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Volume 10, Number 11 - November 2004

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Farm Leases - Time To Review

As we near the end of the fall crop season, we should take this opportunity to review our farm rental agreements. Many farm leases are entered into with a handshake. However, under these circumstances many important lease provisions are too frequently left unsettled or if discussed, the passage of time tends to make many of the verbal agreements vague.

Written agreements encourage the review of our wording and summarization of our thoughts. When a written lease is utilized, a landlord and tenant are more likely to discuss and reach agreement on important lease provisions. Additionally, a written document will provide family members with valuable information, should either the tenant or landlord die or become incapacitated. You're encouraged to consult with your attorney to answer questions regarding a particular fact scenario regarding farm leases.

A verbal farm lease for less than one year is the same as a "tenancy by will". This type of month-to-month tenancy can be terminated by either party with one month's notice in writing. However, a "periodic tenancy" or "year-to-year tenancy" is created when a verbal farm lease is continued for more than one year. A periodic tenancy is continuous and of indefinite duration. At the anniversary of the verbal agreement, the lease continues, unless notice of termination is given. To terminate a year-to-year tenancy, Missouri law requires that written notice be made by the party desiring to terminate the lease to the other party, not fewer than 60 days before the end of the lease.

It is important to note the termination of a lease agreement must be in writing, even though the original agreement was verbal. If proper notice is not given, the other party can enforce another term of tenancy. It is important to note that a lease is a contract and it "marries" the parties to all of the agreed upon provisions. In addition to the basic lease provisions, the parties should also come to an agreement regarding some special points, such as:

Too frequently, these points are overlooked in verbal agreements. If a dispute should arise, it is basically one person's word against another person's word. Written agreements provide a historical record of the agreement, enabling a person to periodically refresh one's memory.

In conclusion, remember: "an ounce of prevention is worth a pound of cure".

(Author: Parman Green, Ag Business Management Specialist)

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Farm Record Checkup Time

Winter is the time when many farm business owners catch up on bookwork. While everyone keeps some type of records for income tax reporting, business managers analyze and utilize those records for business decisions. One of the best ways to measure the financial health of a farm business is to look at selected balance sheet and income statement ratios.

The National Farm Financial Standards Task Force, a committee comprised of lenders, farmers and educators, developed a set of uniform financial statements and ratios for farming. Financial statements and financial ratios are interconnected. Ratios are categorized into five areas: liquidity, solvency, profitability, repayment capacity and financial efficiency. A group of these ratios have become known as the "Sweet 16" ratios.

The liquidity ratios indicate the ability to meet obligations as they become due. The solvency ratios are a measure of the ability to pay all debts. The profitability is the difference between value and cost of goods sold. The repayment capacity ratios are an indication of the ability to repay term debts on time. The financial efficiency ratios are a measure of how effectively assets are used to generate income.

The key to utilizing ratios involves not only calculating the ratios, but also understanding their relevance and relationships. An annual review of these ratios is valuable in determining trends, strengths and weaknesses. A visual way to look at ratios is to record them on a scorecard. An easy to use scorecard can be found at If you do not have computer access, take this article to your county extension center and they can print it for you.

The equations for the "Sweet 16" ratios are listed below:


  1. Current ratio = total current farm assets/total current farm liabilities
    (desirable range: 1.5 - 2.0)

  2. Working capital = total current farm assets - total current farm liabilities
    (desirable range: positive, stable)


  1. Debt/asset ratio = total farm liabilities/total farm assets
    (desirable range less than 0.4)

  2. Equity/asset ratio = total farm equity/total farm assets
    (desirable range greater than 0.6)

  3. Debt/equity ratio = total farm liabilities/total farm equity
    (desirable range less than 0.66)


  1. Rate of return on farm assets = (net farm income from operations + farm interest expense - value of operator and unpaid family labor)/average total farm assets
    (desirable range over 4%)

  2. Rate of return on farm equity = (net farm income from operations - value of operator and unpaid family labor)/average total farm equity
    (desirable range greater than ROR on farm assets)

  3. Operating profit margin = (net farm income from operations + farm interest expense - value of operator and unpaid family labor)/gross revenue
    (desirable range 20% - 30%)

  4. Net farm income
    no standard

Repayment Capacity

  1. Term Debt and Capital Lease Coverage Ratio = (net farm income from operations + total non-farm income + depreciation expense + interest on term debt and capital leases - total income tax expense - family living withdrawal)/principal and interest payments on term debt and capital leases
    (desirable range greater than 1.25)

  2. Capital replacement and term debt repayment margin = net farm income from operations + total non-farm income + depreciation expense - total income tax expense - family living withdrawal (including total annual payments on personal liabilities) - payment on prior unpaid operating debt - principal payments on current portion of term debt and capital leases
    (desirable range at least 25% more dollars than scheduled payments on debts & leases)

Financial Efficiency

  1. Asset turnover ratio = gross revenue/average total farm assets
    (desirable range greater than 25% - 30%)

  2. Operating expense ratio = operating expense-depreciation/gross revenue(desirable range less than 65%)

  3. Depreciation expense ratio = depreciation expense/gross revenue
    (desirable range less than 15%)

  4. Interest expense ratio = interest expense/gross revenue
    (desirable range less than 15%)

  5. Net farm income from operations ratio = net farm income from operations/gross revenue
    (desirable range greater than 15%)

(Author: Mary Sobba, Ag. Business Specialist)

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Taxation Tidbits: Employee Wage Statement

The end of the calendar year provides an excellent opportunity for employers to analyze the costs of hired labor and to communicate this information to their employees. Too many employees and employers fail to recognize the total benefits/costs of hired labor. Substantial labor costs are in the form of fringe benefits and other non-taxable benefits. Since a W-2 must be provided to each employee in January, take this opportunity to complete and include an "Employee Wage and Benefits Statement" with the employee's W-2. Click here to view statement.

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Missouri River Issues


The U.S. Army Corps of Engineers manages flows on the Missouri River through a system of six reservoirs located in North Dakota, South Dakota, and Montana. These reservoirs are located sequentially on the Missouri River and include Fort Peck, Garrison, Oahe, Big Bend, Fort Randall, and the lowest reservoir, Gavins Point. Much of the current debate on the Missouri River is driven by the five year drought where these reservoirs are located. At the end of July 2004, water-in-storage in the six reservoirs totaled 37.8 million acre feet, the lowest level since the reservoirs were built. Unfortunately, the month of August offered no improvement in the reservoirs above Gavins Point, with runoff averaging only 67% of normal. The water-in-storage in the upper reservoirs totaled 36.6 million acre feet at the end of August compared to 42.9 million acre feet one year ago. The reservoir system is nearly 23 million acre feet below average for this time of year.

Navigation Impacts

The low level of water in the reservoirs triggered below full service navigation levels beginning in July 2000. In 2003 and 2004 minimum navigation support levels were triggered. Lawsuits over endangered species halted navigation support over the August 11 to September 1, 2003 period and kept barge operators leery of navigation on the Missouri River until Judge Magnuson's ruling on the Corps' new Master Manual and associated lawsuits in July 2004. Judge Magnuson affirmed the Corps full discretion in managing the Missouri River to "secure the maximum benefits to river interests" and dismissed the associated lawsuits.

As per the Master Manual, the navigation season was shortened 47 days in 2004, ending navigation support in Kansas City on October 11 and October 15 in St. Louis when water-in-storage fell to 38.6 million acre feet as of July 1.

Under the Master Manual, navigation support for the whole season is ended when water-in-storage drops below 31 million acre feet (as measured on March 15). While this is likely not the case for 2005, another year of drought in 2005 makes this a distinct possibility for 2006. At this time, unless the upper basin experiences above average snowmelt, the navigation season for 2005 is shaping up to be a 7 month season with minimum service.

An additional concern is the possibility that the minimum water-in-storage requirement of 31 million acre feet could be raised to 40 million acre feet. Under Senate bill S.2804 (appropriations for the Department of Interior), the minimum water-in-storage would be increased to 40 million acre feet. With 36.6 million acre feet in storage as of August 31, 2004, the implication of enacting this bill is no navigation support in 2005. Senator Bond introduced language in the VA/HUD appropriation bill that counters the changes in the minimum water-in-storage requirement by removing all funding for enforcement. Ultimately, these conflicting appropriations bills will have to be resolved. This could occur through debate on the Senate floor or in committee negotiations.

In March 2004, FAPRI surveyed businesses along the Missouri River to determine the value of barge transportation as measured by the freight savings in using barges versus other transportation modes. FAPRI found that the average transportation cost savings per year was 10.4 million dollars.

Navigation on the Mississippi River could also be affected by low flows from the Missouri River. During dry summer periods the Missouri River accounts for 60 percent of Mississippi River flows between St. Louis and Cairo, Illinois.

Power Plant Impacts

Twenty five percent of the total power generation capacity in the states of Missouri, Kansas, Nebraska, and Iowa originates from power plants that use water from the Missouri River for cooling purposes in the power generation process. There are nine power companies that operate the eighteen coal and nuclear power plants along the river. These power plants are referred to in the power industry as base load units because they are the most efficient and inexpensive to operate and are designed to operate continuously. Peaking units such as natural gas turbines are often at two to six times more expensive to operate.

Over the summer months, power plants are primarily impacted by river flow rate and water temperature. It is important to note that the power plants are not uniformly affected by flow rate and water temperature. Lower flow rates will reduce the amount of water available for compliance with thermal effluent limitations and will generally result in higher ambient river water temperatures. Extreme low flows may also result in water accessibility problems for individual power plants. At high river water temperatures or low river flows, power plants may have to reduce power generation from normal capacity levels (de-rate) or shut down. When a plant must de-rate, replacement power must be purchased from the excess power market. In extreme cases, the transmission network may not support the quantity of power that needs to be moved, resulting in rolling blackouts or blackouts.

In September 2004, FAPRI simulated minimum releases from Gavins Point utilizing tributary inflows over the 1898 to 1997 period adjusted to 1987 depletion levels. Under the Master Manual, when the water-in-storage falls below the 31 million acre feet requirement, the following minimum flows are released from Gavins Point are:

December - February 12,000 cfs
March - April 9,000 cfs
May - August 18,000 cfs
September - November 9,000 cfs

Simulation of these minimum releases produced expected economic damages to power plants of 128.7 million dollars. FAPRI estimates a 20 percent chance of economic damages to power plants exceeding 196.6 million dollars and a 10 percent chance of damages exceeding 527 million dollars. While blackouts or rolling blackouts are difficult to precisely predict, the stress on the power transmission system is significant when annual summer economic damages exceed 100 million dollars. Simulated minimal summer releases from Gavins Point indicated economic damages exceeding 100 million dollars would occur 37 percent of the time.

Power plants are also concerned about low fall releases of 9,000 cfs when tributary inflows are minimal. Without sufficient tributary inflows, power plants could experience problems accessing and enough cooling water to maintain full power generation. Beginning in October 2004, releases from Gavins Point will be scaled down to 9,000 cfs through November and then be increased to 12,000 cfs in December through March. This historically low winter flow increases the potential for ice jams, which further limit downstream flows and cause water access problems. Last year, releases from Gavins Point averaged above 15,000 cfs during the winter with a fairly mild winter.

(Author: John Kruse, Research Assistant Professor, Food and Agricultural Policy Institute, University of Missouri, Columbia)

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Publishing Information

Ag Connection is published monthly for Central Missouri Region producers and is supported by University of Missouri Extension, the Commercial Agriculture program, the Missouri Agricultural Experiment Station and the MU College of Agriculture, Food and Natural Resources. Managing Editor: Kent Shannon.