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Financial analysts help with tough decisions

Financial analysts help with tough decisions

Liquidation. It’s a word that no farm family wants to hear uttered around the dinner table or out in the farmyard.

Low commodity prices are making it more and more difficult for some farmers to cash flow their operations, and tough choices lie ahead for farmers to make sure they stay in business.

Heaven forbid, if it does come to the point where the farm is no longer sustainable, liquidation may be the best bet. There are several things to keep in mind, especially when it comes to taxes.

Without the right advice, liquidation could wind up costing a producer hundreds of thousands of dollars. It’s important to have a good group of professionals to help producers through the process. It’s also important to remember that if liquidation happens, it’s not the end of the world. There is light at the end of that tunnel. 

“It’s (the decision to liquidate) a lot of stress,” said Forrest Buhler, staff attorney for the Kansas Ag Mediation Service, “and often that stress has been building for some time. Debt combined with low prices in all sectors of agriculture have made it very difficult for farmers to cash flow. The decision doesn’t just happen.”

It can be a combination of factors that bring a farm family to the point of liquidation, which can be full or partial. Buhler says there are many times that lenders have asked farmers to partially liquidate assets to help pay down debt so that they can continue to provide financing for the farmer.

Buhler recommends farmers get some analysis done before they come to a big decision like this. Mediation services are available in 40 states across the country. 

“There may be some things you can do to change your operation or the structure of your debt to make things work better,” Buhler said. “Seeing where you are at currently is one analysis that needs to be done. The financial program we run at Kansas Mediation can often make suggestions on what can be done, such as restructuring the debt or lowering the interest rate.”

If it gets to the point that a producer decides to call it quits, there are several things to keep in mind.

The potential tax burden should be top of mind for producers. If care isn’t taken through the process, a producer could pay off debts and owe the IRS a lot of money.

“Debt forgiveness is taxable, recapture of depreciation assets is taxable, and capital gains on the sales of assets like land are all taxable,” said Duane Hund, director of the Farm Analyst Program in the Department of Economics at Kansas State University.

“There are ways of avoiding those if you hire a good tax practitioner before you do the liquidation to make sure things are in order. That’ll take careful planning.”

He said the potential tax liability can run into hundreds of thousands of dollars, and it’s caught producers before, usually in the case of producers who decide to downsize their operations to pay down debts.

“People have thought, ‘Well, if we just sell a piece of land and downsize some machinery, we’ll be OK,’” Hund said. “They used that money to pay off debts and then were presented with a tax bill a few months later. They paid their debts, but the liquidation had several taxable events, which now must be paid for at the state and federal levels.”

It’s also a good idea to look at what the loan documentation is with respect to creditors, to see exactly what they have a mortgage against in terms of real estate or a security interest in terms of chattel assets. 

“That includes machinery and livestock,” Buhler said. “It’s good to check out those documents to see what a creditor has an interest in for collateral purposes to see how well secured they are.”

Farmers will often have unsecured accounts to look at, like charges at the local co-op for seed and inputs that may not have a security interest in assets. Buhler said the goal of looking at the paperwork is to figure out who is due what proceeds. You don’t want to get in trouble for selling assets that a creditor might have a lien or mortgage against.

One advantage of using mediation service is having someone to bring a producer together with creditors to hash out the details of the liquidation. A producer or a creditor can request mediation to help move the process along.

“They’ll all be together at the same table to figure out what the producer can do as far as repaying debts,” Buhler said. “They’ll also know what other creditors are looking at and what their positions are in relation to recovering debts owed to them.”

Buhler adds that communication is a key to any liquidation, letting creditors know that they’re being treated as fairly as possible. Mediation is a tool that can be very helpful to keep lines of communication open.

Hund said producers need to be proactive if they find themselves in a tough situation. The sooner a producer can recognize that, the sooner they can get pointed in the right direction with a clear and concise plan.

“A lot of total liquidations I’ve been part of didn’t have to happen,” Hund said. “By the time we got there, it was too late to do anything to help.”

There’s no question it’s a stressful process. Hund noted that there is life after liquidation. In fact, he’s seen several producers go through the process successfully and were able to get back into farming at some point down the road.

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The Wallace family is well known to many in agriculture based on their leadership in publishing and government in the early 1900s. 

Henry C. Wallace and his son Henry A. Wallace both served as United States secretaries of agriculture, with the latter going on to serve as U.S. vice president and secretary of commerce.

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