the invitee of the dangerous conditions.

Meeting the Landowner’s Legal Duties
To meet his or her legal duties to visitors, the landowner must first understand the situations on the property that might be “dangerous conditions”. These are conditions that create an unreasonable and unnecessary risk of harm to the invitee, and are not readily apparent to the invitee. For example, a hidden hot electrical wire would probably fit within the definition of a dangerous condition. Minimal or trivial defects, such as a nail head popping out of siding, will not likely be deemed “dangerous conditions”. Nor will situations ordinarily encountered, such as snow falling, or “open and obvious” conditions, such as a ladder placed on a slippery floor.

While it might sound simple to protect visitors from obviously dangerous conditions, note that the law requires a landowner to address both unknown and known dangerous conditions on the property. The landowner must actively seek out conditions that could pose a danger, even if the conditions are not readily known to the landowner.

In response to a dangerous condition, the landowner must either eliminate the condition or provide a warning that allows the visitor to stay away from the condition. Taking either of these actions constitutes an attempt by the landowner to satisfy his/her legal duty to the visitor. If the visitor is still harmed despite the landowner’s attempt to meet the legal duty of care, it is possible that the landowner will not be liable for the visitor’s harm. For example, if a property owner puts a fence around a dangerous condition and the visitor climbs over the fence and is harmed, the law supports the argument that the landowner met his legal duty of care by warning the visitor with the fence. Other ways of warning visitors can include verbal or written instructions, signs, maps, blockades, roping or additional measures that clearly identify the danger.

Statutory Immunity for U-Pick Invitees
A recent revision to Ohio law establishes statutory immunity from liability for pick-your-own operators in certain situations. The law, which became effective in April of 2005, addresses owners and operators of “premises open to the public for direct access to growing agricultural produce.” By giving permission to enter the premises, the owner or operator does not make an assurance to customers that the premises are safe from naturally occurring hazards, according to the law. The law also states that the owner or operator has no liability for injuries resulting from the natural terrain or from cultivation of the soil.

Immunity is not automatic, however. The new law provides a defense for pick-your-own landowners and operators to assert against a legal claim of negligence. For example, a u-pick customer who breaks a leg by falling into a dip in the raspberry field can bring a claim of negligence against the owner of the operation. The operator could then assert the immunity defense, arguing that the injury resulted from a naturally occurring hazard on the property. If the operator can prove that the natural hazard caused the fall, then the operator will have no liability to the customer for the injury.

Risk Reduction
Pick-your-own operators can reduce legal liability risk by continuously assessing and eliminating all dangerous conditions on property that is open to customers. If a condition cannot be eliminated, be sure to warn the customers of the danger by way of signs, instructions, fencing, etc. Be aware that there is limited statutory immunity from liability where injuries result from naturally occurring hazards such as the natural terrain or the effects of soil cultivation. Despite this protection, don’t overlook good property management and insurance as risk management tools. A comprehensive approach to liability risk management should lessen the increased risk associated with bringing customers onto the property.

Ohio Ag Manager Team Garners National Recognition

OSU Extension is pleased to announce the Ohio Ag Manager Team will be recognized at the National Association of County Agricultural Agents (N.A.C.A.A) national meeting on July 23-27, 2006 in Cincinnati, Ohio. The Ohio Ag Manager Team was selected as the NATIONAL Finalist in two categories (team newsletter and team web page) of the NACAA Communications Contests. Team members will also be sharing a poster presentation titled, “Using Teamwork and Technology to Provide Farm Management Information to Ohio Agricultural Producers” at this conference. Congratulations to the Ohio Ag Manager Team for this national recognition.

Ohio Farm Custom Rates-Part 2


Barry Ward, Leader, Production Business Management, OSU Extension and The Department of Agricultural, Environmental, Development Economics

Many Ohio farmers hire custom farm work in their farm business or perform custom farm work for others. Custom farming rates traditionally have been arrived at by a series of calculations and negotiations. One of the most common ways custom farming providers and consumers arrive at an agreeable custom farming rate is to access University Extension summarized surveys. Ohio State University Extension and the Department of Agricultural, Environmental and Development Economics have historically published farm custom rates to assist farm businesses with this important task.

“Ohio Farm Custom Rates 2006” is the first Ohio custom rate survey update since 2002 and is available at your local Ohio State University extension Office or online at:

http://aede.osu.edu/programs/FarmManagement/OhioFarmCustomRates2006.pdf

“Ohio Farm Custom Rates 2006 is based on survey results from 277 Ohio farmers, custom farmers and farm managers. The custom rates presented may differ from rates in your region depending on availability of custom operators & machinery, timeliness, operator skill, field size & shape, crop conditions, performance characteristics of the machine being used and demand for custom farming services.

Custom farming rate increases for 2006 include custom Corn Harvest at $24/acre, Conventional Corn Planting at $14.30/acre and Drilling Soybeans at $14.20/acre (see the June edition of the OAM for planting rates). These represent increases of 14%, 19% and 9%, respectively over 2002 Ohio custom rates. Other operations show similar 4 year rate increases. Higher machinery, fuel and labor costs have contributed to custom farming rate increases over the past 4 years. For more information on custom farming rates and other Farm Management Topics see our Department Farm Management Website at:

http://aede.osu.edu/programs/FarmManagement/

The “Average” rate listed below is the average of all responses. The range is the average +/- one standard deviation which includes about two-thirds of all responses.

Ohio Farm Custom Rates – 2006 – Part II

Average Range
Grain Harvest
Combine Corn / acre $24.00 $21.53 $26.47
Combine Soybeans / acre $23.50 $20.57 $26.41
Combine Small Grains / acre $23.05 $20.30 $25.81
Ear Corn Picker / acre $22.05 $12.00 $32.69

Grain Storage

Take-in plus 4 months / bushel 0.14 $0.09 $0.19
Initial take-in / bushel 0.14 $0.06 $0.21
Storage / month / bushel 0.031 $0.02 $0.04
Storage / year / bushel 0.14 $0.08 $0.20
Grain dry
Moisture Removed / per point / bushel $0.03 $0.02 $0.05
Grain Haul
Farm to market (30 miles-one way) / bushel $0.13 $0.08 $0.18
Field to farm (11 miles-one way) / bushel $0.09 $0.05 $0.12
Custom Farming
(All Machinery Operations for Growing and Harvesting)
Corn / acre $74.30 $50.00 $108.24
Soybeans / acre $60.85 $46.72 $74.98
Small Grains / acre $60.65 $51.20 $70.05

Hired Labor
Machinery operation / hour $10.90 $8.57 $13.20
General farm labor / hour $9.00 $7.10 $10.91
Machinery Rental (machine only)
Tractor / horsepower / hour $0.24 $0.15 $0.32
Corn Planter (No-Till) / acre $15.65 $10.00 $21.49
Combine / Separator hour $113.60 $87.29 $139.91
Grain Drill (No-till) / acre $11.40 $7.50 $15.51
Bobcat/skid loader / day $140.90 $88.29 $193.53
Miscellaneous
Bush Hogging / acre $13.35 $5.09 $21.65
Income Tax prep / hour $139.15 $103.05 $175.28
Income Tax prep / return $262.80 $150.65 $374.97
Farm account summary / return $282.20 $151.45 $412.99
Track Hoe / hour $91.80 $72.23 $111.37
Snow Removal (Loader) / hour $55.00 $26.72 $83.28
Snow Removal (Blade) / hour $58.90 $30.83 $72.92
Snow Removal (Blower) / hour $67.00 $50.00 $67.95
Bulldozing / per foot of blade / hour $8.35 $6.56 $10.12
Average Range
Silage Harvest
Upright Silo
Corn Silage / Chop / ton $4.40 $3.50 $5.80
Corn silage / Chop/ haul, and fill /ton $6.15 $5.00 $7.44
Hay/Straw Harvest
Mowing / acre $10.50 $8.38 $12.62
Mowing and Conditioning / acre $11.75 $9.65 $13.85
Raking / acre $5.90 $4.38 $7.40
Tedding / acre $5.85 $4.35 $7.35
Baling Small Bales
Bale and drop in field / bale $0.44 $0.26 $0.62
Bale and load on wagon / bale $0.50 $0.28 $0.72
Haul and store / bale $0.33 $0.19 $0.47
Baling Large Round bales
Bale and drop in field / ton $17.35 $11.82 $22.88
Bale and haul / ton $21.40 $13.53 $29.31

Complete Hay Harvest
Complete Hay Harvest / ton $32.50 $21.94 $41.50
Complete Hay Harvest / % of crop 54.00% 50.00% 60.00%
Drainage and Tile Installation
Excluding Material
Ditching Machine
4″ Plastic / foot $0.23 $0.17 $0.30
6″ Plastic / foot $0.28 $0.22 $0.34
8″ Plastic / foot $0.30 $0.20 $0.40
Average Lateral Spacing / feet 39.81 31.50 48.11
Drain Plow
4″ Plastic / foot $0.15 $0.11 $0.19

Economic Data from Ohio Dairy Farms Using FINPACK

For nearly a decade, dairy farm profitability has be extremely volatile. Changes in milk pricing has created wide fluctuations in gross income. From the expense side, feed costs varied with weather conditions, plus supply, electricity, building and equipment costs have been affected by higher energy and material costs. Hired labor has become more of a factor since farms have grown in size. For dairy farmers, lenders, suppliers and others, it is important from time to time, in light of these changes, to review financial and production benchmarks. These can be most useful as a person compares key indicators to individual operations and address ways to improve profits. One source of benchmark data may be found at the Center for Farm Financial Management, University of Minnesota, at www.cffm.umn.edu and the FINBIN data base.

For the past nine years, some Ohio Dairy Farms have entered data into this multi-state data base. This has been through the efforts of Ohio State University Extension and several FBPA programs (Farm Business Planning and Analysis). The data is collected by using a FINPACK computer analysis program. An opportunity cost for home grown feeds was used since Ohio farmers have the option to sell grain and forage. The home grown feeds were priced on a annual basis, by averaging monthly farm-gate values reported by the Ohio Agricultural Statistics Service. Accrual adjustments were made to farm records, and unpaid labor/management was valued in a consistent manner. Once again, cost control has been determined to be essential for differentiating profit levels on dairy farms. It is especially true for family farm operations in Ohio that average 103 cows (2003 DHIA data).

Comparisons were made of the Ohio farms to the larger, Minnesota data base, to further assist in identifying benchmarks for critical production costs. Over the nine year period (1996-2004), the average, annual feed costs per hundred pounds of milk produced (including feed for replacements) was $7.40/cwt sold. The most profitable third of farms had feed costs that were $.65 less at $6.75. The total cost of production (not including unpaid labor/management) averaged $13.74/cwt, and the top third produced milk for $1.04 less at $12.70. Net returns per cow averaged $325/year, and the top third more than doubled returns at $732/year/cow. The average size of herds and cost of production were very close between Ohio and Minnesota farms using FINPACK, strengthening most generalizations about the Ohio data. The weighted average net returns per cow for the Minnesota group of herds was higher than the Ohio group of herds, at $475/cow (Ohio’s weighted average was $352/cow). The biggest disadvantage, causing the Ohio dairy’s to have lower net returns, was higher feed expense. The goal is $6.50 average feed cost per hundred weight of milk sold, including replacements feed. The weighted average feed cost of Minnesota herds completing FINPACK analysis was $6.43/cwt for the same nine year period (Ohio was $7.33/cwt). In-part, the opportunity cost of Ohio grain and forage is higher than in the upper midwest, and some inefficiencies in replacement raising were also identified in some of the Ohio herds.

The following tables compare the differences between the Ohio and Minnesota dairy data. Graphs represent Ohio data for the nine year period, 1996-2004. Special note should be given to the table of Financial Summary of Dairy Farms in Ohio and Minnesota, compared with the chart of Dairy Farm Financial Goals:

http://ohioagmanager.osu.edu/resources/dairy_breece_0706.pdf

Renting Farm Buildings

UPDATED 9/20/10 by Jerry Mahan

We have a lot of bank barns, storage sheds, and cattle or hog barns located around Ohio. Many of these structures are in relatively good condition but for various reasons are not being used for their original purpose. The bank barns were designed for housing livestock, hay, and grain. The stone walls depended on the heat from the livestock in the winter to compensate for the freezing temperatures and the expansion and contraction of the walls and soil. Without livestock some barns have deteriorating barn support walls especially on the “bank” side of the barn. Many of these barns were also designed for farm machinery long since out of use. The farm machinery used today is larger both in width and height. Some counties in Ohio are long known for hog production but with contract feeding of hogs we have fewer people raising hogs. Thus many hog barns sit empty as does some cattle feeding facilities.

Knowing what to charge or pay for these buildings if used for storage is not easy to figure. Some guidelines revolve around the DIRTI five – depreciation, interest, repairs, taxes and insurance.

Depreciation is figured based on the remaining value of the building. Many structures have been depreciated to “zero” for tax purposes but you can estimate the value of the building and divide it by the expected remaining life. For example a bank barn might be valued at $15,000 and have an expected life of 15 years – so the annual depreciation would be $1,000. You can get a value of the building from your insurance agent or property tax statement. Keep in mind your insurance policy may deal with a replacement value verses a functional replacement building, i.e. replacing a bank barn with a pole barn of comparable square footage. The replacement value for a bank barn might be as high as $100,000 or more where as a pole barn with 2000-2400 square feet useable space might cost $20,000-25,000 to build.

Interest rate on intermediate loans can be used to estimate interest costs on capital investments. The current value of existing building multiplied by the rate selected can establish a value for current annual interest costs. Using our $15,000 building example listed above and a 5% intermediate interest rate we would have an annual interest cost of $750.

Repairs are the average annual costs of keeping the building in good repair. This may be higher or lower than past records might indicate depending on the new use. Generally we could use a 2% figure which equals $300 in our example building.

Taxes include those property taxes paid annually and can be retrieved from tax bills. For our example I am using .5% figure or $75. Insurance is the cost of insuring against fire, storms, etc. Your insurance policy should give you this figure. Again I am using a .5% figure for a cost of $75. Total all of these DIRTI costs give us $2,200 per year or about $180 per month. This is a starting point for negotiation. Most leases include additional rent when major damage is done to a building by the leasee. Electricity use above and beyond general use lighting might be added to the lease agreement as well.

Caution – If you plan to rent your barn for non farm uses like boat or truck storage check with your insurance agent. These types of non-farm uses will change your insurance coverage and insurance costs. Likewise the owner of such vehicles or equipment should carry their own insurance.

For more information on this topic consult with your insurance carrier and you can print Factsheet FR-007-02 titled Leasing Farm Buildings & Livestock Facilities:
http://ohioline.osu.edu/fr-fact/0007.html

Other figures can be found also through Iowa State University at http://www.extension.iastate.edu or the Ohio custom rates found at:

http://aede.osu.edu/Programs/FarmManagement/MgtPublications.htm for grain bin storage information.