AAE 320 Spring 2011 Final Exam Name: 1) (20 pts.) True or False? Mark your answer. a) T F Wisconsin s processing vegetable industry may be important in the state, but nationally it ranks quite low. b) T F To be eligible for Supplemental Revenue Assistance Payments (SURE), the federal crop disaster aid program, farmers have to buy crop insurance. c) T F Crop insurance has become popular recently, but in 2010 it was still used for less than 50% of all corn and soybeans planted acres in Wisconsin. d) T F GRP is the most popular crop insurance policy in Wisconsin for corn and soybeans, especially for small farms. e) T F Average milk production per cow has been on an increasing trend in the U.S. since about 1930; for decades before then it changed little. f) T F People, Partners and Planet is a simple way mentioned in class to describe the three aspects of sustainability. g) T F Real (not nominal) prices for crops in the U.S. have been on a steady increasing trend since about 1970. h) T F The majority of those the USDA considers farmers receive commodity support payments, but they are a very small part of their annual income. i) T F A Life Cycle Assessment primarily estimates how much profit goes to each business entity along the supply chain during a product s life cycle. j) T F In Strategic Management, a goal should be specific, measurable, and have a deadline. 2) (3 pts.) Of the business entities discussed in class (sole proprietor, general partnership, limited partnership, C-corporation, S-Corporation, limited liability company), which do not provide some limited liability to the owners? 1
3) (17 pts. total) Provide short answers to each of the following questions. Mable and Patrick own a farm, with all assets owned as marital property with a right of survivorship under Wisconsin s marital property law. Among their assets are 50 raised beef cows currently worth $25,000 with a zero income tax basis because they deducted all the costs of raising them. Use this information to answer each question below. Give a brief explanation for each answer. 3a) (2 pts.) If Mable and Patrick gave the cows to George, what is George s income tax basis in the cows? 3b) (2 pts.) If George put the cows in his breeding herd for 24 months and then sold them for $20,000, how much gain or loss must he report on his income tax return? 3c) (3 pts.) Would George s gain or loss from the sale of the cows be ordinary income or capital gain and would it be subject to self-employment tax? 3d) (3 pts.) If Patrick died and then Mable gave the cows to George, how much income would George have to report if he sold them the next day for $25,000? 3e) (3 pts.) If Mable and Patrick contributed the cows to a C-Corporation in exchange for an ownership interest in the C-Corporation and the C-Corporation sold the cows the next day for $25,000, how much gain would the C-Corporation realize? i) (2 pts.) If the C-Corporation realizes gain from the sale, does it pay income tax on that gain? 2
ii) (2 pts.) If instead the C-Corporation returned the cows back to Mable and Patrick before the cows were sold, would the C-Corporation and/or Mable and Patrick have to pay income tax as a result of this transfer? 4) (5 pts) Explain what is meant by the theory called Cochrane s Treadmill as discussed in class. In particular, discuss the effect of new technology on real crop prices and farmer options to respond. 5) (5 pts.) In class we discussed the Cool Farm Tool, the Field-to-Market Field Print Calculator, and Healthy Grown as examples of agricultural sustainability assessment tools or standards currently used by farmers. Briefly describe the types of questions farmers answer or the types of information they provide and the sorts of output generated by these tools or standards. 3
6) (23 pts) Answer the following questions about these five commodity support programs: i) Direct Payments, ii) Counter Cyclical Payments, iii) Marketing Assistance Loans, iv) Loan Deficiency Payments, and v) Average Crop Revenue Election (ACRE) Payments. 6a) (3 pts.) Which of these five programs use base acres? Mark the boxes to indicate your answers to the following questions. 6b) (4 pts.) Suppose you own 20 acres of land and are eligible for a corn Direct Payment. For each action below, would you Keep or Lose your corn Direct Payment? Action Keep DP Lose DP Plant all 20 acres in soybeans Plant all 20 acres in corn and sell the grain for $8/bu Build condos on the whole 20 acres Plant all 20 acres in carrots and sell them in town 6c) (4 pts.) Suppose you own 20 acres of land and are eligible for a corn Counter Cyclical Payment (CCP). For each action below, would you Keep or Lose the corn CCP? Action Keep CCP Lose CCP Plant all 20 acres in soybeans Plant all 20 acres in corn and sell the grain for $8/bu Build condos on the whole 20 acres Plant all 20 acres in carrots and sell them in town 6d) (3 pts.) Assuming you are eligible, briefly explain what triggers a Direct Payment. 6e) (3 pts) Assuming you are eligible, briefly explain what triggers a Counter Cyclical Payment. 6f) (3 pts) Assuming you are eligible, briefly explain what triggers an ACRE Payment. 6g) (3 pts) Assuming you are eligible, briefly explain what triggers a Loan Deficiency Payment. 4
7) (12 pts) Answer the following questions about these crop insurance policies: i) Yield Protection (YP), ii) Revenue Protection (RP), iii) Group Risk Plan (GRP), and iv) Group Risk Income Plan (GRIP). 7a) (3 pts) Which policy is an individual revenue policy? Briefly explain what triggers an indemnity payment for this policy. 7b) (3 pts) Which policy is an areawide (county) yield policy? Briefly explain what triggers an indemnity payment for this policy. 7c) (3 pts) Which policy is an individual yield policy? Briefly explain what triggers an indemnity payment for this policy. 7d) (3 pts) Which policy is an areawide (county) revenue policy? Briefly explain what triggers an indemnity payment for this policy. 8) (17 total pts.) Answer the following questions about crop insurance. 8a) (3 pts.) A farmer has insured corn using Revenue Protection and, with the announced harvest price of $6/bu, the final guarantee for the unit is $50,000. If the total yield harvested for the unit is 9,000 bushels, would the farmer receive an indemnity and if so, how much? Explain why. 5
8b) (6 pts.) A farm has 50 acres of wheat insured as one unit with an average yield of 70 bu/ac. i) (3 pts.) Suppose the farmer buys Yield Protection with a 60% coverage level. What is the per acre yield guarantee? What is the total yield guarantee for the entire 50 acre unit? ii) (3 pts.) Suppose half the unit yields 20 bu/ac and the other half yields 70 bu/ac. What is the total harvested yield? Would the farmer receive a crop insurance indemnity? If so, how much? Explain why. 8c) (4 pts) Briefly explain how the federal government subsidizes crop insurance for farmers. 8d) (4 pts) Briefly explain what is meant by the coverage level and the price election for YP. 6
9) (8 pts. total) You are deciding the seeding rate for your processing carrots. This table gives the seeds planted per acre (1000 s of seeds per acre) and the yield (cwt/ac). Seeds (1,000 s) Yield (cwt/ac) Marginal Product Value of Marginal Product 80 190 -- -- 85 220 90 230 95 235 9a) (3 pts.) Use this table to show how to calculate the Marginal Product and then fill in the Marginal Product column in the table. Show your work for potential partial credit. 9b) (2 pts.) Processing carrots sell for $25/cwt. Show how to calculate the Value of Marginal Product for one example, and then fill in the Value of Marginal Product column in the table. 9c) (3 pts.) If the cost of carrot seed is $100.00 for 1,000 seeds, what is the profit maximizing seeding rate based on the table above? 10) (10 pts) Green bean yield is G = 4.0 + 0.8Z 0.01Z 2, where G is yield (tons/ac) and Z is insecticide (oz/ac). If the price of green beans is $70/ton and insecticide costs $20.00/oz, what is the profit maximizing amount of insecticide to apply? Check the Second Order Condition. 7
11) (8 pts. total) This table reports the cost ($/yr) for Betty to produce flowers (bouquets/yr). Flower Bouquets Fixed Cost Variable Cost Total Cost Marginal Cost 5,000 1,000 15,000 -- 6,000 1,000 19,000 7,000 1,000 24,000 8,000 1,000 30,000 11a) (5 pts.) Using the table above, show how to calculate the Total Cost and Marginal Cost and then fill in the missing values in the table. Show your work for potential partial credit. 11b) (3 pts.) If flower bouquets sell for $5.00 each, what is the profit maximizing number of flower bouquets for Betty to produce? 12) (10 pts.) Your total cost of producing turkeys is C = 1,000 + 5Q + 0.01Q 2, where C is cost and Q is the number of turkeys. If you sell turkeys for $25 each, what is the profit maximizing number of turkeys to produce? Don t forget to check the Second Order Condition. 8
13) (12 pts. total) You bought a baler for $20,000. Answer these questions about depreciation. 13a) (4 pts.) For your farm accounts (not tax accounts) you plan to keep the baler for 4 years. Calculate annual depreciation for the baler assuming a $4,000 salvage value. Fill in the table using Straight Line Depreciation. Show your work for potential partial credit. Year Depreciation During Year 1 2 3 4 Value at Year End 13b) (3 pts.) For tax purposes, could you deduct the full cost (all $20,000) from you farm income the year you buy the baler? Provide a brief explanation. 13c) (3 pts.) You bought the baler for $20,000. Suppose after 2 years, you have claimed a total of $15,000 in deprecation for the baler on your taxes, and then you sell the baler for $10,000. How much gain (also called depreciation recapture) will you have to claim on your taxes? Do you pay ordinary income tax, self-employment tax, and/or capital gains tax on this gain? 13d) (2 pts.) Below is the IRS depreciation table used by your accountant. Calculate depreciation for the baler to claim for income tax purposes for year 1 and year 2: Depreciation Year Rate 1 18.75% 2 17.41% 3 13.68% 4 12.16% 5 12.16% 6 12.16% 7 12.16% 8 1.52% 9
14) (15 pts. total) Use the simplified Balance Sheet and Income Statement below to answer these questions. Show your work for potential partial credit. BALANCE SHEET 12/31/2010 12/31/2009 12/31/2010 12/31/2009 Current Assets 260,000 240,000 Current Liabilities 190,000 160,000 Non-Current Assets 650,000 610,000 Non-Current Liabilities 220,000 270,000 Total Liabilities 410,000 430,000 Equity 500,000 420,000 Total Assets 910,000 850,000 Total Liabilities and Equity 910,000 850,000 14a) (3 pts.) What is the Current Ratio on 12/31/2010? 14b) (3 pts.) What is the Debt to Asset Ratio on 12/31/2010? INCOME STATEMENT 12/31/2009 to 12/31/2010 Crop and Livestock Sales 570,000 Operating Expenses 360,000 Interest Expenses 40,000 Net Farm Income from Operations 170,000 14c) (9 pts.) Assume the farm family paid themselves $70,000 for their labor & management. i) What is this farm s Return on Assets? ii) What is this farm s Rate of Return on Assets? iii) What is this farm s Profit Margin? 10