Doug Houser:
From Rea & Associates studio, this is unsuitable, a management and financial services podcast for entrepreneurs, tenured business leaders, and others who are ready to look beyond the suit and tie culture for meaningful, measurable results. I'm Doug Houser. On this weekly podcast, thought leaders and business professionals break down complicated and mundane topics and give you the tips and insight you actually need to grow as a leader while helping your organization to grow and thrive.
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Industries continue to work towards pre-COVID conditions, and now that we are weathering through this storm, we can't help but look ahead. Today, Brian Kempf, Principal at Rea & Associates, is here to share his experience in the agriculture industry, the current economic impacts, what the industry may look like in the future, and the estate planning and tax considerations you should look at before the election. Welcome back to unsuitable Brian.
Brian Kempf:
Thank you, Doug. It's good to be back again.
Doug:
Yeah, it's good to see you. Sorry, we couldn't get together in person, hopefully, we can make that happen sooner rather than later. It's always more enjoyable.
Brian:
Yes. We're all looking forward to that as well.
Doug:
Absolutely. Talk a little bit about the current state of the Ag industry. Obviously, it's been certainly in the news politically with tariffs and everything else, but before we get into maybe that part of it, talk about how COVID has affected the climate with regard to agriculture. What are you seeing out there?
Brian:
Yeah. Well, it's interesting a lot has changed since March, April. Almost seems like an eternity ago thinking back to March and April, but there's been a lot of turmoil in the agricultural market. Remembering back to March and April, two of the big things that we're hitting the news locally, as well as nationally, were both the milk shortages and dumping the excess of milk and a lot of the retail meat shortages were two things that people really didn't understand why they were coming about. I mean, that's one thing that I find interesting is just informing the general public on things that they don't understand that are going on in the background.
A lot of people would see what's at the grocery store and that's about as limited as they are on their knowledge on what Ag products are coming out. With the milk shortages and dumping, a lot of people were confused about why farmers were dumping milk, while at the same time retail stores were saying they had no milk. A lot of that had to do with couple things. Like toilet paper, there was a spike in demand on fluid milk, the jug of milk that you buy in the store, and so customers went out and bought tons of milk, which doesn't make sense, because it has a limited shelf life anyways.
So you had a spike in demand and then you also, at the same time, had plants that were either shutting down or reducing capacity or had outbreaks in that they were not able to operate at full capacity. Milk has to run through some sort of processing plant in order to be sold. And so, with a limited shelf life, you can't just store milk indefinitely until plants are able to process it, and milk can't be in its raw stage.
It was a fairly short period, but it hit the news quite a bit, a fairly short period of some farms dumping excess supplies of milk. And unlike other industries, construction, manufacturing, you can't store raw material or just inventory for an indefinite amount of time. That has mostly been corrected as far as you don't see milk shortages anymore. Similarly, with retail, with meat, a lot of retail stores were putting quotas on how much meat you can purchase in-store.
The shortage of processing plants across the U.S. And what some people don't understand with hogs was one good example. If you continue to feed hogs, they will continue to grow and fatten. There's a certain way at which most hogs are sold. Once they get above that weight, your price continues to decrease. And so to continue feeding hogs, having increased costs with decreased market price just didn't make sense. Unfortunately, you saw hogs being slaughtered with no... Not being processed because there wasn't the capacity for it. Again, ...
Doug:
The convergence of a lot of these factors, right. And I've also seen things that obviously the Ag industry had to adapt because the weight really of the end-users has changed in that, obviously less going to restaurants and that type of thing. So how has that also impacted production and processing and that type of thing?
Brian:
Yeah. So schools and restaurants were both large consumers of dairy. Restaurants ate cheese a lot. Like a lot of industries, how it affected certain businesses really depended on who their customer was. You've had some dairy processors that are spread out amongst grocery stores, restaurants, schools, they weren't affected nearly as much and were able to transfer over the lack of demand from schools and restaurants over into the increased demand in grocery stores, because you did see a large increase in purchases of agricultural products in the grocery store. So if [inaudible 00:06:53] a change that over and meet that demand, a lot of people saw a fairly healthy increase in demand, but that's not... not all processes are able to do that, or have existing contracts with grocery stores that allow them to just change over their demand from schools or restaurants over to grocery stores.
Doug:
The old adage, right. Be diverse in your customer base and your ability to adapt and evolve. And I think we've... No matter what industry you're in, obviously, we've all certainly had that lesson reinforced here during this time period.
Brian:
Yep, that's exactly right.
Doug:
What about labor as well? Now, obviously, labor is a big issue with Ag not only in Ohio right but throughout the country and the allocation of certain visa types that allows for immigrant labor, what's been the impact there over the last couple of years [crosstalk 00:07:56]?
Brian:
At the beginning of this, there was widespread fear that the farmers were not going to be able to get their agriculture labor, which is largely from immigrant labor. There were some changes in the H-2A visa program, which is the temporary farm labor that lessens restrictions, lessens regulations, and has allowed somewhat more immigrants to come over for a seasonal period. But the reality is that the H-2A visa program only supplies a small amount of the overall farm agricultural labor in the U.S. I was looking at statistics on the Farm Bureau website only about 50 to 70% of farm labor is unauthorized, what people would call illegal immigrants.
Doug:
Wow. It's that high still?
Brian:
It's that high, that makes up somewhere between a million and a half to two million workers. H-2A visa program only provides about 4% of those workers. So the reality is anyone that's tied into the agricultural industry knows it has been pushing for immigration for... I don't know, as many years as I've been alive, probably, but really in the last 10 years, there's lots of rhetoric. Certainly, everyone would agree that there needs to be some sort of immigration reform. You find people on either side of the issue, but the reality is we truly need immigration reform.
Most agricultural experts are not looking for widespread deportation of undocumented workers that Farm Bureau did a study on that a number of years ago, and said, if we took an enforcement-only approach towards immigration, we would lose approximately 30 to $60 billion of agricultural output in one year. And it would result in a five to six percent increase in food prices across the board. So we certainly need some sort of immigration reform it's been talked about for years. No one can agree on what it looks like.
Doug:
Yeah. In the end, we get nothing basically which is what has happened.
Brian:
Exactly right. And dairy is one of the big issues in our local area here homes in Wayne County, there's a lot of dairy producers. H-2A visas are for short term labor, and the dairy industry needs long-term labor. They don't need short term labor. You have to milk your cows every single day. So they've long pushed for dairy to be as a subset of H-2A, but so far nothing has been passed.
Doug:
Brian, talk a little bit about the evolution of what types of agriculture businesses have been successful. I know you and I was talking a little bit before the show about the increase in small farms over the last six months. And that's really surprising to me.
Brian:
Yeah. Through the Coronavirus, there was an increased consumer awareness of where their food comes from and how it's processed. So both out of fear of where is my food coming from and how am I going to come in contact with the virus because it's coming from California or somewhere else. And so it's partially because of food shortages, that people were afraid that they wouldn't be able to get the food that they wanted. And so you have seen an increase in direct farm to retail, so small farms, your 30, 50, 60-acre farms and people are using social media to market direct to consumer.
And so you have seen an increase in some of that type of activity. Organic is still on the rise. So people again are thinking more and more about their food sources and what all goes into producing that. So you've seen an increase again, it's like with any industry there're winners and losers, there are some people that are really losing out, and there are some people who have taken advantage of lots of different things that have changed over the last six months.
Doug:
Yeah, for sure. And that ability to adapt and evolve quickly and I know we've got certainly a number of clients in the geographic sphere where you are as you mentioned that you have catered to that environment, right?
Brian:
Yeah. We have a good small tractor manufacturer, Tilmor, that has really capitalized on these smaller farmers all across the U.S. that are looking for new ways to cultivate weed without chemicals. That's a big deal right now.
Doug:
Awesome. Not the weed you smoke, right?
Brian:
Very different weed. It would not be a good idea.
Doug:
Yeah. Just clarifying. Although now, we've got clients in the cannabis industry too. So it's hard to believe. I mean just this week, Chris Spielman opened a CBD shop in the town where I live in Lincoln County. Believe it or not, that's something I never would've thought. I'd say like 25 years ago.
Brian:
It is a very different market than what most people think of as agriculture, but it's still there and it's, growing. So …
Doug:
Talk about all these factors. In your opinion, what does the Ag industry look like? How does it evolve over the next five to 10 years?
Brian:
There is a shift in agriculture that is starting now and will only be evolving even quicker over the next five to 10 years. The average age of the farmer has continued to increase over the last 10 years. And the average number of new or beginning farmers has continued to decrease. And so the large consolidation in farms is only getting bigger. I mean, you still have an increased overall agricultural output with fewer people to do it. And so you have a natural progression to larger farms, which will... So you have larger farms with fewer people to own them and fewer entrances and fewer potential workers for it. And so you do see a lot of mechanization and technology it's been around for a while, but it's catching on much faster. Robotic milkers are a good example.
They've been around for quite some time, most likely in five to 10 years, that's where a lot of large farms are going to be. It's still expensive to get into right now. And with the milk price where it has been over the last two years, it was hard to justify that cost. If you see milk prices coming back up and like with any new technology, the more people that use it and the better they are at producing it, hopefully, prices will come down when those two things happen. I think you'll see more and more robotic milkers put in across both Ohio and the U.S.
Doug:
So it sounds like in, Ag, there's this kind of bifurcation, like in many industries, you either have to be really small and really nimble and respond quickly to demand and market, or you have to be really, really big, right, to take advantage of those economies of scale?
Brian:
That is exactly right. It's not-
Doug:
Interesting.
Brian:
industries.
Doug:
Yeah, let's talk a little bit then about say as we approach the end of the year here. Obviously, we don't know how tax laws may change in the future. We know that there's a shortage of revenues at the government level, be it federal, state, local, whatever, but what can we do if we're in the Ag industry or really any owner-managed business, what are we thinking about as we approach your end with regard to tax and estate planning?
Brian:
Yeah. This year is going to be a big one. And not this year, the next five years, I think from a tax and estate planning aspect. The big thing that we're watching in agriculture is the lifetime exemption. So after you die, you have the ability to transfer $11 million of assets close to 12 million to the next generation, without facing a state tax issue. If you're married, it's 22 to $24 million, it's a large number right now. And so you do have a lot of people that blow off estate planning thinking, well, I don't have nearly that much. But the reality is that number can be cut in half instantly. Right now, there's talk of having it rather than reverting in a number of years, back to six million. There's potential that it would revert to $6 million per person immediately in 2020.
And with increased land prices, when you have land selling anywhere between $15,000 and $100,000 an acre, depending on where it is and what it's going to be used for, it doesn't take a lot of acres to add up to a $12 million joint exemption. I mean, you could be anywhere between 200 and 400 acres, which is not a huge farm, and need that estate exemption. So that's one thing that people, especially if they have not worried about estate planning from an estate tax standpoint, that's something they definitely need to get in contact with their attorney and their CPA about. There's also the potential for an elimination of the step-up in basis at death, which is a huge deal for farmers who bought their land for $500 an acre, 30, 40, 50 years ago and now it's worth $25,000 an acre. That step-up in basis at death is a huge issue.
There's also been thrown around the idea of paying capital gains tax at death, and another huge liability for farmers who are often land rich and cash poor. It will go back to when the Ohio estate tax was at $383,000, you had some farms that had to sell in order to fund the Ohio estate tax. So those would all not be good things for farmers, but all things that you still need to plan for in the case that it would happen. That was a great time to be looking at estate planning. That's for sure.
Doug:
Well, that's certainly Sage advice, Brian, and I would highly advise anybody in the Ag or related industries to certainly get in touch with Brian. He is far and away from the best expert I've ever encountered in the space. And I think you need to make sure that you've got that advisor close to you that you can run these things by. Don't assume because it's always changing and certainly getting more and more complicated.
Brian:
Yeah. And it's important to have both an attorney and a CPA that understand farms and why they're a little bit different than a lot of other businesses. It's a business, but it's a way of life, and how the next generation treats it is different from farms than it is with a lot of other types of ...
Doug:
Very well said, very well said. Well, if you want more business tips and insight, or to hear previous episodes of unsuitable, visit our podcast page at www.reacpa.com/podcast. And while you're there, sign up for exclusive content and show notes. Thanks for listening to this week's show, be sure to subscribe to unsuitable on Apple podcast, Google podcast, or wherever you're listening to us right now, including YouTube. I'm Doug Houser, join us next week for another unsuitable interview with an industry professional.
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