Month: February 2011

Crop Insurance Premium Calculators

Now that half of February is over, base prices and volatilities can be more accurately estimated, leading to fairly accurate estimates of crop insurance premium.

The Crop Insurance section of Farmdoc has online 2011 Crop Insurance Premium Calculators. Also available for download is the 2011 Crop Insurance Decision FAST Tool, a Microsoft Excel spreadsheet useful in premium estimation and crop insurance evaluation.

The 2011 iFarm Crop Insurance Payment Simulator returns estimates of premiums, frequency of payments, average payments, net costs, and risk reductions associated with alternative crop insurance products and election levels.

On Demand Webinars are also available describing the new COMBO product. Don’t miss the presentation entitled “Crop Insurance and Risk Managements Strategies for 2011” which gives suggestions for choices of crop insurance products.

All of these farmdoc Crop Insurance resources are available at:
http://www.farmdoc.illinois.edu/cropins/index.asp

REFLECTIONS AND CONTENT: JANUARY USDA GRAIN REPORTS

USDA released a key set of reports on January 12: final production of 2010 crops, stocks of grains on December 1, 2010, acres of winter wheat seeded for 2011, and January World Agriculture Supply and Demand Estimates (WASDE). The reports were viewed as bullish, especially for corn and soybeans. Click on the following link to access the entire paper:

http://aede.osu.edu/programs/outlook/zulauf/Jan-2011DemandSupplyNewsletter-ZulaufAyers.pdf

New Rules for Estate Taxes

by Jim Skeeles & Chris Bruynis, OSU Extension Educators

Congress passed new legislation in December affecting estate taxes, but only for 2011 and 2012, reducing federal taxation of large estates. This legislation affects families with an individual who dies in 2011 or 2012 and has assets more than one million ($1M) or an individual that gifts more than $1M dollars during this period.

With this law change, an individual can pass on a total of $5M worth of assets with no federal estate or gift tax due. Further, if the net worth of an individual’s estate combined with the total counted amount given exceeds $5M, the federal estate and/or gift tax rate has been reduced to 35%.

Also upon the death of the first spouse, the surviving spouse now receives the unused $5M exclusion of the deceased spouse. Since the surviving spouse also has her exclusion of $5M she now can transfer assets totaling $10M, either by giving them away, the assets going through her estate, or a combination of the two.

Since the federal estate tax and gift taxes are “unified”, the $5M exemption is for the combination of the value of the estate and total value of “counted” gifts over a lifetime. For instance, if the value of one’s estate is $5M and counted gifts of $1M were made over that person’s lifetime, for a total of $6M, then the amount over the exclusion, the $1M, would be taxed at 35%.

However, if the estate value is $1M with counted gifts being another $1M, the unused exclusion that could be passed onto a surviving spouse would be $3M [(5M exclusion – 1M used for estate – 1M used for gifts = 3M available to be passed onto surviving spouse) + 5M exclusion of surviving spouse = 8M available exclusion to surviving spouse].

Any assets given per person per year that total over $13,000 (has increased from $10,000 originally since indexed for inflation) count against that individual’s $5M unified exclusion. Each time a gift is over $13,000 per person per year the giver is required to file a gift tax return listing all such gifts with their income tax return for that year.

If the total counted gifts accumulate to more than $5M during one’s lifetime, gift tax will be assessed at 35% for the amount exceeding the $5M, to be paid along with income tax. If that occurs, there will be no estate tax exclusion left so estate taxes will be assessed at 35% on any countable assets in the estate.

These estate tax and gift tax changes will give a reprieve to those with estates over $1M, but only for the next two years. Those families with large estates who live into 2013 will have to give away assets to lock in these provisions. Keep in mind that if you are going to “give” assets through a trust and have them qualify for the exclusion that the assets have to be truly given and no strings can be attached. That means that assets must be truly given away or given to an irrevocable trust with someone else being the trustee.

Estimated ACRE Coverage Levels for 2011

Click here to read a PDF version of this article (includes tables)

Farmers are now into the third year of the 2008 Farm Bill programs. The ability to elect into the Average Crop Revenue Election (ACRE) or to remain in the Direct and Counter Cyclical Program (DCP) will close on June 1, 2011 for this program year. Farmers not currently enrolled in ACRE have until June 1, 2011 to decide if ACRE or DCP might be the better decision for this crop year. However, once a farm has elected ACRE it cannot be switched back to DCP.

The guarantee price for 2011 will be the two year average U.S. cash price from the marketing years for the 2009 and 2010 crops. Using the 2009 actual prices plus the USDA estimated price (from January 12, 2011) for the 2010 crops, the 2011 ACRE price guarantee can be calculated as shown in Table 1 of the attached article. As prices continue to change during the marketing year the 2011 ACRE price guarantee will also change. In the last column of the table, the 2011 ACRE price guarantee is listed.

Since ACRE is a revenue protection program, price is only half of the equation in determining the 2011 ACRE revenue guarantee. The second half of the equation is the five year Olympic average yield for each crop respectively. In Table 2 in the aticle, the new five year Olympic average for 2011 is calculated for each crop. Even thought the final numbers for the 2010 crop might vary slightly from the estimates, it will not affect the outcome significantly.

The estimated 2011 Ohio ACRE revenue guarantee is calculated by multiplying the Ohio Olympic average yield times the U.S. average cash price times the 90% coverage level provided by ACRE. There was also a provision in the 2008 Farm Bill that established a limit on how much the revenue guarantee could change once the program started. This 10% cup and cap based off of the 2010 revenue guarantee sets a floor and ceiling for the 2011 revenue guarantee. The 10% cup and cap come into effect for all three major crops in Ohio if these forecasted numbers hold for the 2011 crop year. The Ohio ACRE revenue guarantee would be $570 for corn, $448 for soybeans and $325 for wheat, which is different than the calculated values. (see Table 3)

Table 4 in the article provides some insight into whether or not enrolling in ACRE in 2011 would be a good decision. If the Ohio crop yields in 2011 are equal to the 5 year Olympic average, the 2011 average U.S. market price (from 9/1/2011 through 8/31/2012) would need to be below $3.63 before an ACRE payment would be made. However, if crop yield are better the price would need to be lower before a payment is made and the opposite is true if yield are lower. Under this example if the Ohio average yield and U.S. average market price would trigger a payment, individual farm revenue would also need to be below the farm’s 2011 revenue guarantee before any payment would be received.

In examining the current future market prices relative to the U.S. average cash price needed to trigger an ACRE payment, it does not appear that ACRE will be beneficial in 2011. However, with that said the markets are fickle and can move quickly and unexpectedly at times. The ACRE payment is based on the average U.S. market price from harvest 2011 until harvest 2012, not what a farmer receives for his crop. Although the markets look good today, you have no downside risk protection if they decide to decrease significantly. The ~$4.00 per acre cost to enroll might still be a good risk reduction strategy for some operations. Remember, even if you decide to sign up for ACRE, it is not a substitute for crop insurance since it depends on low state revenue to trigger. ACRE will not cover localized crop failures in the same fashion that crop insurance does.