Guest Blog: Vomitoxin in Corn – Legal Ramifications for Producers and Buyers

Thanks go to my colleague Robert Moore for  submitting our first guest blog and sharing the following expertise on the issue of vomitoxin detection in corn.

by Robert Moore, Attorney, Wright Law Company, LPA

Ohio and other areas of the Corn Belt have seen unusually high levels of vomitoxin in corn.  Vomitoxin is a mycotoxin that can cause livestock to reduce feed intake and reduce weight gain.  Some elevators and ethanol plants have been rejecting corn that has tested too high for vomitoxin.  What legal standing do producers with rejected corn have?

Producers with a Contract                       

Producers who have a contract with a buyer must look to the contract to determine their rights.  All provisions, including any small print on the back of the contract, must be read entirely before assessing legal rights.  The language of the contract is what matters; any verbal agreements made outside the contract have very little effect in enforcing legal rights.  Even if the producer and buyer agree to certain terms, if the terms do not find their way onto the contract then the parties are probably not bound by the terms.

In regards to Vomitoxin, the key terms are those describing the quality of the corn required to be delivered.  Grain contracts will include at least the bare minimum “No.2 Yellow Corn” requirement.  No. 2 Yellow corn is a grade established by the USDA and may have up to 5% damaged kernels.  The USDA defines damaged kernels as “kernels and pieces of corn kernels that are badly ground-damaged, badly weather-damaged, diseased, frost-damaged, germ-damaged, heat-damaged, insectbored, mold-damaged, sprout-damaged, or otherwise materially damaged.”  Therefore, if the only grade standard in the contract is No. 2 Yellow Corn, a producer’s corn should not be rejected or discounted solely for Vomitoxin unless more than 5% of the kernels are diseased.  However, corn could likely be rejected if 3% of the kernels were diseased with Vomitoxin and another 3% were damaged in another manner.  The 5% threshold is the accumulation of all damaged kernels and not just a single type of damage.

Some contracts will include more restrictive grade terms such as “must be suitable to be fed to livestock” or “must meet all FDA guidelines”.  The FDA has established a 5 part per million (ppm) threshold for hogs and 10 ppm threshold for cattle and poultry.  Therefore, an elevator that requires corn to meet FDA standards or to be safe for livestock consumption can reject corn if it has more than 5 ppm vomitoxin.  It is important to note that corn could have less than 5% damaged kernels but have more than  5 ppm vomitoxin.  That is, the USDA No.2 Yellow Corn grade is a completely different standard that the FDA’s ppm standard.  Ethanol plants must be extra concerned with vomitoxin becoming concentrated in the distillers grain by-product and may have even more restrictive terms than FDA.

Producers that have corn rejected can have the dual problem of having corn rejected and still being obligated to fulfill the contract.  A worse case scenario would see a producer not being able to sell his corn due to high vomitoxin levels while still being required to fulfill his contract obligations for untainted corn with the elevator.  Local reports indicate that elevators have been letting producers out of their contracts if their corn has been rejected for vomitoxin but this could change at any time.

Producers without Contracts

A producer who intends to sell a load of corn to the elevator without a contract has very little legal protection from the corn being rejected.  The elevator is under no obligation to buy the corn and can simply opt not to buy the corn for any reasonable reason.  Without a contract, the elevator is not bound to any predetermined grade standards.  Even the smallest amount of vomitoxin in the corn could cause it to be rejected.

Disputed Grain Samples

Producers have the right to appeal the grain grading determination performed by the elevator.  The Federal Grain Inspection Service (FGIS) oversees grain grading procedures and methods and also provides inspection and appeal services.  A producer who disputes the elevator’s grading can send a sample to FGIS and FGIS’ determination will be binding on both parties.  A FGIS office is located in Toledo.  For more details and information on grading appeals, contact FGIS at 419- 893-3076‎.

Crop Insurance

Some crop insurance policies cover Vomitoxin damage. It is best to have the corn checked by an adjuster while still in the field to avoid tainted corn from being mixed with untainted corn in bins.  Many producers have opted to not file a claim due to the significant impact on APH.  They would rather maintain a higher APH than to file a marginal crop insurance claim.  The deadline for any claims on vomitoxin was December 25, 2009.  In the future, a producer’s crop insurance agent should be contacted at the first sign of Vomitoxin to ensure that all claim procedures are property followed.

Future Implications

Will we see grain contracts move away from the USDA No.2 Yellow Corn standard and towards the FDA ppm standard for vomitoxin and other mycotoxins?  Elevators relying on the USDA standard could get stuck buying corn that exceeds the FDA’s ppm standards.  Unless blended with non-tainted grain, this grain would seemingly be unmarketable as it could not be used for human consumption, livestock consumption, and/or export. Producers should anticipate possible changes to grading standards in contracts offered by elevators and other buyers.  A careful reading of all new grain contracts should be a must for producers to make sure they fully understand the quality and grade of grain they are expected to deliver to the buyer.

Robert Moore is an attorney with Wright Law Co. LPA in Dublin, Ohio, www.wright-law.net.  E-mail:  rmoore@wright-law.net

Ohio House Introduces Livestock Care Standards Legislation

Representatives Sayre and Bolon introduced the implementation legislation for State Issue 2′s Ohio Livestock Care Standards Board on Tuesday, January 19.  H.B. 414 does the following:

  • Defines “livestock” as equine animals, regardless of the purpose for which the equine are raised; porcine, bovine, caprine and ovine animals; poultry; alpaca and llamas. 
  • Requires the appointment of the Ohio Livestock Care Standards Board within 45 days of the bill’s effective date and establishes board member provisions such as terms of office, vacancies, meetings and compensation.
  • Reiterates Issue 2′s language regarding the purpose of the board.
  • Directs the board to adopt rules regarding civil penalties for violating care standards.
  • Establishes duties of the director of the Ohio Department of Agriculture for assisting the board and grants authority to the director and his/her representative to enter property for inspection and investigation.
  • Prohibits anyone from providing false information in response to the livestock care standard requirements, or otherwise violating the rules developed by the board.
  • Creates an Ohio livestock care standards fund and authorizes the director of the Ohio Department of Agriculture to use the fund for program administration and enforcement.
  • Increases the commercial feed and seed inspection fee in ORC 923.44 by 15 cents over the next three years, in five cent increments per year–to 30, 35 and 40 cents per ton–and increases the minimum fee from 25 to 50 dollars.
  • Allows the director of ODA to request annual transfers of not less than $500,000 from the commercial feed and seed fund to the Ohio livestock care standards fund.
  • States that the law does not affect the authority of county humane societies or officials.
  • Clarifies that the law does not apply to food processing production activities regulated under ORC Chapter 1717.

View H.B. 414 here.

Ohio changes transfer on death deed to an affidavit process

This blog was just posted early this morning by Peggy Kirk Hall (attorney and director of the OSU Agricultural & Resource Law Program) on her OSU AG Law blog located at: http://ohioaglaw.wordpress.com/

Here is her blog:

Since 2000, Ohio law has allowed property owners to avoid the probate process with a transfer on death deed, a deed that automatically transfers real property to a designated beneficiary upon the death of the property owner.   Under a new Ohio law, such transfers now require the preparation of an affidavit rather than a transfer on death deed.  The new law also allows those who hold “survivorship rights” in property to transfer their rights upon death, which the previous law prohibited. 

The changes occurred in S.B. 124, which became effective upon the governor’s signature on December 28, 2009.  The Ohio State Bar Association’s Real Property Law Section proposed the changes to simplify the transfer on death process and remove confusion over the rights of those holding survivorship deeds. 

See the bill and its changes to Ohio Revised Code Chapter 5302  here.     The Legislative Service Commission’s analysis of S.B. 124 is available here.   Visit this website for a good summary of the law.

Ohio Ag Manager Newsletter Posted

I just posted the January edition of the Ohio Ag Manager newsletter at: http://ohioagmanager.osu.edu  This month’s newsletter features this Blog (and our OSU Extension Ag Law Blog) as well as our article on the 2010 Federal Estate Tax is in Limbo which was posted here first earlier this week.  Producers should also check out the tax management articles as they do have an impact as families make their succession and retirement plans.  I highly recommend you read Dr. George Patrick’s article from Purdue University at: http://www.agecon.purdue.edu/extension/pubs/taxplan2009.pdf

Federal Estate Tax in Limbo for 2010

 It is 2010, and there is officially no Federal Estate Tax.  Why and for how long?  While the House recently passed a bill to reinstate the federal estate tax in 2010, U.S. Senators failed to reach a deal to temporarily extend the estate tax into 2010.  The extension proposed by the House would have kept the 2009 estate tax levels in place.  If the bill passed in the House becomes law, the first $3.5 million of an estate will be exempt from federal estate tax and the estate tax rate on the taxable portion of an estate would be 45%.  Senate Republicans want a permanent extension to a $5 million exemption and an estate tax rate of 35%.  If no compromise can be reached, we may continue with existing law.

Under the Economic Growth and Tax Relief Reconciliation Act of 2001, the federal estate tax exemption increased during the past decade from $1 million to its 2009 level of $3.5 million and the maximum rate decreased from 55 percent to 45 percent.   In 2010, there is a full repeal of the federal estate tax.  Starting in 2011, the federal exemption is scheduled to revert back to $1 million.

The lack of movement by Congress could cause a huge TAX headache for many of Ohio farm families if someone dies before a compromise can be reached.  This is mainly due to the fact there will be only a limited step-up in basis. Under current federal estate tax laws (prior to 2010), the assets of the deceased get a step-up (or step-down) in basis to the fair market value at date of death (or 6 months later).   The step-up simply means when heirs sell an inherited asset, they only owe capital gains tax on the asset’s appreciation from the day the asset was inherited to the date of sale rather than from the day the asset was originally purchased by the decedent. 

In 2010, if the federal estate tax remains repealed, the step-up in basis is limited to $1.3 million for the overall estate, plus $3 million for assets transferred to a surviving spouse.  The Executor will be able to add this extra basis to the existing basis of the property.  This means that Executors or heirs will have the added complexity of determining the prior basis of the property, which might go back many years or even generations. 

With the value of many of our farm estates, the lack of full basis step-up could trigger larger capital gains for farm families who inherit farm assets.  As a reminder, tax liability due to capital gain is not triggered until sale of the appreciated asset. If the asset is inherited this tax will not be assessed until later when and if the asset is sold.  It also may pass through another estate settlement (before it is sold) which may allow for the full step in basis if Congress passes legislation to allow such (as was allowed prior to 2010).  The tax assessed on capital gain is calculated on only the appreciated amount and currently is at a much lower rate (10 to 15%) than the federal estate tax rate.

So what is on the horizon?  It appears the full repeal of the federal estate tax in 2010 may be very short lived in 2010.  Senate Finance Chairman Max Baucus, D-Mont., and House Ways and Means Chairman Charles Rangel, D-N.Y., have said they will try to repeal the repeal and get the federal estate tax reinstated retroactively for 2010 after the New Year.  This will cause confusion, uncertainty and possibly very large tax headaches for those families who have someone pass between Jan 1, 2010 and whenever Congress reaches a compromise.  Families in that situation who are inheriting estates exceeding $3.5 million (or for whatever $ level the new federal estate will be) may be surprised when they owe a large federal estate tax bill if the law is changed retroactively.

This entry was written by David Marrison & Dr. James Skeeles, Extension Educator for OSU Extension and Russell N. Cunningham, OSBA Certified Specialist in Estate Planning, Trust and Probate Law (Barrett, Easterday, Cunningham & Eselgroth, LLP)

Transferring Your Farm Business to the Next Generation Bulletin Available from OSU

OSU Extension is pleased to announce the newly revised Bulletin 862 titled, Transferring Your Farm Business to the Next Generation is now available as a resource for families to use as they plan for the future. This 89 page bulletin helps families plan for he future of their business by examining the following questions:

1) Do I want to pass my farm operation to my heirs as an ongoing business or do I want to pass it on as a group of assets?

2) How can you tell if the business is profitable enough to provide for the next generation?

3) Are there enough income and assets to provide for the older generation’s wants and needs?

4) How can you help the two generations get along?

5)What should you transfer and in what order?

6) How can you avoid paying too much income, gift and estate taxes?

This bulletin is one which each generation should read. This bulletin can be purchased at your local county Extension office for $9.25 or can be accessed for free at: http://ohioline.osu.edu/lines/bulls.html

2009 Year-End Enterprise Budgets for Corn and Soybeans On-line

Putting together budget projections for the upcoming year can guide you through your decision making process as you attempt to commit resources to the most profitable enterprises on the farm. Crops or Livestock? Corn or Soybeans?

As producers we also need to complete year end budgets to determine whether our projections met the reality of the past year’s revenue and expenses. We have put together a set of year-end budgets for corn and soybeans for conditions in much of Ohio. These budgets may assist you in developing your own year-end budgets to evaluate profitability in 2009.

The sample year-end budgets that were developed all include storage and extra transportation costs and include:

Corn – With Higher Fertilizer Costs

Corn – With Higher Fertilizer Costs and Higher Grain Moisture

Corn – With Lower Fertilizer Costs

Corn – With Lower Fertilizer Costs and Higher Grain Moisture

Corn – With Lower Fertilizer Costs and Higher Yields

Corn – With Lower Nitrogen Costs and No P&K Applications

Soybeans – With Lower Grain Price and Higher Fertilizer Costs

Soybeans – With Higher Grain Price and Higher Fertilizer Costs

Soybeans – With Higher Grain Price and Lower Fertilizer Costs

These year-end budgets are available online at the bottom of our Farm Management Publications website:

http://aede.osu.edu/Programs/FarmManagement/MgtPublications.htm

Enterprise Budgets projections for 2010 can be accessed at:

http://aede.osu.edu/Programs/FarmManagement/Budgets/

ACRE Payments: Will there be any for 2009?

On August 14, 2009, farmers either had signed up for the average crop revenue election (ACRE) or remained in the tradition DCP program. In Ohio, approximately 6% of the farms representing 10% of the farm acres were enrolled in ACRE. Farmers who signed up for ACRE now want to know if it will make a payment for the 2009 crop.

Although this is a legitimate question, I am not sure it is the correct question to ask. I am more inclined to want to know if it was a good decision. However, I will answer the previous question first. Payments will be made if the actual state revenue per crop is less that the state revenue guarantee for that crop. The actual state revenue per crop is determined by multiplying the actual state yield times the average U.S. cash price for each crop. The average U.S. cash price for each crop is the average terminal price starting at harvest and going forward 12 months. For wheat the year starts July 1 and for corn and soybeans it starts September 1. Currently, many of the numbers needed to determine the actual state revenue are either estimated or predicted. If these hold the actual state revenue estimates along with the Ohio state revenue guarantee are listed in the table below.

Commodity

USDA Predicted 2009 Prices

December 10, 2009

Ohio Average Crop Yields

(*)estimated

Average 2009 Revenue Guaranteed 2009 Ohio Revenue ACRE Payment Possible

Corn

$3.55

166*

$589

$558

No

Soybeans

$9.50

48*

$456

$416

No

Wheat

$4.85

71

$334

$393

Yes

In examining the state trigger, a payment for corn and soybeans does not appear likely at this time. For corn, the average U.S. cash price would need to average $3.36 or less for the year meaning the next 8 months would need to be lower yet to offset the four months of $3.50 plus corn we have already had. Soybeans are in the same position with a yearly average needing to fall below $8.67 to release the state trigger.

Wheat is the one crop that appears likely to make a payment. However, depending on the proven yields of the farm, there may not be a payment even with the state trigger looking like it might be met. In an example I calculated, the farm had an average yield of 67 bushels and would still receive a payment providing the 2009 wheat yield was below 94 bushels per acre. Each farm would need to calculate their own scenario to determine if they might qualify for an ACRE payment for their wheat acres. Again with my example, the payment would be in the $40 – $50 range per acre not the $90 – $100 range that was possible for this farmer.

Now that we have answered the first question, I will let you determine for yourself if the decision was the correct one. If a farmer was farming 1,000 acres and had 100 acres of wheat, he would have given up approximately $4,000 in direct payments and should receive approximately $4,000 – $5,000 in ACRE payments. Financially it is about a wash, but from a risk management perspective, it was a good decision. What if crop yields were low like in 2008? What if prices had fallen to 2005 levels?

Farmers who did not enroll in ACRE have the opportunity to re-examine the decision in 2010. Study the program parameters and make sure to sign up for the program of your choice by June 1, 2010.

OSU Extension Small Farm Program Announces Two Upcoming Conferences for March 2010

The OSU Extension Small Farmer Program is pleased to announce that two Small Farm Conferences & Trades Shows will be held in Ohio this upcoming March.

“Opening Doors To Success” Southwest Ohio Small Farm Conference & Trade Show, Wilmington Ohio – March 12 & 13 2010

The second Annual “Opening Doors to Success” Small Farm Conference and Trade Show will be held in Wilmington , Ohio on March 12-13 at Wilmington College . This conference will feature, “A Night of Organics”: an evening dedicated to investigating the “ins and outs” of Organic Production and the opportunities that exist, including certification, fertility, weed control, marketing and more on Friday, March 12 beginning at 5:30 pm with registration. The conference will continue on Saturday March 13, at 7:30 am and conclude at 4:30 pm. This intensive day will feature over 35 breakout sessions to pick and choose from along with a trade show for small farmers.

Some of the breakout sessions that will be featured at this year’s event include: Growing Grapes/Making Wine, Agritourism Opportunities, Bee Keeping Fundamentals for the Small Farm, Poultry Production for the Small Farm, Self Help Veterinarian for the Small Farm, CSA’s – Can they work for me?, Fertility Fundamentals for Small Farm Production, Equipment 101, Food Preservation, Introduction To Aquaculture, Cage Fish Culture, High Bush Blueberry Production, Strawberry Production, Raspberry Production, Agricultural Law Considerations for the Small Farm, Fence Line Law, Tax Issues for the Small Farm, Orchard Planning for the Small Farm , Pasture and Hay Production, Business Planning, Branding my Agricultural Product, USDA Services and Programs and Grants and Loans Available to the Small Farm.

Cost of this conference is $20 for the Friday session, $50 for the Saturday only sessions or $60 for both Friday and Saturday sessions. For more information about this conference, contact Tony Nye at nye.1@osu.edu or 937-382-0901 or watch the Clinton County Extension website for details at clinton.osu.edu.

“Opening Doors To Success” Northeast Ohio Small Farm Conference and Trade Show, Massillon , Ohio – March 27, 2010

The inaugural Northeast Ohio Small Farmer Conference and Trade Show will be held on Saturday, March 27 at the R.G. Drage Career Center in Massillon, Ohio from 9:00 a.m. to 4:00 p.m. This conference will include two keynote addresses ( Choosing the Best Farm Enterprise for Your Family and Making Your Small Farm Dream Come True!) and will include a trade show and over 18 break-out sessions for small farmers to attend.

Breakout sessions will be held on: Aquaculture Opportunities in Ohio, Freshwater Shrimp Production, Pond Management, Backyard Poultry Production, Meat Goat Production, Producing Grass-Fed Livestock, Berry Production, Selecting a Fruit & Vegetable Enterprise for Your Farm, Operating a Small Greenhouse, Maple Syrup for Fun and Profit, Developing a Lease Hunting Enterprise, Managing the Woodlot, Line Fence Law and Other Private Property Issues, Tax Issues for the New & Small Farm, Planning For Your Small Farm Dream.

Cost of this conference will be $50. More information about this conference can be obtained by contacting Mike Hogan at hogan.1@osu.edu or 330-627-4310 or by going to clinton.osu.edu. as details become available.

Both conferences are sponsored by: The Ohio State University Extension; Wilmington College; Farm Credit Services; and the U.S.D.A. Departments of Natural Resources Conservation Service, National Agricultural Statistic Services, Farm Service Agency, and Rural Development.

Income Tax Management for 2009

January is the time of the year which farm managers begin their annual winter task of compiling their records to complete their schedule F tax form. Farmers can receive a free copy of IRS Publication 225, the Farmers Tax Guide, at their local county Extension office. 

Click here to find the location of the OSU Extension County Extension offices

The farmers tax guide can also be obtained on-line at:

http://www.irs.gov/publications/p225/index.html

This year’s tax major tax changes include a new recovery period for certain machinery and equipment. Certain machinery or equipment placed in service after 2008 and before 2010 will be treated as 5-year property. The maximum amount you can elect to deduct for most section 179 property placed in service in 2009 is $250,000. This limit is reduced by the amount by which the cost of the property placed in service during the tax year exceeds $800,000. Under current legislation, the Section 179 limit is scheduled to drop back to $125,000 with indexing for 2010.

Farmers are also reminded that for the 2008 to 2010 period, individuals in the 15-percent or lower ordinary income tax bracket have a zero-percent tax rate on qualifying long-term capital gains. For individuals in the 25-percent or higher tax bracket, the tax rate on qualifying long-term capital gains is 15 percent. Earnings of up to $106,800 are subject to 12.4-percent tax for social security in 2009 with all earnings are subject to the 2.9- percent Medicare tax. For 2010, the maximum social security portion is unchanged as there is no cost of living adjustment for 2010 benefits.

Producers are encouraged to review Purdue University Professor George Patrick’s income tax publication written for agricultural producers.  This 32 page paper explains in detail many of the new agricultural tax changes.  Topics addressed include: reduced capital gain & dividend rates, child tax credit, charitable contributions, alternative minimum tax, depreciation and Section 179 expenses, new recovery period for new machinery, recovering lost depreciation, deferring income and pre-paying expenses, farm income averaging, crop insurance and disaster payments, casualty losses, self-employment tax, and gifts and donations of commodities. This paper can also be accessed at:

http://www.agecon.purdue.edu/extension/pubs/taxplan2009.pdf

All producers are reminded to obtain professional tax assistance as each farm business could benefit from different tax strategies.