TIMELY TOPICS
Farmers in the Rockbridge region have had a tumultuous year with dry weather, short hay supplies, a declining corn market, and generally higher cattle prices. Perhaps more so than other years, the financial state of farm finances for both full-time and parttime farms is extremely variable with some farms having been forced to buy very expensive hay and some others that were counting on selling a valuable corn crop not realizing the income they had hoped for. Still others have sold cattle for higher prices than in recent years and their books for the year are firmly in the black.
Right now, there is a good chance we have some farmers reading this column that are thinking “I’ve made money with cattle this year, I need to keep back some heifers and/or buy something so I can avoid paying taxes”.
Here is a retrospective case study that explains why this is a bad idea and why most cattle producers need to consider the benefits of building a cash reserve even if it means paying some taxes this year.
In 2014, cattle farmers A and B each had $15,000 income and similar costs/cow. Producer A chose to pay a 20% tax and put $12,000 in the bank ($15,000 x 80%) in 2014. Producer B avoided taxes and retained seven breeding age heifers at a cost of $2,000 each in 2014. The cattle market declined 30% in 2015, and Virginia cattle prices were 50% of 2014 prices from 2016 to 2022.
Producer A paid the taxes in 2014 but retained 12 breeding age heifers at a cost of $1,000 each in 2016. Producer A had $16,752 in accumulated profits over eight years from 2016 to 2023 because prices were trending upward across this period. After selling the 12 cows for slaughter in 2024 at $110/cwt, Producer A realized a 13.6% return on the original $15,000 from 2014 (it was actually a 20% return on the 12,000 they invested in 2016).
Producer B avoided $3,000 in taxes but realized only 3,052 in accumulated profits from 2015 to 2022 because prices declined sharply from 2014 to 2017 and after the seven cows were sent to slaughter in 2022 for $95/cwt, realized a net return of –3.2% on the investment of $15,000.
No one knows how the cattle market will perform in the next five years but there is a general consensus among market watcher we are less likely to see the precipitous declines experienced from 2014 to 2017. But we know cattle prices are significantly higher than the 10-year running average.
Implementing good tax management is wise. But farmers should not let a preoccupation with minimizing tax obligations prevent them from building essential cash reserves that can allow the farm to insulate itself from unexpected expenses or perhaps afford itself a great opportunity to invest in some aspect of the farm when opportunities present themselves at a later date.
Building and maintaining a cash reserve is difficult and demands self-discipline and patience. But many livestock producers can appreciate the unexpected turn in the weather that demands feed purchases. Likewise, most stockmen can remember having to forego great opportunities to purchase high quality breeding stock at a heavy discount simply because the cash reserves were not available to take advantage of the opportunity.
