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Published January 25, 2011, 02:08 PM

Bismarck specialist helps with FSA plans, succession

FARGO, N.D. — One of the new players in the region’s farm business planning services is — surprise — a farmer.

By: Mikkel Pates, Agweek

FARGO, N.D. — One of the new players in the region’s farm business planning services is — surprise — a farmer.

Jim Hauge 63, of Bismarck, N.D., works as a consultant for Eide Bailly L.L.P., known mostly for its accounting services. Hauge left the farm near Carson, N.D., in 2006, to take a job with the firm, where he helps clients make sure they’re in compliance with Farm Service Agency rules on payment limitations. In some cases, he helps FSA year-end reviews, as well as well as ownership/management succession plans.

Hauge is relatively new to the consulting field, but his lifetime of farming and leadership in commodity organizations — including the hog industry, which is uncommon in the southwest North Dakota community where he farmed — have given him an “edge” in business that he hopes to pass along to others.

Helping find

‘an edge’

Hauge was raised near Carson, N.D. He finished high school in 1965, went to North Dakota State University in Fargo, where he went straight through on quarters, coming home springs to farm and graduating in 1970. After a stint in the Army National Guard, he started farming full time in 1971. He was married to Jody Sullivan of Lisbon, N.D., in 1971. In 1972, they started farming alone on a rented place.

“I had a kind of philosophy that in farming you needed an edge,” Hauge says. “One of my goals was to be fully employed, year-round. To do that, we got into hogs and went into backgrounding calves. Pretty soon, it was more than full time, and we had some people working for us.”

Southwest North Dakota wasn’t exactly the epicenter of the hog country.

In the 1960s, a prominent farmer in his community had been successful in hogs, and became a mentor. Initially, the Hauge hog herd had some disease and genetic issues. In 1974, it was a low year for hog prices, and the Hauges sold everything out bought SPF (specific pathogen-free) stock from Keith Bjerke of Northwood, N.D.

The Hauges started with confinement farrowing, but everything else was outside. In 1976 to ’77, they built a finishing barn. They went to 35 sows, then to 75 sows. By the mid-1990s, they were farrowing 150 to 200 sows. For many years, the Hauges were the sole source of pigs for Missouri Valley Meats of Mandan, N.D., and any over-run was shipped to Sioux Falls, S.D.

Locally grown barley was the main feed supply. In those days, the federal farm program had “bases” established for various primary crops, and so farmers simply had to grow barley.

“It was all feed barley, and there wasn’t an exceptional market for it, so for years, we fed barley,” he says.

Meanwhile, Jody also was involved in the operation. The couple attended their first North Dakota Pork Producers Association meeting in 1977. Jim became the state president in 1983 to 1984. Jody became the editor of the association newsletter, and both served on national boards.

The Hauges employed a person until 1996, but then tried to do it all themselves. Their best year was 1997, but they also realized that, between the hogs and the cattle, they were working more than they wanted.

“Jody said, ‘I said I’d do this for awhile, but I won’t do it forever,’” he says.

So they sold out “the first time” in February 1998 and got out just before the bust year.

Sixty percent of the Hauges’ farmland was pasture.

When the 1996 farm bill came along, farmers were told that production and price supports were going to be “decoupled.”

“To prepare for that, we looked at expanding our feedlot,” Hauge says.

They couldn’t expand significantly where their first feedlot was located, so they found a place to buy four miles away. They bought that in 1995, starting out at 800 to 900 calves and since have expanded to 4,000 head.

Success and succession

Significantly, the Hauges had sons who wanted to return to the farm.

An older son, Jamie, now 38, graduated from high school in 1991. He went on to North Dakota State College of Science and then NDSU, where he graduated in 1995. He went to work in Nebraska and met a woman from Emerado, N.D., who graduated from college in spring 2000, when they returned to the farm.

In 2000, the Hauges resumed their hog operation. They’d remodeled and streamlined the barns to make them more efficient, even as the cattle feedlot was growing. But Jamie’s first wife, Jolene, died in a car accident in 2001. Jamie, a single parent, shifted his work to the calving, and Jim went back to the pig barn. But that fall, the Hauges started to get out of pigs permanently. Jamie remarried in 2004 to Deb.

Meanwhile, a younger son, Clair, now 33, also was interested in returning home. Clair graduated from high school in 1996 and graduated from NDSU in 2000. Clair first worked for Farm Credit Services and then Bremer Bank in Crookston, Minn. As soon as his wife graduated from law school at the University of North Dakota in Grand Forks, they moved to Flasher, N.D. Clair commuted to the farm, and wife Jennifer went the other direction to Bismarck.

In spring 2006, Jim and Jody surprised their sons.

“I told them we don’t need three chiefs. I was 58 years old,” he recalls. “I said that if I want to start doing something else, I need to do it now or people won’t take me seriously. Back then, they didn’t want to see me leave, but now I think they wouldn’t want me to come back permanently. They make their own decisions.”

The pig operation ended in February 2002. The 4,000-head beef feedlot had shifted toward backgrounding. Sometimes, they’ve done custom feeding. This year, they owned them all, roughly in the 3,300-head area. They have a herd of some 800 cows and, since 2001, have done embryo transplant work using 300 cows for “recip” work. The farm now includes more than 5,000 acres of crops.

Switching to new job

Eide Bailly still was doing Hauge’s farm taxes. In February 2006, he was meeting with his tax man, Steve Eckroth, and asked him a question.

“I asked if he thought anybody would hire someone like me, at 58. He said ‘We would.’ He gave me a call after tax season and I went to work for them in October 2006,” Hauge says.

Initially, Eide Bailly had expected Hauge to simply work with farmers on tax preparation. That’s largely what he did in 2007 — prepared taxes for later review by accountants.

But before Hauge got to work, Eide Bally decided he’d also work with farmers on succession planning. Hauge went to some trade shows and to Annie’s Project meetings, an Extension Service program for farm women. Eventually, Hauge saw there were more potential clients in the Fargo and Aberdeen, S.D., areas.

Hauge also worked with farmers in applying for the CSP — first the Conservation Security (later, Stewardship) Program.

“Our farm had always been big in conservation, going back to the Soil Conservation Service and its Great Plains Program. In 1985, when the Soil Conservation Service (now Natural Resources Conservation Service) came out with its programs for rotational grazing, we’d gotten into that pretty big — a lot of cross-fences.”

In 2008, Hauge worked in CSP work, but in 2009, he expanded into the FSA compliance work, helping more than 100 clients prepare the so-called “902 forms” for payment limitation work.

FSA compliance matters

Most farmers don’t take Farm Service Agency compliance issues seriously enough because they really don’t know the consequences, Hauge says.

“The FSA takes it very seriously,” Hauge says.

A year-end review is “can be more important to most farmers than an IRS audit would be, from the simple fact that they could have more at risk.”

He hears some farmers say they’d be willing to give up their FSA direct payments, but if they get into a drought or other protracted disaster, they can quickly max out on their disaster payments. If the FSA audit shows problems, the farmer could be asked pay tens of thousands of dollars because the farm is out of compliance on payment limitation matters.

There are some common problems.

Farmers with an “entity operation” — a general partnership, a joint venture, corporation or limited partnership — anything more than a sole proprietor — can have problems.

“It’s been our experience that 50 percent of those entity operations have some kind of ‘issue’ and they don’t know it,” Hauge says.

When the FSA does a year-end review, the local person in the county who helped the farmer fill out the paperwork to begin with will not be the one doing the review. Reviews are done by a committee of three FSA employees from outside counties, maybe several counties away.

“The biggest thing is that in general partnerships and joint ventures, how do farmers pay themselves?” Hauge says. “If their distributions are not commensurate with their ownership, they are automatically out of compliance. The rules are very specific on that.”

How they pay themselves

Hauge uses his own family as an example. They had a consultant from Fargo help them with a succession plan. It was just him and Jamie — before Clair was added.

“We were trying to develop a succession plan for our own operation, and we asked him, ‘Now, if Jody and I don’t take anything out of this partnership — this was our idea, except for family living draws — how do you take the income tax? The consultant told us we’d take a draw from the partnership. The problem was that I was in a higher income tax bracket than my sons. Until I started doing this work, I didn’t realize we could potentially have been out of compliance for FSA rules.”

A similar thing is true for land payments. One partner might need to take a draw to make a land payment, or has built a house, or has kids in college, or medical expenses. But if he draws more out of the partnership, the operation may be out of compliance with the Farm Service Agency.

“Farmers don’t know this,” Hauge says. “They have no way to know it because it’s all in the fine print in the back.”

To be in compliance, if a farm has 50-50 partners the draws must be equal. If the partnership is 75-25 the draws have to be in that proportion.

There are capital contribution rules. A grandfather starting his grandson farming, for example, may rent land to him and cosign the loans. That capital would be considered “tainted” because the grandfather has an interest in the operation, because he’s renting land to the grandson. Probably out of compliance.

“Those are just some of the simple things that jump out at you,” Hauge says. “Basically, you don’t realize how important they are.”

In 2010, Hauge has heard the number of FSA year-end compliance reviews will be greater in number than in 2009. “I haven’t talked to North Dakota, but in South Dakota, they’re up considerably,” Hauge says. “The 2009 year-end reviews were the first in the 2008 farm bill. It was the first year people had to fill out the new forms.”

Succeed on succession

Hauge also helps farmers in succession planning.

“Generally, I sit down with people and try to find out what their goals are — instead of putting them in one-box-fits-all. I try to give them options, recognizing that most people are reasonably intelligent. If they see options, usually they can pick the right option for them.”

If a family has a son who wants to come back on the farm, for example, they must decide, should they 1) start them as an employee of the partnership; 2) bring them into the existing partnership as a partner, which means decisions on what percentage the partnership should be, and whether the percentage is paid for or gifted; 3) have him start a new partnership with a checkbook and a loan; or 4) have him go off on the side, farm separately and trade labor for equipment.

Hague lists the pros and cons and considers whether retirement is a goal or even possible for the older generation. Another issue is how to help the next generation with management resources, as well as monetary resources.

Farmers should be clear-eyed about what they’re doing and whether they want to continue farming at all. A farmer in their mid-50s, for example, may be earning $50,000 a year on the farm. But if the cash rent value of that farm is $40,000, in reality, he’s making $10,000 a year.

This winter, Jim and Jody have done extension and other presentations on succession.

To start with, they discuss why people don’t transfer ownership in an orderly way.

- Control.

- No confidence in next generation.

- Tax issues.

- Conflicts.

- Don’t know where to turn for help.

- Uncertainty about whether the operation is large enough to support another family.

Every case is different. In the Hauges’ case, they decided they didn’t want “any junior partners,” meaning their sons would have equal shares.

There also has to be “fair vs. equal” decision. Their daughter, who lives in the Twin Cities area, has a decent job. She’ll get a share of the land, but none of the operations — things like equipment, or cattle inventory.

“We decided that’s going to go to our sons who decided to come back,” he says.

“We’ve always been kind of big on planning,” Hauge says. “It’s kind of like creating your own destiny.”

Now he’s helping others do the same.

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