In This Issue

Producer Alliances and Value-AddedBusiness Ventures . . . . . . . . . . . . . . . . 1Soybean Production: CompetitivePositions of the United States,Brazil, and Argentina . . . . . . . . . . . . . 4Weather and Taxes . . . . . . . . . . . . . . 10Farmland Lease Law Update . . . . . . 12

he food industry is undergo-ing significant structuralchanges, as the industrial-

ization of agriculture continues andthere is increased consolidation andconcentration of agribusiness firms.In a drive to increase efficiencies,businesses in the agrifood sector aredeveloping closer connections withfirms at adjacent stages along thesupply chain to relay information andtake redundant costs out of thesystem. In addition, a drive to achieveeconomies of scale has resulted infewer and larger agribusinesses.

These changes have resulted infarmers facing a more competitivebusiness environment and examiningways to improve the returns fromtheir farm operations. One responseby farmers is to form produceralliances, often structured as newgeneration cooperatives. In somecases, the driving force behind theformation of the producer alliance isfarmers’desire to move along thevalue chain and capture profits fromother stages.

In other situations, producers findthemselves without amarketing or processingplant when agribusiness

firms consolidate andclose local facilities. Iowa

turkey farmers are one example.When Oscar Mayer was closing aprocessing plant and feed mill, theproducers formed Iowa TurkeyGrowers Cooperative and purchased

the facility (Perkins). These produceralliances have the common objectivesof producers working together toachieve/reach common business goalsand capture additional value from thecommodities they produce. The formsthat an alliance can take include: newgeneration cooperative (NGC),limited liability company (LLC),partnership, corporation, buying ormarketing group, joint venture,strategic alliance, as well as uniqueownership arrangements with aregional cooperative.

The success of producer alliancesoften depends upon the answers tothree important questions:

1. Is the alliance a good businessinvestment?

2. Will the organizational structurework?

3. Are there other goals for thealliance, and do they competewith or complement the goal ofbusiness profitability?

In the following sections of thisarticle, each of these questions isexplained in further detail.

Is the Alliance a Good BusinessInvestment?There are two important questionsto consider when evaluating whetheran opportunity represents a goodbusiness investment or not. First,

what are returns and risks associatedwith the business venture? Second,what is the potential for the businessventure from the perspective oflong-term strategic positioning?

Returns and RisksA series of M.S. theses at PurdueUniversity evaluated the returns andrisks associated with producerinvestment in value-added businessactivities (Andreson, Jones, Rosa,Van Fleet). Three sub-sectors ofagriculture were considered in depth:pork, corn, and beef. In each case, astochastic simulation model wasdeveloped and alternative strategicbusiness decisions for producers wereidentified and evaluated. Stochasticdominance analysis was used todetermine the alternatives that werepreferred by risk-averse producers.

Jones evaluated opportunities forhog producers investing in hogpacking operations. A stochasticsimulation model was developed firstand then used to analyze alternative

Producer Alliances and Value-Added Business VenturesJoan Fulton, Associate Professor; and Kevin Andreson, Elizabeth Beetschen, Brian Jones, Michelle Rice,

Erica Rosa, Shylea Wingard all current and former Ag. Econ. Graduate Students

T

PURDUEAGRICULTURALECONOMICSREPORT NOVEMBER 2002

2 NOVEMBER 2002

Purdue Agricultural Economics Report is aquarterly report published by the Departmentof Agricultural Economics, Purdue University.

EditorGerald A. HarrisonE-mail: harrisog@purdue.eduPhone: 765-494-4216 ortoll free 1-888-398-4636

Editorial BoardStephen B. LovejoyChristopher A. HurtPhilip L. Paarlberg

Layout and DesignCathy Malady

Circulation ManagerPatt Sheahan

Agricultural Economics Departmentwww.agecon.purdue.edu

PAER World Wide Webwww.agecon.purdue.edu/ext/paer

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Purdue UniversityCooperative Extension Service,

West Lafayette, IN

business strategies, includinginvesting all equity in the hog farmand investing different percentages ofequity in the hog farm, hog packing,and stocks (through the S&P 500)and bonds (through T-bills). Threedifferent sizes of farrow-to-finish hogoperations were considered: 300, 600,and 1200 sows.

Andreson examined opportunitiesfor corn producers,

including investmentin both wet and drycorn milling. Astochastic simulation

model was developed to analyze theimpact of investment in a dry cornmilling (ethanol) operation. Animportant aspect of this research wasthe consideration of different govern-ment programs for corn producers aswell as for ethanol operations.

Van Fleet and Rosa evaluatedopportunities for cow-calf producers.The scenarios evaluated reflectdecisions that cow-calf producers arecurrently facing. These include:retaining ownership and customfeeding in a feedlot, incorporationof improved genetics in the beefherd, different pricing grids in acoordinated marketing system, springversus fall calving, and diversification

into the stock market. The differentpricing grids reflect situations thatproducers are currently consideringwith cooperative marketing programsthat are being established by beefproducers, while the spring versusfall calving is an important consider-ation for these groups as they need asteady supply of beef year round tomeet consumer demand.

Three important conclusions canbe drawn from the results of theresearch involving the stochasticsimulation analysis and the questionof returns and risk:

(1) producers will benefit from abalanced portfolio,

(2) producers will benefit fromleveraging into more profitableareas, and

(3) government subsidies andprograms influence investorbehavior.

Producers will benefit fromdiversifying. Diversification intobusiness activities other than thefarm or ranch may result in both anincrease in expected return and adecrease in the variability of returns(or a decrease in risk) when comparedto a 100% investment in the farm orranch.

It is important that this diversifi-cation result in a balanced portfolio.In particular, diversification intoa value-added business related to afarmer’s commodity can be a goodinvestment if there is a negativecorrelation between farm income andprocessor income. When a product ischaracterized by volatile commodityprices and relatively stable wholesale/retail prices, there tends to be a highdegree of negative correlationbetween farm income and processorincome. This phenomenon exists inthe pork industry, and Jones’research revealed that there is thepotential for hog producers todiversify beyond the farm intoprocessing and increase expectedreturn and decrease risk. Of course,achieving this potential depends uponfinding an appropriate businessorganizational structure forsuccessful implementation. In

particular, in the case of the process-ing of livestock, scale economies maymake it infeasible for a produceralliance to directly own the entireprocessing plant because they maynot be able to support a large enoughoperation to achieve economicefficiency.

Producers will benefit fromleveraging into moreprofitable areas. Somesub-sectors of agricul-ture do not yield ashigh a rate of returnas outside invest-

ments. In these instances, it is oftenargued that individuals place valueon the lifestyle of farming or ranch-ing and thus are willing to accept thelower rate of return on their equity.Historical data on the profitability ofcow-calf operations provide a pictureof a sector of agriculture that oftenearns a lower rate of return thanother investments. In these situa-tions, with low rates of return, thediversification scenarios are attrac-tive because the other investmentsyield higher returns.

Government subsidies andprograms influence investor behavior.This conclusion is highlighted inAndreson’s study of corn producersinvesting in ethanol production. Inparticular, the business scenariosinvolving investment in an ethanolproject were preferred only whensubsidies for ethanol production werein place. It is therefore vital forproducers to evaluate all relevantgovernment programs as part of theevaluation of a new business venture.

Long-Term Strategic PositioningA strategic business analysis thatcarefully and systematically identifiesall assumptions and evaluates thepotential actions and reactions ofcompetitors is an important step inthe evaluation of investment alterna-tives. A typical framework for thisanalysis is to examine the fivecompetitive forces set out by Porter:barriers to entry, rivalry amongcompetitors, substitute products,power of buyers, and power ofsuppliers. One particularlyinteresting result in Andreson’sanalysis of the corn milling industriesfollows from the analysis of the

PURDUE AGRICULTURAL ECONOMICS REPORT 3

“rivalry among competitors” force.In wet corn milling, industry concen-tration is very high, with the topthree firms having almost 80%market share in the corn sweetenermarket and the top three firmshaving over 86% market share in thelysine industry. From the perspectiveof competitive rivalry, the wet cornmilling industry is not a goodprospect for any firm to enter andcertainly not one for farmer-ownedcooperatives or other produceralliances. The advantage of hindsightfrom a real-world example confirmsthis. Guebert reports an interesting1994 meeting where Dwayne Andres,then CEO of ADM, urged JoeFamalette, then CEO of AmericanCrystal Sugar, not to build theProGold high fructose sugar plant.American Crystal Sugar did proceedwith the ProGold plant, but itexperienced financial difficulties andis now being operated by Cargill.

Will the Organizational StructureWork?As noted above, producer alliancescan be structured under a variety ofdifferent business forms, including:new generation cooperative, limitedliability company, partnership,corporation, buying or marketinggroup, joint venture, strategicalliance, as well as unique ownershiparrangement with a regional coopera-tive. There are advantages anddisadvantages associated with eachof these different business structures,and those advantages and disadvan-tages often depend upon specificbusiness conditions. It is veryimportant for investors in a produceralliance to get legal and accountingadvice and then evaluate theirspecific business to determine themost appropriate organizationalstructure.

There is a second set of issuesassociated with establishing anorganizational structure that willwork for a producer alliance. Will themembers cooperate with each otherand work towards a common goal,or will they take on a competitivenature, resulting in the alliancefalling apart? The conclusions fromFulton’s research on joint ventures

and strategic alliances are useful here(Fulton et al.).

First, producer alliances are morelikely to be successful when thebenefits from working together in thealliance are larger. With significantbenefits, members are more likely toovercome the challenges associatedwith working together in an allianceto have a successful business. Next,producer alliances are more likely tobe successful when the membershipis relatively homogenous and finan-cially stable. It is easier to organizean alliance around common goals themore homogenous the group ofindividuals. In addition, an alliancemade up of producers who arefinancially stable is more likely to besuccessful because the ability towithstand difficult financial timeswill be greater. The stability, andtherefore success, of a produceralliance also depends upon therebeing a mechanism for penalizing anymembers who defect because it isinevitable that members will attemptto defect or renege on their agree-ments with the alliance from time totime. Finally, producer alliancesinvolve significant interaction amongthe members. These businesses aremore likely to be stable and successfulwhen the members trust each other,are committed to the alliance, andcommunicate with each other.

Are there Other Goals for theAlliance, and Do They Competewith or Complement the Goal ofBusiness Profitability?It is important to identify andevaluate all of the goals that mem-bers, or potential members, of avalue-added business or produceralliance have for the business.Examples of goals that members mayhave include: generating newmarkets for the commodities theyproduce, increasing member income,generating new jobs in the rural area,and enhancing rural development inthe area. It is certainly the case thatsome value-added producer allianceswill generate additional economicactivity in the rural area, generatenew jobs, enhance the local tax base,and strengthen local demand forretail goods and services. Thesebenefits are described for a series

of cases involving a new generationcooperative in each of Iowa, Missouri,North Dakota, and South Dakota ina USDA report (Rural BusinessCooperative Service). However,lenders and investors will judge thesuccess of the value-added businesson the profitability of the business.If a producer alliance becomes toofocused on some of the secondaryobjectives, it may not be able toachieve a level of profitability thatis needed to sustain the business.

It is therefore important forpotential investors in a produceralliance to first explicitly identify allof the goals for the value-addedbusiness. Then they can determinewhether these goals are complemen-tary or competing. Finally, they canproceed with the project focusing onthe goals that are most importantfor the project.

ReferencesAndreson, K. (2000) “The Risk and Return

Implications of Value-Added Investmentsby Corn Producers.” Master’s Thesis.Department of Agricultural Economics,Purdue University.

Fulton, Joan R., Michael P. Popp and CarolynGray. (1996) “Strategic Alliance and JointVenture Agreements in Grain MarketingCooperatives.” Journal of Cooperatives. 11,p. 1-14.

Guebert, Alan. “Fructose Venture Sours OnFarmers Cooperative Was ReportedlyWarned Away From Business By ADMExecutive.” Peoria Journal Star. Dow JonesInteractive Publishing. p. C2, November 25,1997.

Jones, B.R. (1999) “The Risk and ReturnImplications of Value-Added Investmentsby Hog Producers.” Master’s Thesis.Department of Agricultural Economics,Purdue University.

Perkins, Jerry. (1997) “Banding Together: IowaTurkey Co-op Moves Up the Food Chain.”Rural Cooperatives. (March/April 1997):22-26.

Rosa, E.L. (2002) “The Risk and ReturnImplications of Strategic BusinessAlternatives for Eastern Corn Belt Cow-CalfProducers.” Master’s Thesis. Department ofAgricultural Economics, Purdue University.

Rural Business Cooperative Service. “TheImpact of New Generation Cooperatives ontheir Community.” USDA Rural Business-Cooperative Service. Report by a consortiumof Midwest University researchers. http://www.rurdev.usda.gov/rbs/pub/RR177.pdf

Van Fleet, S. (2000) “The Risk and ReturnImplications of Value-Added Decisions byBeef Producers in Coordinated SupplyChains.” Master’s Thesis. Department ofAgricultural Economics, Purdue University.

4 NOVEMBER 2002

Soybean Production: Competitive Positionsof the United States, Brazil, and Argentina

Alexandria I. Huerta, Graduate Research Assistant and Marshall A. Martin,Associate Director of Agricultural Research Programs, Purdue University

oybean production inArgentina and Brazilcombined is expected for the

first time, this year, to surpass thatof the United States (USDA, 2002).Furthermore, the U.S. share of worldsoybean exports has declined. Inrecent years, U.S. farmers have beenfacing some of the lowest soybeanprices in decades, due in part tobumper crops, coupled with a weakerworld demand. Also, the loan defi-ciency payments (LDP) incentivesassociated with the 1996 Farm Billencouraged American farmers toincrease soybean acreage.

Both Brazil and Argentina havenot yet fully developed their agricul-tural resources. Infrastructureimprovements, particularly transpor-tation, combined with a more stablepolitical and economic environment,could lead to further gains in South

American soybean production andmarket share.

Can U.S. soybean producersremain competitive?

Geographical ComparisonsThree countries (United States,Brazil, and Argentina) produce 80%of the world’s soybeans. The UnitedStates and Argentina share a temper-ate climate, while the climate inBrazil is more tropical. Because oftheir location in the SouthernHemisphere, Brazil and Argentinahave a crop production seasonopposite to that of the U.S. withapproximately a six-month differencein the time of harvest. This providessome market advantages to Brazilianand Argentine farmers since theyharvest their soybeans betweenFebruary and April when historicallysoybean prices have been higher.Growing seasons for these threecountries also vary in their length.The United States has a shortergrowing season (May throughOctober) than its competitors.Argentina’s growing season mayextend from November through May.In Brazil’s frost-free tropics, threecrops might be produced each year.

In the United States, the deep richsoils of the Corn Belt have made thatregion the world’s most productivesoybean-growing area. Argentina’ssoybean production region, known asthe “Pampas”, has soils that areequally fertile (See figure 1).

In Brazil, soybean productionhistorically was concentrated in thesouth, but in recent years hasexpanded into the “Cerrado”, whichis a savannah-like flatland in thecentral west. The Cerrado soils,which are high in aluminum, highlyacidic, and deficient in phosphorusand nitrogen, are naturally lessfertile. But, public and privateresearchers in Brazil have adaptedsoybean varieties to these soilconditions. The addition of lime and

phosphorus minimizes aluminumtoxicity. Brazil has large supplies oflime. The soils in the Cerrado arevery fragile, and high rainfall levelscreate significant soil erosion prob-lems. Producers in Brazil haveadopted no-till production practicesand terracing to minimize erosion.

Between 1991 and 2001, U.S.soybean production increased about50% from 52.9 to 79.1 million metrictons (million ts). In 1991, the UnitedStates exported 23.6 million ts, 39%world market share. In 2001, U.S.exports had increased to 35.1 millionts, but the export share had fallen to32% (Schnepf, et. al, 2001).

Brazilian soybean production morethan doubled over the past decade,from 18.5 million ts in 1991 to 41.5million ts in 2001 (Schnepf, et. al,2001). Brazilian production hasexpanded faster than domesticconsumption, resulting in increasedexports. Argentina too has experi-enced an increase in soybean produc-tion. In 1991, Argentine soybeanproduction was 11.1 million ts, and by2001 had also more than doubled to27 million ts (Schnepf, et. al, 2001).

Soybean yields are comparableamong the three producers; in theU.S. Heartland Region soybeansaverage 45.0 bushels per acrecompared to U.S. average yields of41.0 bushels per acre (Table 1).Soybean yields in Brazil and Argen-tina are 44.5 and 40.0 bushels peracre, respectively.

Total U.S. agricultural land areais 418.3 million hectares (one hectareequals 2.47 acres), with 239.3 millionhectares in permanent pasture, 177million hectares in cropland, and 2.1million hectares in permanent crops.Soybean expansion in the UnitedStates primarily must come from areduction in the area planted toanother crop (Table 2). Brazil andArgentina combined have approxi-mately the same amount of agricul-tural land as the United States: 419.4

S

Figure 1. Soybean Prod uction R egions for Latin Am erica

PURDUE AGRICULTURAL ECONOMICS REPORT 5

Table 1. Soybean Yields, Major Production Regions

Region

Soybean Yields (Bushel/acre)

United States1 41.0 Heartland1 45.0 Brazil2 44.5 Argentina3 40.0

Source: 1 USDA National Agricultural Statistics

Service,

2 Companhia Nacional de Abastecimento,

3 Consorcio Regional de Experimentacion Agricola

million hectares. The difference liesin the potential for expansion. Forexample, Brazil currently has 50% asmuch land under cultivation as theUnited States, but it has the potentialto increase crop area by 56% morethan the United States has underproduction (Leibold, et al.). BothArgentina and Brazil have vastexpanses of land in permanentpasture which could be converted tosoybean production with appropriatemarket incentives and technologies.

InfrastructureThe United States possesses a welldeveloped marketing structure. U.S.soybean producers are able to movetheir product to internationalmarkets more efficiently and at acheaper cost. Paved highways aremore prevalent in the United Statesthan in Argentina and Brazil, whereonly 10 percent and 30 percent,respectively, of the highways arepaved. The availability of rail linesand a common single gauge allowsfor larger load densities in theUnited States that further reducetransportation costs for commodities.

In contrast, Argentina’s andBrazil’s waterways and overlandtransportation infrastructure areunderdeveloped and generallysub-standard. The governments inthese countries have not investedmuch capital or implemented policiesto modernize and improve existingtransportation infrastructure.Inefficient barge and railroadtransportation systems have led toa dependence on slower, and moreexpensive, overland trucking.However, recent initiatives toderegulate and privatize railways

and ports in both countries could leadto infrastructure improvements.

Another major problem in Argen-tina and Brazil is the underdevelopedon- and off-farm storage. Increasingstorage capacity would reduce theneed for harvest-time sales, andshipment, which tends to depressharvest-time prices and createcongestion at terminal elevators andport facilities.

Competitive PositionsCompetitiveness in internationalcommodity markets reflects theability to deliver a product at thelowest cost. Competitiveness isinfluenced by many factors: relativeresource endowments, agro-climateconditions, macroeconomic policies*,agricultural policies**, infrastructureand supporting institutions***(Schnepf et. al, 2001). The combina-tion of farm-level production,transportation, and marketing costswill determine a farmer’s competi-tiveness on the international stage.

As noted previously, there areclear differences in agro-climateconditions among the three soybeanproduction regions. Soil types andclimate conditions dictate yields andwhen the product reaches themarket. However, there are otherequally important differences: typesand availability of technology, landcosts, labor costs, access to capital(cost of capital), transportation costsand marketing costs.

A major production cost differenceis the cost of land. The relatively highsoybean production costs in theUnited States are partially attributedto higher fixed costs, especially land.A recent study by the USDA’sEconomic Research Service (ERS)shows estimated land rental rates forBrazil at $6 per acre (in Mato Grosso)

to $14 per acre (in Parana). Averageper acre rental rates in the UnitedStates and Argentina were muchhigher: $88 and $63, respectively.U.S. data represent the Heartlandregion in the Midwestern UnitedStates, while those for Argentinarepresent prime land in northernBuenos Aires Province. The lowerland rental rates in Brazil are areflection of the abundance ofland available in the Cerrado foragricultural development. Highyielding land in Mato Grosso can bepurchased for as low as $200****per acre compared to the $2000 ormore per acre costs in the U.S. CornBelt (Schnepf et. al, 2001).

In terms of competitive advan-tages from infrastructure, the UnitedStates still holds the advantage. U.S.transportation systems are superiorto those in South America. The U.S.infrastructure is better for movingsoybeans from the field to a domesticport, and on to a foreign port. Sincethe mid-1980’s, the average U.S.producer to free-on-board (f.o.b.) portprice spread has shown little variabil-ity at about $16 to $18 per ton. Lowertransportation and marketing costsfor U.S. soybean producers reflect in

Table 2. U.S. Crop Acreage

U.S. Crop Acreage Per Marketing Year

Crop

1997/1998 Crop Year --millions of acres--

2000/2001 Crop Year --millions of acres--

Change --millions of acres--

Corn 97.5 95.8 (1.7) Wheat 70.4 59.6 (10.8) Soybeans 70.0 74.1 4.0

Source: Agricultural Outlook USDA/ERS April 2002

__________* Macroeconomic policies affect exchangerates, investment incentives, energy costs,etc.

** Sector specific policies include creditsubsidies and import and export taxes.

*** Supporting institutions includeregulatory agencies, credit, and news andinformation services.

**** This reflects land that has not yetbeen cleared or prepared for planting.

6 NOVEMBER 2002

part the efficient barge transporta-tion system. With the barge system,soybeans can travel long distances atrelatively low costs. However, on theMississippi River, barges loaded withHeartland grown soybeans often waitin line for hours to pass through aseries of 80-year-old locks that lowerthe barges down to sea level at NewOrleans. From there the soybeans areloaded onto freighters. Farmers havebeen lobbying for upgrades in thelock system, a project that will costmore than $1 billion (Rich, 2001).This long awaited upgrade has beenslowed by doubts raised aboutcost-benefit analysis and environmen-tal impact studies by the Army Corpsof Engineers. Such transportationimprovements will be essential if U.S.soybean producers are to remaincompetitive in the internationalmarket.

This transportation advantageis under constant threat from U.S.competitors. There have been somereductions in internal transportationcosts in Argentina and Brazil, whichhas boosted their soybean exportcompetitiveness. However, despiteconstruction of some new rail linesand ports, roadways are still theprimary means of moving commodi-ties throughout Brazil. In the last fewyears, the Brazilian government hasleased roads for private maintenance.To fund road maintenance, privatecompanies charge high tolls, therebyincreasing the transportation costsfor Brazilian soybean producers.

The trucking distance in Brazilis greater than that faced by U.S.farmers. Approximately 80% ofBrazil’s soybeans are trucked tomarket (McVey, et. al, 2000). UnlikeU.S. production regions, soybeanproduction in Brazil is not conve-niently located near a main source ofwater navigation, thus its reliance onoverland travel. The quality of these

roads is poor and a substantialportion of Brazil’s main highwaysthat serve much of the soybeanproducing regions are dirt surfaced.On average, Brazilian soybeans travel900 miles by truck before beingtransferred to railroad cars orwaterways (Spangler and Wilson,2002). These soybeans must thentravel approximately an additional900 miles to reach an east coastseaport, as is the case for soybeansproduced in Mato Grosso. Theproducer f.o.b. price spread isestimated at $47 per ton.

The Brazilian government hasbeen promising upgrades in pavedroads and navigable waterways, butchronic economic instability andlarge budget deficits have held upthis work. Private companies arestepping in and partially filling thegap. Using loans from a government

development bank, private companiesare building new railroads. Oneexample of private initiative is BlairoMaggi, one of Brazil’s largest soybeanproducers. When promises of infra-structure improvements from thegovernment went unfulfilled, Maggiprovided $20 million plus $40 millionfrom the state of Amazonas to build aport on the Amazon-feeding MadeiraRiver. Once the port was opened, soyshipments on the Madeira Riverquadrupled, and Maggi’s shippingcosts fell 20 percent (Rich, 2001).

Another competitive advantagefor Brazilian soybean producerscomes from the government breakingup the long-standing petroleummonopoly. New laws have allowednew petroleum companies access tothe country, resulting in increasedimports. In January 2002, Brazilianssaw a 20% drop in fuel prices, whichtranslates into decreased fuel costsfor soybean producers.

One area that has concernedgovernment and soybean producers

alike is the state of navigation onBrazilian rivers. Producers want thegovernment to invest in the develop-ment of a system of locks and damsto raise water levels on the rivers,especially the Parana-Paraguay Riversystem. These projects would keepthe waters deep enough to floatbarges capable of carrying largersoybean loads to ports. Such a projectwould require huge investments andhas significant environmentalimplications. Draining this watershedcould have an adverse impact onwildlife.

Argentina’s soybean producersalso face the problem of shallowrivers. The Parana River whichconnects the Port of Rosario, oneof the largest in Argentina, to theAtlantic Ocean requires dredging tomaintain a deeper channel. Withoutdredging, barges cannot carry bigshipments. This results in highertransportation costs for Argentinesoybean producers.

The United States has a fairlyefficient water-based system oftransportation using barges. Truck-ing distances in the United States areshorter, especially since the majorityof soybean production occurs in theregions surrounding the Ohio,Illinois, Mississippi, and MissouriRivers. U.S. soybeans are hauled tothe nearest river, and loaded ontobarges. The majority of the soybeansexported flow down the MississippiRiver.

There is the potential for substan-tial gains in South America, but thesegains will require overcomingeconomic, political, and environmen-tal hurdles and issues. The currentgap in production costs will narrowwith improvements in South Amer-ica, but the United States canmaintain a comparative advantagein transportation costs, with improve-ments in the existing U.S. locks anddams.

Cost of Production: AnalysisDifferent countries and institutionswithin a country use differentconcepts, definitions, terminologies,and measurement methods toestimate production costs. This studysummarizes production cost datafrom several sources. Data for U.S.

“It is not likely that U.S. soybeanproducers will be able to regainthe dominant export positionthey once enjoyed.”

PURDUE AGRICULTURAL ECONOMICS REPORT 7

soybean production costs are fromUSDA-ERS. Data for Argentina andBrazil were gathered from variousgovernment agency websites, e-mailcontacts with key industry personnelin South America, individual com-pany websites, and the USDA-ERS.

Methods used to calculate costsvary from country to country, withcertain variables included in the costsby one country, but omitted byanother. Another difficulty lies in theadoption of different productionpractices. These would include singleversus double cropping, conventionaltill versus no-till, transgenic versusconventional varieties, etc.

Exchange rates further complicatecost estimates. Fluctuations in theBrazilian currency make accuratedollar-valued cost estimates some-what difficult. Between 1995 and1999, apparent declines in Braziliansoybean production costs were largelya reflection of a weakening Braziliancurrency (the Real). After the Realwas allowed to free float in interna-tional exchange markets, Braziliantotal production costs actuallyincreased in local currency terms(ERS, 2001). If exchange ratesadjustments are ignored and nothingchanged in terms of the Real,devaluation alone makes it appear asif Brazilian producers possess a costadvantage in soybean production.However, the devaluation increasedthe cost of imported goods—machin-ery, petroleum, and agro-chemicals.Non-tradable goods, which areminimally impacted by currencydevaluation, include land and labor,two key production costs. Currencydevaluation drives up the cost ofimported inputs, while makingsoybean exports more competitivein international markets.

Comparisons of costs of productionare complicated by interest rates andinflation. For example, in the recentpast, Brazilian inflation has exceeded30% per month (AAEA, 1998), andfrom 1997 to 2002 the Real depreci-ated by 132%. In 1997, the Real was1.0 to $1.00, and by 2002 it haddevalued to 2.32 to $1.00. Increasedgovernment spending, due todomestic support programs suchas subsidies, increases inflation. This

increase in inflation normally leadsto currency devaluation.

In the last 6 years, soybeanproducers in Argentina have adoptedRound-Up Ready soybeans in about95% of the area. This has resulted inhigher yields and lower overallproduction costs allowing Argentineproducers to be more competitive ininternational markets. Weak patentprotection resulted in Argentinefarmers not paying a technology feefor soybean seed. Cheaper glyphosatebecame available when Monsanto’sRound-Up product patent expired inArgentina.

In the 1990s, the Argentinegovernment privatized the economyto drive out excess labor and increaselabor productivity. The result was anincrease in unemployment to almost20%. Such structural readjustmenttakes a long time to take effect, sosocial unrest can develop, andinvestors can lose confidence in theeconomy. After nearly a decade ofparity of the Argentine Peso to theU.S. dollar, the exchange rate fellfrom 1 to 1 to 3.22 to 1 in a periodof three months (January to March2002). While this made Argentineexports more competitive, importprices increased dramatically. Thecost of most inputs, including capitaland imported inputs, increased by asmuch as 100% (USDA/ERS, 2002).That has resulted in higher produc-tion costs for soybean farmers whouse imported inputs such asagro-chemicals and machinery.Agricultural credit is essentiallynon-existent. Argentina currentlyfinds itself in the midst of a seriouseconomic crisis.

“Underlying the current economiccrisis in Argentina are three interre-lated factors: the policy of pegging thedomestic currency to the U.S. dollarthroughout most of the 1990s, theArgentine government’s failure toreduce budget and trade deficits, andthe default on government debt”(USDA/ERS, 2002). In the short-run,supply-side effects of capital controlshave made it difficult to obtaindollars to buy imports. In April 2002,the Argentine government imposedeven more export taxes on manyagricultural products and otherprimary products, with soybeansexperiencing an export tax of 23.5%.Nitrogen-based fertilizer and fuel,which are produced domestically, areexpected to at least double in cost.Also, percentage markups fortransportation and export marketingexpenses will likely rise due toincreased market and policyuncertainty.

One way for Argentine farmersto off-set the higher costs of inputsis to change cropping patterns.Should this happen, farmers are mostlikely to plant more soybeans andless corn, since corn requires greateramounts of fertilizer, diesel fuel,agro-chemicals, and high-cost seedthan soybeans. Prospects for Argen-tine farm exports will depend on thatsector’s ability to adopt innovativesolutions to the higher productioncosts.

Cost of Production: EmpiricalResultsTotal soybean production costs arehigher for U.S. producers (Table 3).While per acre variable costs forsoybean production are lower in theUnited States, fixed costs are higher,mainly due to the higher cost of land.Higher cost of land is due to limitedavailability of land, governmentpayments, urban developmentdemand, and stronger export demandin the early to mid 1990s.

The Iowa State UniversityExtension Service conducted a surveyof soybean production costs fordifferent tillage systems (Table 4 andTable 5). They found cost advantagesfor using GMO soybeans in a no-tillsystem. The variable costs per acre inthis Iowa study are $106.48, and fixed

Heartland

8 NOVEMBER 2002

costs per acre were estimated at$157.48. Although the variable costsfor Iowa soybean farmers are consid-erably higher than those for theHeartland Region, these variablecosts are still lower than those ofsoybean farmers in Brazil. The IowaState University Extension Servicesurvey reported production costs forIowa and Mato Grosso, a state inBrazil. Results of this survey indicateMato Grosso’s competitive advantagelies in its lower land cost—estimatedat $2.38 per bushel higher for Iowafarmers. Since farmland values arethe major cause of Brazil’s costadvantage in soybean production,Iowa and other U.S. soybean produc-ers must find a way to reduce oroffset high land values (Baumel, et.al, 2000). This will not be easy for anumber of reasons: it is politicallydifficult to reduce farm programpayments which tenants use tomaintain or bid up rents (land costs)and pressure from banks to maintainland values for mortgages.

For the U.S. Heartland Region,variable costs are comparable tothose in Argentina, while Brazil’svariable costs are almost double thatamount. In Brazil, it is illegal toplant Round-Up Ready soybeans,hence herbicide costs for non-GMOsoybeans are higher. The majority of

Brazilian soybean producers customhire harvesting, further increasingtheir variable costs. Finally, produc-tion inputs (fuel, chemicals, lime, etc.)have to travel longer distances to thesoybean production region in theinterior of Brazil, which also resultsin higher variable costs.

The fixed costs for U.S. producersare nearly triple that of their Brazil-ian counterparts. Much of this isattributable to higher land costs inthe United States. Fixed costs forArgentine producers falls betweenthe U.S. and Brazil. Argentine landcosts are higher than in Brazil.

Using data from a USDA-ERSstudy, costs for transportation andmarketing indicate the United Statesholds the competitive edge in interna-tional freight costs (Table 6).Internal transport and marketingcosts for Brazil are nearly threetimes more expensive, due in largepart to the inefficient infrastructureand the longer distances the soybeansmust travel before reaching awaterway. U.S. producers havea slight cost advantage when ship-ping to European markets. Internaltransportation costs are much lowerin the United States, affording U.S.producers a competitive advantage.

Recent U.S. government policydevelopments will impact future

soybean production costs. On May13th President Bush signed a newfarm bill. Once variable productioncosts have been met, remainingmarket revenues received by farmersare used to pay the costs of land, andprovide a return to labor and man-agement. New payments to soybeanproducers will be used to offset inputcosts, and provide residual incomethat will be capitalized into landvalues, resulting in higher land costsand higher production costs for U.S.soybean producers.

ImplicationsHow can U.S. producers become morecompetitive? If the United Stateswants to expand soybean exports,there are two methods to increasecompetitiveness: (1) reduce costs orincrease yields, and/or (2) increasedemand. Supply side changes can beaffected by boosting productionthrough improved genetics. Demandcan be expanded by adding value tosoybean products. However, increas-ing the demand for soybeans withoutconcurrently increasing the supplyside could alter the competitivenessof U.S. farmers.

While most soybeans in the UnitedStates are already produced under ano-till system, encouraging more U.S.farmers to switch to no-till practices,could further reduce labor, machin-ery, and fuel costs. More than halfthe farmers in Brazil and Argentinahave adopted no-till practices. No-tillpractices are of vital importance incontrolling soil erosion, and maintain-ing long-term production efficiency.

Another supply side change wouldbe to improve soybean yields and/orquality. In the United States, a largepercentage of soybean producersalready use Round-Up Ready seed.This allows farmers to reduceherbicide costs, improve weed control,and make fewer trips across the field.Potential for further adoption of thistechnology in the United States andArgentina is limited. Currently, 74%of all soybean acres in the UnitedStates are planted to biotech varieties(NASS, 2002). In Argentina, about95% of the soybeans are biotechvarieties (Round-Up Ready). Eventhough it is illegal to grow biotechvarieties in Brazil, approximately

Table 4. Production Costs in Various Tillage Systems

GMO Soybeans Till

GMO Soybeans No-Till

Total Cost per acre $269.40 $263.96 Total Cost per bushel $5.99 $5.87 Yield per acre 45 45

Source: Iowa State University Extension

Table 3. Production Costs, Major Competitors

Soybean Production Costs

Cost of Production

Heartland4 -$ per acre-

Brazil5 -$ per acre-

Argentina6 -$ per acre-

Variable Costs 76.95 132.39 76.0 Fixed Costs 153.0 46.72 80.8 Total Production Costs 230.0 179.11 157.2

Source: 4 USDA National Agricultural Statistics Service,

5 Companhia Nacional de Abastecimento, 6 Consorcio Regional de Experimentacion Agricola

PURDUE AGRICULTURAL ECONOMICS REPORT 9

Table 6. Transportation Costs, Major Production Regions

Cost

Heartland -$ per bushel-

Brazil -$ per bushel-

Argentina -$ per bushel-

Internal transport and marketing 0.43 1.34 0.81 Border Price 5.54 5.23 4.74 Freight Costs To Rotterdam 0.38 0.57 0.49 Price at Rotterdam 5.92 5.80 5.23

Source: USDA/ERS

Table 5. Farm-Level Production Costs, Iowa and Mato Grosso

Cost ($) per acre Cost ($) per bushel

Non-land costs Iowa Mato Grosso Iowa Mato Grosso

Seed 21.00 11.00 0.42 0.20

Fertilizer & Lime 25.00 70.00 0.50 1.27 Herbicides & Insecticides 30.00 36.00 0.60 0.65 Labor 14.00 5.00 0.28 0.09 Machinery 34.00 29.00 0.68 0.53 Other 15.00 16.00 0.30 0.29 Total Non-land costs 139.00 167.00 2.78 3.03 Land Cost 140.00 23.00 2.80 0.42 Total Cost 279.00 190.00 5.58 3.45

Source: Iowa State University Extension (Baumel et. al, 2000).

10% – 20% of soybeans produced inBrazil are estimated to be Round-UpReady. The potential growth inbiotech soybeans in Brazil will bemuch greater if a court injunctionagainst biotech varieties is rescinded.

Another way to reduce productioncosts is through varieties withenhanced traits. Currently, researchis being conducted on ways toimprove pest resistant soybeanvarieties. Several insects and diseasesattack the soybean plant. Suddendeath syndrome (SDS) and thesoybean aphid can reduce yields by20% or more. Also, nematodes thatattack soybean roots can reduceyields. Purdue University scientistshave developed CystX, a soybeanvariety that is resistant to nematodes.Efforts are underway to cross thisvariety with existing varieties.

U.S. producers can increasedemand by enhancing the qualityof their product and searching foralternative markets. For example,there is growing demand for soybeanoil blended with diesel fuel(bio-diesel). Bio-diesel (ranging from5% to 20% soy oil) can be used indiesel motors, for both on- or off-roadvehicles (trucks, school buses,tractors, combines, etc.). This newfuel blend is environmentally friendlyand reduces sulfur emissions.Research is underway to blendsoybean oil with jet fuel. The goal isto find a cleaner, more efficient jetfuel. This would reduce dependenceon foreign oil also.

Increases in demand also can beachieved through value-addedcomponents in food. For example,work is underway to develop soyiso-flavons (a food additive). Soyderivatives can be used as a hormonereplacement for women to helpreduce the incidence of osteoporosis.Researchers are looking for ways toblend soybeans with petroleum forplastic polymers. This would makepolymers more biodegradable, whichcould have significant impacts in foodpackaging and landfills.

Latin American producers also canconsider various methods to increasetheir competitiveness. First, they canincrease the adoption of no-tillmethods to reduce production costs.Second, they can seek higher yields

through research and development.With the high costs of agro-chemicalsfor Latin American producers and thegreater amount of applicationsrequired, new herbicide and insectresistant varieties could reduceproduction costs. For example, inBrazil the warm weather often makesinsect problems more severe than inthe United States (Leibold et. al.).Many producers spray several timesduring the growing season to controlinsects and diseases. Brazilianproducers also are plagued by thenematode problem. If Brazilianproducers were to adopt geneticallyenhanced pest resistant varieties,they would be able to improve yieldsas well as reduce production costs,and they could reduce their transpor-tation and handling costs throughimprovements in infrastructureand port facilities all of whichwould increasing their exportcompetitiveness.

ConclusionIt is not likely that U.S. soybeanproducers will be able to regain thedominant export position they onceenjoyed. To remain competitive U.S.producers will need to reduce costs,enhance quality, and increase yields.

A growing concern among U.S.producers is that Latin Americancompetitors will gain more marketshare due to lower production costs,mostly associated with lower landvalues in Brazil and Argentina, butthese countries face other challengesthat reduce their competitive edge.They include: economic instability,inadequate transportation infrastruc-ture, and insect and disease pressuresassociated with warmer climates.

In summary, there is nothing inthe foreseeable future that points toBrazil and Argentina leaping overtheir U.S. competitors in the exportmarket. But there will be on-goingcompetition among these three majorsoybean producing countries.

ReferencesAmerican Agricultural Economics Association.

1998. Commodity Costs and ReturnsEstimation Handbook. Ames, IA.

AgBrazil, 2002. Brazil Production InputsMarkets. http://www.agbrazil.com

AgriAmerica. May 8, 2002., US AG Today.Wednesday, http://www.agriAmerica.com

Baumel, P., B. Wisner, M. Duffy, and D.Hofstrand. December 2000. “BrazilianSoybeans – Can Iowa Compete?” AgDMNewsletter Article.

CONAB, Companhia Nacional de Abastecimento(National Food Supply Company). March2002. http://www.conab.gov.br/

10 NOVEMBER 2002

CREA, Consorcio Regional de ExperimentacionAgricola (Regional Consortium forAgricultural Research). March 1998. No.209.

EMBRAPA, Empresa Brasileira de PesquisasAgropecuarias (Brazilian Institute forAgricultural Research). March 2002. http://www.embrapa.br

Fee, R. October 2001. “U.S. Producers Say TheyCan Compete With Brazil.” SuccessfulFarming.

Foreman, L. and J. Livezey. March 2002.“Characteristics and Production Costs ofU.S. Soybean Farms.” ERS StatisticalBulletin. No. 974-4.

Leibold, K., P. Baumel, R. Wisner and M.McVey. January 14, 2002. “Brazil’s CropProduction System Holds Much Potential.”Feedstuffs. Vol. 74, No. 2.

McVey, M., P. Baumel, and B. Wisner. December2000. “Brazilian Soybeans – TransportationProblems” AgDM Newsletter Article.

Rich, J. July 10, 2001. “Soy Growers in BrazilShadow U.S. Farmers.” The New YorkTimes.

Schnepf, R., E. Dohlman, and C. Bolling.November 2001. “Agriculture in Brazil andArgentina: Developments and Prospects forMajor Field Crops.” ERS/USDA Agricultureand Trade Report. WRS-01-3.

Spangler, H. and M. Wilson. March 2002.“Beating Back Brazil.” Prairie Farmer.

U.S. Department of Agriculture. October 2002.“World Agricultural Supply and DemandEstimates,” WASDE - 391 www.usda.gov/oce/waob/wasde/latest.pdf

U.S. Department of Agriculture, EconomicResearch Service (ERS). March 2002.Published Database. http://www.ers.usda.gov/

U.S. Department of Agriculture, EconomicResearch Service. May 2002. “Argentina’sEconomic Crisis: Can the Ag Sector Help?”Agricultural Outlook.

U.S. Department of Agriculture, NationalAgricultural Statistics Service (NASS).March 2002. Published Estimates Database.http://www.nass.usda.gov

Weather and TaxesGeorge Patrick, Professor

any Indiana producershave been averselyaffected by weather

conditions in 2002 and most of thestate has been declared a disasterarea. However, because of cashaccounting methods, these losses maynot be reflected in their taxableincome until 2003. For example,because of reduced feed supplies somelivestock producers have reducedherd size through larger than normalsales of livestock thereby increasingtaxable income for 2002. Some cropproducers who normally sell theircrops in the year following the yearof production may receive cropinsurance indemnities or governmentdisaster assistance payments thisyear. In both cases, these producerswould be likely to have lower thannormal taxable incomes in 2003.Income tax law allows farmers todefer reporting of this income to evenout their income and avoid poten-tially higher taxes. Farm incomeaveraging was enacted after theweather-related provisions and is analternative which may result in lowertaxes for producers in some situa-tions. Good tax management involvesconsideration of several tax yearsrather than minimizing this year’stax bill.

Weather-related Sales of LivestockThere are two provisions in tax lawwhich attempt to cushion producersfrom the consequences of the

weather-related sales of livestock.Livestock held for draft, breeding ordairy purposes and sold because ofweather-related conditions areprovided a two-year reinvestmentperiod under the first provision. Thesecond provision, which applies to alllivestock (other than poultry), allowscash basis taxpayers whose primarytrade or business is farming adeferral of receipts from sales inexcess of normal business practicebecause of weather-related conditionsresulting in a disaster area declara-tion. Both provisions apply only tothose sales which are in excess ofnormal business practice of theproducer.

Sale with ReplacementThe gain on the weather-forced saleof livestock held for draft, breedingor dairy (not sporting) purposes doesnot need to be reported as income ifthe proceeds will be used to buyreplacement livestock within twoyears after the end of the tax year ofthe year of sale. Although declarationof a disaster area is not necessary, aproducer must be able to show thatweather-related conditions forced thesale of more livestock than wouldnormally be sold. For example, a beefproducer who normally sells five cowsper year may sell 20 cows in 2002because of limited feed supplies.Gains from the sale of the extra 15cows would not be reported as incomeif the producer purchased at least 15

replacement animals before the endof 2004. The new livestock must beused for the same purpose as thelivestock which was sold. Beef cowsmust be replaced with beef cows.

A producer’s tax basis in thereplacement livestock equal to thebasis in the livestock sold plus anyadditional amount invested in thereplacement livestock that exceedsthe proceeds from the sale. Forexample, a producer sells 20 raisedbeef cows (with a $0 tax basis) for$500 each. The gain of $7,500 (15cows sold in excess of normal businesspractice X $500) is deferred. If theproducer purchased 15 cows in 2004for $600 each, the tax basis in thereplacement animals would be $100(the $600 cost minus the $500proceeds from sale).

To make the election underSection 1033(e) to defer recognitionof gain, a producer does not reportthe gain and attaches a statement tothe current year’s tax return. Thestatement shows the following:

(1) Evidence of weather-relatedconditions which forced the saleof the livestock.

(2) Computation of the amount ofgain realized on the sale.

(3) The number and kind of livestocksold.

M

PURDUE AGRICULTURAL ECONOMICS REPORT 11

(4) The number and kind of livestockthat would have been sold asnormal business practice withoutthe weather-related sales.

If a producer spends $7,500 andbuys 15 cows before the end of 2004,the basis of the replacement animalswill be $0, the same as the raisedcows sold. If the producer spends lessthan $7,500 on the 15 replacementanimals, the difference between whatwas spent and $7,500 must bereported as 2002 income. If less than15 replacement cows are purchased,the gain from the animals notreplaced must be reported as 2002income regardless of the cost of thereplacement animals. When filing anamended 2002 return, the producerwill be subject to additional tax andinterest on the tax.

Sale without ReplacementProducers who are forced to sell

livestock becauseof weather-relatedconditions maybe eligible for anexception to therule thelivestock-sale

proceeds must be reported as incomein the year they are received. Thisexception allows postponement ofreporting income for one year. Toqualify, an area which affects thelivestock must have been declareda disaster area. The animals do notneed to have been located in thedisaster area and can have been soldbefore or after the disaster areadeclaration. However, only thelivestock sales in excess of normalbusiness practice qualify for deferral.

A declaration must be attached tothe tax return for the year in whichthe weather-related sale occurred.To make the election the statementshould include the following:

(1) A declaration that the election isbeing made under Section 451(e).

(2) Evidence of the weather condi-tions which forced the early saleon the livestock and when thearea was declared a disaster area.

(3) A statement explaining therelationship between the disasterarea and early sale.

(4) The total number of animals soldin each of the three precedingyears.

(5) The number of animals thatwould have been sold as normalbusiness practice if theweather-related condition hadnot occurred.

(6) Total number of animals sold andthe number sold because of theweather-related event during thetax year.

(7) Computation of the amount ofincome (see calculation below) tobe deferred for each classificationof livestock.

For example, a producer normallyfarrows and feeds 2,000 pigs per year.However, because of drought whichcaused the area in which the farm islocated to be declared a disaster area,the farmer sells 1,000 pigs as feederpigs in 2002 rather than feeding themand selling them as market hogs in2003. Under normal practice, nofeeder pigs would be sold, so theproceeds from the sale of the 1,000head can be deferred ($35 per head X1,000 feeder pigs = $35,000) can bedeferred until 2003.

Crop Insurance and DisasterAssistance PaymentsFor farmers who use cash accounting,there is an exception to the generalrule that payments must be reportedin the year in which they arereceived. This exception applies tocrop insurance indemnity paymentsreceived when crops cannot beplanted (prevented planting) or aredamaged or destroyed by a naturaldisaster such as drought or a flood.This exception does not apply wherethe insurance indemnity is due to alow price, such as could occur withthe Crop Revenue Coverage (CRC)or Revenue Assurance (RA) pro-grams. Government disaster assis-tance payments are treated the sameas insurance indemnity payments.

The exception allows farmers topostpone reporting such payments byone year. To qualify for the exception,a farmer must be able to show thatthe income from a substantial portionof the crop (generally considered as50% or more) for which payment hasbeen received would normally havebeen reported in a year following thereceipt of payment.

If a farmer qualifies for thisexception, the producer has theoption of reporting the income in theyear in which it is received. Alterna-tively, the producer can elect to deferreporting the payment as incomeuntil the following year. The electionto postpone the reporting of thepayment as income when receivedcovers all crops from a farm business.For example, a producer cannotpostpone the reporting the paymentreceived for corn unless reporting ofthe payment for soybeans is alsopostponed if both payments arereceived in the same year. However,separate elections can be made foreach separate farming business.

To make the election underSection 451(d), a statement isattached to the tax return whichincludes:

(1) The name and address of theproducer.

(2) A declaration that an election isbeing made under Section 451(d).

(3) Identification of the crop or cropsdamaged or destroyed.

(4) A declaration that under normalbusiness practice the income fromthe crops that were destroyed ordamaged would have beenincluded in gross income in a yearfollowing the year of damage ordestruction.

(5) The cause of destruction ordamage of the crops and dateswhen the destruction or damageoccurred.

(6) The total amount of paymentsreceived, itemized with respectto each crop and each date whenpayment was received.

12 NOVEMBER 2002

(7) The names(s) of the insurancecompanies or federal agenciesfrom which payments werereceived.

Farm Income AveragingIn contrast to the methods of defer-ring the reporting of income dis-cussed above, farm income averaginguses prior years to generate potentialtax savings. Farm income averagingallows farmers to elect part or all oftheir farm income and have it treatedas if it had been earned equally over

the three preceding years. Theportion of elected farm income isadded to the taxable incomes in thebase years and is taxed at the taxrates for those years.

If taxable income in 2003 is likelyto be low relative to 2002, then thedeferral methods discussed above arelikely to reduce taxes. However, iftaxable income in 2003 is likely tobe similar to 2002 or higher, farmincome averaging may provide a taxsavings alternative. This could occurbecause of increased off-farm

employment or the sale of somefarm assets other than land. This isespecially true for producers whosetaxable incomes in the 1999 to 2001tax years have been low.

Further InformationFor additional information on thesetax provisions and details of theelections, see IRS Publication 225,The Farmer’s Tax Guide. This isavailable on the web at www.irs.gov.under Publication 225 in the searchmenu.

Purdue University is an Equal Opportunity/Affirmative Action employer.

Gerald A. HarrisonDepartment of Agricultural EconomicsKrannert Building403 W State StreetWest Lafayette, IN 47907-2056

Non-profit OrganizationU.S. Postage

PAIDPurdue University

__________* For questions on these and other relatedmatters, contact Gerry Harrison, ExtensionEconomist and member of the Indiana Barat 765-494-4216 toll free 1-888-EXT-INFOor E-mail: harrisog@purdue.edu.

Farmland Lease Law Update*

Gerry Harrison, Extension Economistand member of the Indiana Bar

itle 32 of the Indianastatutes dealing withfarmland and other leases

was revised by the 2002 Legislature.What was in article 7 of title 32was moved to Article 31. The “threemonth rule” for advance notice isnow at IC 32-31-1-3 and has notchanged. The statutory form for anotice to terminate a tenancy isnow at IC 32-31-1-5 and has been“modernized.”

A reminder for leases longerthan three years, IC 32-31-2-1states: Not more than forty-five (45)days after its execution, a lease of realestate for a period longer than three(3) years shall be recorded in theMiscellaneous Record in therecorder’s office of the county inwhich the real estate is located. AndIC 32-31-2 Sec. 2 states: If a lease fora period longer than three (3) yearsis not recorded within forty-five (45)days after its execution, the lease isvoid against any subsequent pur-chaser, lessee, or mortgagee whoacquires the real estate in good faithand for valuable consideration.

You may find the Indiana Codeon the Internet at www.ai.org/

T legislative/ic/code. Contact yourlawyer for assistance in dealing withthe legal aspects of leases, rentalagreements and other contractsdealing with farmland.

On another note, a federal taxregulation at Reg Sec. 1.1301-1Averaging of farm income requiresa landowner who otherwise qualifiesto use income averaging as ashare-lease landlord to have awritten lease starting January 1,2003. Further, this regulation saysthere is a bar to income averagingwithout a written agreement evenif the landowner is materiallyparticipating. One more reason tohave an up-to-date written lease.