View all past Braintrust Ag newsletters here.

Edition #29

February 24, 2024

Good morning and welcome to the Braintrust Ag newsletter. Our weekly promise is to not cover you in an ag info-tainment dung heap.

A couple notes to begin:

• Members have been asking, and I finally figured out how to make it happen:

  • You can now view, DM, and meet other Braintrust Ag members easily by clicking the “Members” button in the top left hand corner of the community page. (it looks like this ⤵)

• 📢 If you’re a farmer looking for a new bookkeeping solution, we’re looking for 2 or 3 willing volunteers to do a trial run of a promising new tool. Just email [email protected] if you’d like to participate.

Alright, let’s get to the topics that will help you build a strong, sustainable ag operation.

-Clint

Here’s what we have this week:

• ⚖ Ag LLCs

• 🌱 Seeds

• 📅 Happenings

• 📉 Farm Income Forecast

• 🤝 Land Investors

• and more…

THE BIG IDEA

LLCs Meet Farming

According to the recent 2022 USDA Ag Census, there are 190,000 limited liability company (LLC) farms (10% of total farms) operating on 130 million acres (15% of total acres).

Let’s take a look at the history of LLCs, their legal and tax features, and their specific benefits for farming families and businesses.

History of the LLC

• LLCs emerged in the United States in 1977, with Wyoming being the first state to enact an LLC statute.

• This new business structure bridged the gap between partnerships and corporations, offering both flexibility and liability protection.

• The IRS's 1997 "check-the-box" regulations further enhanced the appeal of LLCs by allowing them to choose their tax classification.

LLC Characteristics and Formation

The process of forming an LLC is relatively straightforward and involves filing specific documents with the state's Secretary of State office. This act of filing is crucial as it declares the business as a separate legal entity.

Key Points in LLC Formation

Articles of Organization: This document is fundamental in establishing the LLC. It's somewhat analogous to the Articles of Incorporation for a corporation. Essential information typically required includes:

• The LLC's name, which must include "LLC" or a similar indicator of its status.

• The name and address of a registered agent in the state, responsible for handling legal documents.

• Additional information may be required, like the principal office address, a general purpose statement, and signatures from members.

Effective upon Filing: The LLC officially exists once the Articles of Organization are filed or upon confirmation of receipt by the state.

State-Specific Requirements: The specific requirements for forming an LLC can vary by state. It’s advised to consult the secretary of state’s website or a legal professional for detailed guidance.

Federal BOIR: Additionally, almost all LLCs have a new reporting requirement, the Beneficial Owners Information Report which is filed at the federal level with FinCEN.

The Operating Agreement

The Operating Agreement is the core document that governs the internal operations of the LLC. It's more detailed and internal than the Articles of Organization.

Key Elements of the Operating Agreement:

1. Member Relations and Management: It outlines the relationship among members and between members and the LLC, including managerial roles and responsibilities.

2. Details of Operation: This includes rules for capital contributions, management structure, voting rights, profit and loss allocation, membership transfer rules, and procedures for amending the agreement.

3. Fiduciary Duties and Indemnification: The agreement may modify fiduciary duties of members and managers and include indemnification clauses, although complete elimination of such duties is generally not permissible.

4. Default Rules: In the absence of specific provisions in the operating agreement, state default rules apply. These rules act as gap fillers but may not align with the members' intentions, highlighting the importance of a well-crafted operating agreement.

5. Voting and Membership Rights: Particular attention is often given to voting rights and the inclusion or exclusion of certain members (like in-law spouses).

6. Legal Assistance and Evolution: It's advisable to draft the Operating Agreement with legal help, ensuring compliance with state laws and alignment with the members' goals. The agreement should evolve as the business and family dynamics change.

Titling and Acquiring Assets for the LLC

For an LLC to function effectively, it must hold assets. The transfer and management of assets are governed by the Operating Agreement.

1. Transfer of Assets: This can be done through various means, such as writing a bill of sale for certain assets, opening a bank account in the LLC's name, executing a deed for real property to the LLC, or transferring the title of personal property to the LLC.

2. Management of Assets: Once transferred, the LLC has legal ownership and can manage these assets as per the Operating Agreement, including purchasing, loan applications, and selling.

3. Capitalization Requirements: Members are often required to contribute financially (buy-in) to the LLC, which is used to capitalize and operationalize the business.

Advantages of LLCs in Agriculture

1. Liability Protection: LLCs protect member’s personal assets from business debts, liabilities, and lawsuits, although this protection is not absolute and has exceptions.

2. Pass-Through Taxation: LLCs offer tax flexibility, allowing earnings to be taxed either at the corporate level or passed through to individual members.

3. Flexible Entity Structure: LLCs are adaptable, accommodating various member configurations and reducing formalities compared to corporations.

4. Estate and Business Transition Planning: LLCs facilitate the transfer of farm ownership and operations across generations, offering a mechanism for maintaining family ownership and control.

Conclusion

The LLC structure is well-suited for the agriculture industry, offering a blend of liability protection, tax benefits, flexibility, and ease in business succession.

Growth in the use of LLCs by farms and agribusinesses is anticipated, given their ability to address specific needs and challenges in the sector.

LLCs have become a popular tool for farming businesses, offering practical solutions for liability, taxation, operational flexibility, and succession planning. It’s important to underscore the significance of understanding state-specific regulations and emphasize the role of well-drafted operating agreements in maximizing the benefits of an LLC structure.

Note: The source for the majority of this summary is: “A Snapshot of LLCs and Farming: How Farm Businesses have implemented the Limited Liability Company Structure in the Midwestern United States”

SEEDS

• 🥩 Ag-Related Businesses: Stumbled across this cool drone promotional video for ag companies business, as well as this cooked, freeze-dried beef for “preppers” business. The gist- there’s unique ways to support agriculture w/o being directly involved in production.

• 📈 Farmland ROI: Here’s an index of farmland that shows investment returns of a large pool of individual farmland properties. I’m still playing around with the site to further understand it.

• 🧓 Will vs Trust: Here’s a great bulletin explaining the differences and working through whether a will or a trust is right for your farm transition plan.

• 📖 Preserve Your Story: A cool new way for ag people to share their stories is now available. The Gravel Road is a digital magazine where farmers, ranchers, and rural folks can memorialize the legacy of their ag heritage. Submissions are now open until 3/25/2024.

• 💥 WATR: Easily my favorite ag-goings-on content of late is the Easy Newz Weekly Ag Twitter Recap. (Here’s last week’s in case you missed it)

• 😎 For Fun: If you think you’re having a bad day… here’s some other folks’ misfortunes to show maybe you’re not so bad off after all.

If you’d be willing to take a minute, click here to leave your testimonial.

Become a member today for lifetime access to everything. It’s a small one-time cost with NO recurring subscription.

PEER GROUP HAPPENINGS

A couple mentions on what Braintrust Ag members are up to:

1. 📅 EVENT!

   Grant Wiese of Farm640.com will be discussing "Planning for a profitable 2024 through a lender's eyes" at our upcoming Expert Q&A!
   
   Grant is an experienced ag lender, frequent contributor to this newsletter, and a member of Braintrust Ag with a significant financial background helping farmers of all sizes become more profitable.
   
   Please join the Zoom call and bring your questions for Grant!

2. Your humble author has the privilege of speaking at the Kentucky Young Farmers Association State Convention next weekend. Looking forward to meeting a bunch of ambitious young farmers. And, wave out the airplane window to everyone in IA, IL, IN, KY, and TN.

3. A few new resources have been uploaded to the resources page: both by me and from a couple members sharing their spreadsheets!

4. Please don’t forget to download the app (Android or iOS) for the community platform.

• Because we have an Expert Q&A Event this coming week and I have a couple speaking engagements, we’re postponing the next SOIL Gathering until Thursday, March 7. Topic to be: Risk Mgmt Part 2 (by popular demand)

FARM ECONOMY

You can take this data with as many grains of salt as you would like, but here’s the highlights from the USDA 2024 Farm Sector Income Forecast:

Decline in Farm Sector Profits

• Net Farm Income: Forecasted at $116.1 billion for 2024, down by $39.8 billion (25.5%) from 2023. Adjusted for inflation, this represents a $43.1 billion (27.1%) decrease from 2023, falling 1.7% below the 20-year average and 40.9% below the 2022 record high.

• Net Cash Farm Income: Expected to be $121.7 billion in 2024, a $38.7 billion (24.1%) decrease from 2023. Inflation-adjusted, this is a 25.8% decline, standing 13.7% below the 2003–22 average and 43.2% below the 2022 peak.

Reduction in Cash Receipts

• Forecasted to drop by $21.2 billion (4.2%) to $485.5 billion in 2024.

• Crop receipts to decrease by $16.7 billion (6.3%), with notable declines in corn and soybeans.

• Animal/animal product receipts to fall by $4.6 billion (1.9%), with decreases in eggs, turkeys, cattle/calves, and milk.

Other Contributing Factors

• Direct Government Payments: Projected to decrease by $1.9 billion (15.9%) to $10.2 billion in 2024.

• Production Expenses: Expected to rise by $16.7 billion (3.8%) to $455.1 billion in 2024, with significant increases in livestock/poultry purchases and labor costs.

Farm Business Income Trends

• Average Net Cash Farm Income per Farm: Anticipated to decrease 27.2% to $72,000 in 2024.

• Decreases expected across all nine USDA ERS Farm Resource Regions and all commodity specializations.

• Largest percentage decline in wheat farms and largest dollar decline in cotton farms.

Farm Sector Equity and Assets

• Equity: Forecasted to rise by 4.7% to $3.74 trillion in 2024.

• Assets: Expected to increase by 4.7% to $4.28 trillion in 2024, driven by higher farm real estate values.

• Debt: Predicted to grow by 5.2% to $547.6 billion in 2024.

• Debt-to-Asset Ratio: Slightly worsening from 12.73% in 2023 to 12.78% in 2024.

• Working Capital: Forecasted to decrease by 16.6% in 2024 relative to 2023.

Conclusion

The 2024 forecast indicates a significant downturn in farm sector profits, influenced by reduced cash receipts, lower government payments, and increased production expenses. Despite the decline in income, farm sector equity and assets are expected to rise, with a marginal increase in debt levels.

LOCAL INVESTOR GROUP

So you've got a handful of locals who want to invest in some farmland.

You also want to invest + farm it.

Now what?

Here's how you could set it up: (*not legal advice) 

→ Form an LLC 

Designate you as the "managing member" or "manager" depending on LLC type.

→ Find the target land 

For our purposes, let's say it's 160 acres of tillable ground.

→ Build out the proforma (financial projections) 

This will need two components:

1. Uses & Sources

Note: Uses & Sources always need to match. 

2. Cash Flow Summary

Income = Rent

Expenses = Property taxes + liability insurance + management fee + capital expenditure set-asides + loan payments + bank covenant holdbacks

Income - Expenses = Cash Flow for distributions

→ All investors (members of the LLC) sign off on the proforma & risk factors 

Makes sure all members of the LLC are on the same page & agree to the investment parameters.

Note: ask an attorney about what a Private Placement Memorandum (PPM) or Prospectus is. You want to avoid securities issues. 

→ Draft & sign the operating agreement 

This is the governing document for the LLC which will be buying the farmland.

• tax matters

• voting rights

• exit strategy

• distribution waterfall

• unit (that's LLC talk for shares) transfers

• other specific rights, terms, & conditions

→ Close on purchase of property 

→ Execute lease between the LLC and you (member & farmer) 

Cash rent, share-crop, or flex lease agreement.

But make sure terms are "at arm's length" and other members agree to them.

---

Say you had 5 "silent investors" plus yourself.

Each of you contributes $81,500 and becomes 1/6 owner of the LLC that owns the land.

LLC distributions would (most likely) be split 6 ways to the owners.

All members share in the appreciation value of the farmland.

Also, since you're the farmer, you've expanded your farmable acres by 160.

Once you've successfully done this deal, rinse and repeat for the next one(s).

MEME OF THE WEEK

That’s a wrap, folks.

Until next week, thank you to everyone involved in ag. Come engage on the community platform & let’s grow profitable ag businesses together.

And, share this email with 5 of your friends.

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DISCLAIMER: All content, communications, and resources provided by Braintrust Ag, its principals, operators, or members is intended to merely be educational and entertaining. Nothing published by Braintrust Ag should be relied on as legal, financial, investment, or other professional advice. Investments and legal matters involve substantial risk and are not suitable for all individuals. It is recommended to enter into a client relationship with an ESP for obtaining professional advice.