My two sons, who are 30 and 33 years old, and my wife and I milk 200 Holstein cows in a freestall/parlor setup. Up until 18 months ago, we raised all our heifer calves and sold between 20 and 25 fresh heifers throughout the year that we didn’t need. This provided an additional income stream, and allowed us to keep the best heifers and sell the rest. With continued low milk prices, we no longer are doing that. We genomic-test all our animals, and we are thinking about breeding the lower half of our dairy herd with AI sexed beef bull semen to get dairy-beef bull calves. We’ve seen some Holstein-Simmental calves that look just like beef calves. We have the facilities to finish out about 100 dairy-beef steers. We’re also thinking about using sexed Holstein heifer semen on the top half of our herd to get more dairy heifer calves out of our best cows. Do you think this is a good way to add an additional revenue stream to our operation?
Doug Hodorff: In my opinion, the question you asked is more of a strategic decision. Yes, you have the setup to raise steers and you can use sexed semen. Neither of these decisions will increase your cash flow in the short term. As a strategic decision, I would encourage you to do some budget projections to look at the profitability of raising steers and using sexed semen. Both decisions could benefit your labor efficiency and add some cash flow. In these challenging economic times, make sure you do your projections. Both decisions will take 1½ to 2½ years to add cash flow to your business.
Sam Miller: The adoption of sexed semen and genomic testing has changed the replacement rate for dairy farmers in the past couple of years. Many farmers are adopting a similar dairy replacement system to your proposed plan.
I question breeding as much as the lower half of your herd for beef purposes, as you may be short of replacement heifers in a couple of years. Work with your AI technician and veterinarian to figure out a comfortable rate to breed for both genomic dairy heifer replacements and beef for the bottom fraction of your herd. In addition to housing, be certain you have the appropriate feedstuffs and management for the new beef enterprise. Good luck adapting your farm to these technological investments.
Katie Wantoch: Progeny testing has been done for more than half a century, though the expense has limited the effectiveness of using this testing on commercial dairy farms for improving genetic traits that are difficult or expensive to measure routinely, such as feed efficiency. Dr. Kent Weigel, University of Wisconsin-Madison Department of Dairy Science professor, has done research on the effective use of genomics in sire selection and replacement heifer management. Based on his research, he notes that the key to successful implementation of genomic testing in the long term is development of additional tools that will allow farmers to take an appropriate action for every heifer, depending on the outcome of the genomic test. Such actions might include culling, insemination with sexed semen, use as an embryo donor or recipient, or insemination with beef semen.
Decision support tools have been developed that will allow farmers to more effectively identify candidates for genomic testing, evaluate the expected costs and benefits of genomic testing, and monitor their inventories at the herd level and individual animal level. Weigel notes herds that develop standardized protocols for genetic management of replacement animals — including genomic testing, culling, breeding, mating and related decisions — will reap the greatest benefits of this technology.
I’m 64 years old, and I milk 60 cows in central Wisconsin. I farm 250 tillable acres, which I own. I’m planning to retire in three years when I turn 67, and I’m looking to cut back a little bit and pay down some debt. I’m thinking about selling 60 acres that I own 2 miles down the road from my main farm. It’s highly productive land, and I figure I can get at least $5,000 an acre. I bought this land in 1998 and paid $1,250 an acre, so I’m sure there will be some taxes owed. I owe the bank about $200,000. Would selling that land pay off what I owe at the bank? I don’t have anyone in my family who wants to farm. Do you think this is a good idea?
Hodorff: I am not a tax person or a banker. You will need to engage an accountant to figure the tax implications of selling this land. If $200,000 is the only debt you have, this could make sense. If there is other debt, I would encourage you to talk to your lender. Sometimes selling assets that change the collateral position of your loan can be frowned upon by your lender. Make sure you check with all parties involved. Could you retain ownership of the land and use the rental income as a possible income stream as you retire?
Miller: Make an appointment with your tax professional or farm certified public accountant to calculate the expected capital gains tax owed on the sale of the property. Assuming a 20% capital gains tax rate, you should have enough to pay off your bank debt and the capital gains tax with some funds left over.
While you are visiting with your tax professional, discuss plans for three years from now as to how you might sell the rest of the farm assets in order to fund your retirement and minimize your tax liability. Now might also be a good time to visit with a financial planning advisor on how to invest funds from asset sales to fund your retirement in addition to Social Security. Fortunately, you are starting the planning process with a couple of years of lead time. Good luck with your retirement planning.
Wantoch: There are very few farmers who prepare their own federal and state tax forms. What I mean is that few farmers, like many small-business owners, do not know the impact that some business decisions will have on their federal and state tax liability. First and foremost, I suggest you consult with an accountant, bookkeeper or other tax/finance professional to help you understand and appropriately assess the impact that this decision will have on your income tax liability. Penn State Extension provides a great overview for your situation: The sale of business property results in a gain if the selling price is greater than the property’s adjusted tax basis plus any selling expenses.
The adjusted tax basis of business property equals its book value for tax purposes (i.e., the property’s initial basis plus the cost of any improvements less depreciation allowed or allowable, including any depreciation taken as a Section 179 expense). Farmland isn’t depreciable since it doesn’t have a definite life, nor is a home because it is personal property. If the result is a net gain, then the gain is eligible for treatment as long-term capital gains and will be taxed at a rate lower than ordinary income. Remember, farmers pay self-employment tax on their business income, which would include the sale of farmland in this scenario. Keep this in mind, as the tax liability owed will reduce the net gain from the sale of your farmland.
Agrivision panel: Doug Hodorff, Fond du Lac County, Wis., dairy farmer; Sam Miller, managing director, group head of agricultural banking, BMO Harris Bank; and Katie Wantoch, Dunn County, Wis., Extension ag agent specializing in economic development. If you have questions you would like the panel to answer, send them to: Wisconsin Agriculturist, P.O. Box 236, Brandon, WI 53919; or email [email protected].