Edition #8

August 26, 2023

Good morning and welcome to the Braintrust Ag newsletter. We know you’re relaxing in the AC to beat the heat… so you may as well learn something from your recliner.

A few notes to begin:

• Members Only Meet-Up

On Thursday, August 31 (7:30-8:00 pm) we’ll hold our first ever virtual SOIL gathering. This is a half hour where members share their stories, opportunities, insight, and lessons in their operations. Hope you’ll join in, meet other members, and contribute. It would be awkward if it was just me talking to myself for a half hour…

• Want to attend but aren’t a member yet? Join today by clicking here.

• Contact Clint if you want to tell your Ag Origin Story. How you got into ag & what key takeaways you can pass on to others.

Alright, let’s get to the topics that will help you build a strong, sustainable agri-business.

-Clint

Here’s what we have this week:

• 📃 Business Plan: Cash Flow

• 🌱 Seeds

• 📜 ROFR Part 2

• 🌽 Basis → defined

• and more…

BUSINESS PLAN SERIES

As a refresher, successful farms and ranches don’t just happen by mistake.

They are the result of a well thought out plan that allows for growth and flexibility designed to reach a distant goal.

Whether you have been running a farm for years, are looking to start one from scratch, or are somewhere in between, you ought to have a business plan.

To get everyone up to speed, here’s the previous installments of the series:

Here’s Part 1: Business Description

Here’s Part 2: Products & Services

Here’s Part 3: Marketing & SWOT Analysis

Here’s Part 4: Operational Plan

Here’s Part 5: Operating Proforma (Sources & Uses)

This week’s Part 6 focus is the Cash Flow Summary.

For this part of the business plan, we’ll be using a simple Operating Proforma that shows our Sources, Uses, and 10 Year Cash Flow projections.

Access it under the Business Plans folder on the Resources Space: Click Here

A note before we dive in: you’ll see the end result of our analysis shows this plan to not be feasible using traditional purchasing and financing options. So, we’ll need to look at alternative methods of achieving the desired outcome next week. Also, this cash flow summary is not generated using standard accounting classifications…think of it more as a cash budget forecast.

Last week we outlined our estimated costs to start the farm from nothing. By using the “Uses & Sources” tab of the spreadsheet, we identified how much capital Sample Farms would need and listed the potential sources for that capital.

The next step is to model annual income and expenses to see if this venture is feasible. Spoiler alert, it’s not how it’s currently structured. For this exercise we will be using the “Cash Flow Summary” tab of the spreadsheet.

The first section (top of the sheet) is where our various sources of income are projected.

As you can see, since these are forward looking financials, we must make a wide array of assumptions. (The highlighted cells are the ones you can/need to change)

The result is: $679,000 total revenue in Year 1.

Now we need to list out the expenses we expect to spend as shown here:

We end Year 1 with: $554,500 of expenses.

Which gets us a Net Operating Income (NOI) of $124,500.

That sounds great - we made money on planting and harvesting the crop. But, this doesn’t account for our payments to the bank on our various loans.

We have to subtract, from our NOI, the payments made on:

• Land Loan

• Machinery Loan

• Operating Note (only accounting for interest on the operating note in the next section)

Also, we will account for some capital expenditures in the “Other Expenses” section:

As you can see, we get $863,871 of total expenses (Operating Expenses + Other Expenses)

Unfortunately, this leaves us with a big red number at the bottom of the sheet. To the tune of ($184,871).

Which tells us we need to rethink our plan because this is not viable.

So, next week we’ll look at options to restructure the Uses & Sources, our operating plan, or a combination of both to try and make Sample Farms profitable.

RESOURCES UPDATE

Here’s a couple of the resources available to download on the website I’d like to highlight:

Rancher’s Ag Leasing Handbook

This 132 page handbook is packed with information on grazing, hunting, and livestock leases. It breaks down different ideas and structures while providing a few example/template leases.

Located: Resources > Industry Resources > USDA Ag Leasing Handbook

Farmland Purchasing Due Diligence Checklist

Comprehensive checklist to be used when you’re anticipating buying farmground. This covers the common steps and documents needed to ensure you’re protected before making that massive land investment. Also, it includes a sub-checklist on what needs to be included in your Purchase Agreement.

Located: Resources > Miscellaneous > Farmland Purchase Due Diligence Checklist

I’d encourage you to look at the other resources available on the site, and check back from time to time as new tools get uploaded.

Are you an expert who provides professional services to ag folks?

Click Here to learn about becoming an Endorsed Service Provider (ESP)

SEEDS

• 📜 Trust To Avoid Taxes: An oddly named trust, intentionally defective grantor trust, may be a useful tool for avoiding tax issues when transferring farm assets to the next generation. Here’s an overview with a simple example.

• 🐔 Avian Influenza: The bird flu outbreak that spiked egg prices over the last year and killed 58.8 million birds seems to have let up for the summer; only 3 outbreaks have been reported since Memorial Day.

• 🌎 Foreign Ownership: Here’s a deep dive into the various questions you may have about foreign ownership laws in the 50 states. Currently, 24 states restrict ownership with many states actively considering legislation.

• 🏦 Bank Failure: The fifth US bank to fail in 2023 was a small, rural bank in Kansas. However, Heartland Tri-State Bank didn’t fail like the other, larger headline banks from earlier. This Elkhart, KS bank with $139 million assets failed because it was a victim of a scam…

• 📱 Profit > Revenue: This article discusses the feel-good emotions of revenue, but why that’s not what we ought to be chasing. Profits (more revenue than expenses) is what really matters at the end of the day.

LEGAL

Right of First Refusal (ROFR) - Part 2

Last week, we learned that a ROFR is a contractual agreement that grants a designated party the option to purchase a property under the same terms and conditions as a bonafide third-party offer before the owner can sell the property to that third-party buyer, and this right can be incorporated into a farmland lease agreement or exist as a separate, standalone agreement.

Benefits of ROFR

1. For the Tenant or Neighboring Farmer:

   • It provides a level of security and opportunity for the tenant or neighboring farmer to expand their farming operations without the risk of the land being sold to an unrelated third party.

   • It can help the tenant or neighboring farmer to plan long-term, as they have a clearer potential path to land ownership.

2. For the Landowner:

   • It can make the property more attractive to potential tenants, as it offers them the potential opportunity to eventually own the land they are farming.

   • It can simplify the selling process, as the landowner may have a ready buyer when they decide to sell.

Challenges of ROFR

• It can potentially lower the marketability of the property to third parties, as they may not wish to go through the process of making an offer that the ROFR holder might match.

• It can create tensions between the landowner and the holder of the ROFR, especially if disagreements arise over the terms of a potential sale.

Legal Considerations

It is crucial that the ROFR clause or agreement is drafted clearly and comprehensively, and in accordance with local and national laws. It’s highly advisable for both parties to consult with legal professionals experienced in real estate and agricultural law when creating such an agreement.

ROFR Example

Here’s a LINK to access this template. Or, you can find it under the “Agreements” folder on the Resources Space.

In summary, ROFR is a powerful tool, serving as a bridge between leasing and ownership, and helping to maintain agricultural continuity and long-term planning for farmers. It can be incorporated either within a lease agreement or as a stand-alone contract, each with its own set of considerations and potential complications.

RISK MANAGEMENT

Excited to pick up where we left off learning about Risk Management (RM) from one of our ESPs — Devin Patton. Here’s the previous installment explaining futures contracts.

Now for Part 5: Basis
 
“Nobody has ever been able to explain to me what Basis actually is.”
 
This is a direct quote from a lifelong farmer who also happens to be my uncle here in Oregon. The more I talk to farmers, PNW wheat farmers especially, the more I find that this is common.

Here is the answer: “Basis is simply the difference between local cash prices and the futures price at the CME”. (Agweb)
 
Basis is a single number description of the price spread between your local cash bid and the related futures market. When you are building a marketing plan, understanding Basis is critical.

Depending on where you are your cash bids may be Basis bids. Meaning that the bid may be shown as –30 basis December for Corn. In that scenario, the cash bid is whatever December corn futures are trading at minus 30 cents.

The Basis number changes depending on the buyers need for grain in the timeframe for the bid. Whether that is the immediate delivery bid or a bid a few months away. As a hedger you are trading the Basis. When you take a hedge position you have priced those bushels via futures and your only risk is the move in Basis.
 
Example: November Soybeans are at 1360 (as of this writing) and the Current CHS Mankato Soybean bid is minus 25 cents, or 25 under.
 
You enter a short hedge at 1360 November soybean futures instead of making a forward cash sale at 1335 (25 cents less than futures). Then you look at that Basis number, and when it makes a strong move, you make the cash sale and lift your hedge.

The risk is that the Basis bid could become weaker, but the range is much smaller than the futures price range. Once you have bushels hedged, you can only gain or lose on the Basis… this is why hedgers are “Basis Traders”.
 
Every grain buyer has their own Basis for their own supply/demand and freight cost reasons. You must know what “normal” is for your buyers so you know when the Basis is giving an opportunity.

When your Basis is historically “weak” and you need to make a sale, locking in the futures via hedge or a HTA (Hedge-to-Arrive) is the best move. If Basis is historically strong and you see reasons for the futures to rally before delivering, you can ask about a “Basis contract” whereby you lock in the strong basis and wait for the futures to make a strong move.
 
A lot of money is left on the table by farmers who haven’t taken the time to understand what Basis is and why it moves. It is worth your time and effort to research and learn.

Want more?

ESP Devin Patton is ready and willing to answer any questions regarding Risk Management for your operation. Shoot him an email here: [email protected]

Disclaimer

Trading futures and options involves substantial risk of loss and is not suitable for all investors. An investment in futures contracts involves a high degree of risk and is suitable only for persons who can assume the risk of loss in excess of their margin deposits. You should carefully consider whether futures trading is appropriate for you in light of your investment experience, trading objectives, financial resources, and other relevant circumstances. Past performance is not necessarily indicative of future results.

SUCCESSION/TRANSITION

An "intentionally defective grantor trust"...

Odd name, but may be a good tool for transitioning the farm to the next generation.

• For estate tax, trust assets are separated from the grantor

• For income tax, trust assets are treated as owned by the grantor

An example: Farmer wants to transfer Good Farms, LLC to children, but still looks to receive $ from the operation for some years.

→ If operation sold directly to children... capital gains issues on the sale

So,

1. Farmer creates IDGT naming children as the beneficiaries and trustees

2. Farmer sells Good Farms, LLC to the IDGT on a promissory note

Result:

• IDGT makes payments to the farmer (on the promissory note)

• Children eventually own Good Farms, LLC (as beneficiaries to the IDGT)

Finally, the promissory note can do a couple things:

A. Protect Farmer's estate from estate taxes

B. Include canceling terms to be used for gifting the assets

There's sure a lot of different ways to skin a cat...

MEME OF THE WEEK

That’s a wrap, folks.

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

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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.cast