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:: General Livestock - Chapter 8 - Swine Industry Issues   Introduction The reference used for this section is Raising Pigs Successfully, Kathy and Bob Kellogg, 1985, Williamson Publishing Co., Charlotte, VT. Although designed for the small hog farmer, the information and concepts combined with information from government sources has proven invaluable. The swine breeding industry is undergoing a greater level of stress than any other livestock segment. With major legislation in several states related to waste and odor management, the industry is facing a period of adjustment to maintain compliance with the law. This adjustment will likely result in additional capital investment requirements which some businesses may not be able to afford. In NPPC's (National Pork Producers Council) Swine Care Handbook for Pork Producers Using Environmentally Controlled Housing, five goals for waste management systems are listed. They are maintaining acceptable levels of health and production through clean facilities; proper management of water, soil, and air resources; minimizing odors and dust; minimizing vermin and parasites; and complying with local, state, and federal laws, regulations, and policies. In general, if the fifth goal is met, the others usually follow. Swine operations are individual ventures. The extensive feedlot operations for cattle are not duplicated due to high susceptibility to disease. Access to actual facilities will be closely controlled to prevent the introduction of disease into the herd. Some operations will require special coveralls upon entry. Swine will be brought together for short stays at auction barns. As with other livestock a variety of breeds are available each with its own characteristics and temperament. Consumer and market demand will determine the choice made by the breeder. Let the farmer tell you what breed is used in the operation and why. Whether Berkshire, Chester White, Duroc, Hampshire, Yorkshire, Landrace, Poland China, Hereford, or any other of a number of breeds, the farmer will likely enjoy describing the reasons for his/her choice. The facilities may consist of the simplest hutch and well-built pen or the high-tech, computer- controlled, totally enclosed confinement building. Considerations will include finances, extent of operation, and health and waste factors. Daily attention is required for hog operations for feeding, health analysis, facility condition and waste processing. Large operations will likely be more modern, enclosed facilities with automation for many functions, such as feeding and waste removal. Smaller operations may utilize pasturing to some extent during moderate weather. If used for clearing, movement from one pasture to the next will take place every 2 to 3 weeks. Due to the rooting process, the use of hogs on potato or other root crop after harvest will generally provide enough food for the hogs and a well cleared field in the process. In the breeding operation, most farmers will limit introduction of new animals and concentrate on internal reproduction. Breeding goals can be expressed using the following statistics. Of the breeding sows, 90 percent will produce 2 litters per year with an average of 12 piglets per litter. Loss of 25 percent of piglets before weaning due to still births or early death is normal. Therefore, production in a herd of 100 sows could be estimated as follows:   Number of sows 100 Average reproduction 90% Producing sows 90 Litters per sow/year 2 Litters per year 180 Piglets per litter 12 Piglets per year 2,160 Survival rate 75% Surviving to weaning 1,620 A boar will probably be kept on site for operations with 10 or more sows. Stud servicing is dangerous regarding disease transmission. Boars can service one sow daily when under one year of age and double that when fully mature. Young females are called gilts until the second pregnancy and are then known as sows. Gilts can reproduce as early as 9 months of age but are often held back until a full year old to increase the number of eggs and, thus, the size of the litter. Gestation is an average of 114 days. Piglets can be weaned early by using a starter mash at 1 to 2 weeks. By 3 to 6 weeks, the weaning process will begin with a completion goal of 8 weeks in order to prepare the sow for the next breeding process. Boar piglets should be castrated, barrowed, within 2 weeks of birth. Barrows will be fattened for slaughter. Gilts may be maintained for future breeding. Teeth clipping, tail docking, and ear notching are all processes which take place in the first few days of life. If the operation is designed for fattening, weaners, likely already barrowed, will often be purchased. Care will be taken to isolate new acquisitions to prevent spread of disease. The facilities may include "misters" or "foggers" to spray fine water particles and assist in the cooling of the animals during potential heat stress periods. Feeder pigs are sold at an average weight of 40 - 60 pounds and an age of 6 - 8 weeks. Barrows and gilts are usually sold at market weights of 220 - 280 pounds at the age of 5 - 6 months. Sows sold as breeding stock will weigh 300 - 700 pounds with price quotes categorized as under or over 500 pounds. Boars will weigh from 300 pounds up. - Return to Table of Contents -   Industry Facts The following is a sample of price quotes. See chapter 4, Cattle Industry, for information on historical prices. South St. Paul, Mn Tuesday, March 18, 1997 USDA-AMS T.E.A.M. Electronic Feeder Pig Auction Prices per cw t Feeder Pigs US 1-2 Head Weight Avg Wt Price Avg Price 420 40 - 44 41.5 129.00 - 151.00 146.32 170 45 - 47 45.5 127.00 - 140.00 132.76 25 50 - 50 50.0 119.00 - 119.00 119.00 180 55 - 55 55.0 127.00 - 127.00 127.00 All pigs that are sold through "TODAY'S ELECTRONIC AUCTION MARKET" (T.E.A.M.) system are located on farms that have been rated by the T.E.A.M. system. This rating system is based on 30% health breeding, 20% feeding and 20% overall management. Source-USDA Livestock and Grain Market News in South St. Paul, Mn 612/451-1565 South.St.Paul,MN Tuesday, Mar. 18,1997 USDA-AMS Barrows & Gilts: Compared to Monday, steady to .50 lower.   US 1-3 220 - 250 lbs 48.00   250 - 260 lbs 47.50 - 48.00   260 - 270 lbs 46.50 - 47.50 US 2-3 270 - 280 lbs 45.50 - 46.50 Sows: weights under 500 lbs steady; over 500 lbs steady to 2.00 higher. US 1-3 300 - 450 lbs 40.50 - 41.50   450 - 500 lbs 44.00   500 - 550 lbs 47.00   550 - 700 lbs 48.00 Boars: 300 - 700 lbs 40.50 Source-USDA Market News South St. Paul, MN 612/451-1565 - Return to Table of Contents -   Issues IRC Section 168 Hog facilities are used extensively in examples of qualifying or non-qualifying single-purpose agricultural facilities. The primary focus is on the economic feasibility of use in other applications after construction or actual use of equipment or stored items for other purposes. Hogs used for breeding are 3-year property for MACRS. - Return to Table of Contents -   Chapter 9 - Ratites and Alternative Livestock Issues Ratites (Ostrich, Emu, Rhea) Introduction In the last few years, the Service began receiving inquiries from the public, as well as the practitioner community, concerning inconsistencies with the market segment of "exotic animals." The inquiries started with questions concerning the depreciable life of these animals. Limited inquiry and research revealed that there were many more issues that warranted additional research into the area. We have contacted various organizations, universities, zoos, and other governmental agencies to gather information concerning this market segment. The purpose of this chapter is to provide some basic information concerning the industry and the tax issues that are present. Industry Facts Item Ostrich Emu Rhea Life Expectancy 50 years+ 35 years+ 20 years+ Size 7-9 ft. 5-6 ft. 4-5 ft. Weight 350-450 lbs. 125-150 lbs. 50-80 lbs. Maturity (Breeding Age) 2-3 years 2-3 years 2 years Eggs Per Year 30-50/year 20-40/year 35-40/year Slaughter Age 12-14 mo. 12-14 mo. 12-14 mo. Dress Weight 80-100 lbs. 25-30 lbs. 20-25 lbs. Retail Price of Meat $12-$14/lb.     Cost (May 1994) Eggs $ 1,000 $ 1,000 $ 250 Chick $ 6,000 $ 4,000 $ 2,000 Yearling $12,000 $10,000 $ 4,500 2 year old $25,000 $15,000 $ 7,000 Proven Breeder Pair $45,000+ $30,000 $10,500 - Return to Table of Contents -   End Products Up until 1994, the primary purpose for raising these birds was to establish a breeding market. There has always been a limited market for feathers and leather, however the intent of the industry now is to saturate the country with breeding stock in anticipation of a viable meat market. Cost figures are for 1994 and prior years. These prices have decreased significantly in the last year. However for the years under current examination the above amounts should be fairly accurate depending on the area of the country. All of these birds are quite tolerant to the upper Midwest winters and are also raised in Canada. Shelter is required for the chicks to keep them warm and dry. Special fencing/pens are used for the adult birds - usually 5 to 6 ft high. A breeding pair of ostriches require 1/2 to 2 acres of land. An Emu pair needs a pen approximately. 30 x 50 ft. Rheas need pens of 50 x 100 ft. There are many retailers around that sell specialized equipment and supplies for these birds - incubators, hatchers, transportation equipment, feeders, commercial feed and even insurance. - Return to Table of Contents -   Issues IRC Section 1231 Section 1231(b)(3)of the Code specifically excludes "poultry" from the definition of livestock for purposes of Section 1231. Treas. Reg. section 1.1231-2(a)(3) broadens the term "poultry" to include "other birds." Recent communications with the Office of Chief Counsel indicate that the ratite family of birds (ostriches, emus, etc.) are not IRC section 1231 property. This exclusion from 1231 treatment only affects the tax treatment of the gain or loss realized upon the disposition of the animal. Publication 225, Farmer's Tax Guide, states, "* * * livestock does not include chickens, turkeys, pigeons, geese, emus, ostriches, rheas, or other birds. This language is causing some confusion with taxpayers. Some taxpayers feel that this exclusion from the definition of livestock permits them to expense eggs and/or chicks similar to the treatment of chickens. It is our position that ratites should be treated as livestock for other tax purposes, (IRC sections 162, 168, 179, etc.). The life expectancy, cost, and mating practices of these should not be treated the same as chicks and geese. Many states have, in recent years, changed the classification of these birds to "livestock" for state regulatory purposes. It appears that the differences may continue to cause some confusion. - Return to Table of Contents -   IRC Section 61 Sale of chicks or yearling birds as breeders has been the primary source of income for these breeders. With the crash of the breeder market and the development of a slaughter market income sources will shift and stabilize. Contracts with specific butcher operations will be likely with prices dependent on the development of the overall markets. The primary product from the operation, other than the birds, which will be separately marketable is the egg. Infertile eggs can be cleaned and sold intact for art or decorative uses. IRC Section 168 Ratites are not specifically described in any asset class and thus default into the 7-year GDS class-life category. The ADS recovery period is 12-years. Fences, rearing pens, incubators and hatchers are also 7 year property. Some taxpayers are asserting that the hatchery building is a single-purpose agricultural structure (similar to hog-confinement facilities). Facts and circumstances control and if eligible the building would be 10 year MACRS. However many taxpayers are merely converting old barns, sheds, etc. to hatchery facilities - these probably would not qualify as single purpose structures. - Return to Table of Contents -   IRC Section 179 These birds probably qualify for the election under IRC section 179 (See PLR 8817003). The issue encountered is whether the purchased bird/chick/egg are being "placed in service". The ratite breeding stock should not be expensed under IRC section 179 unless they are "placed in service" during the year. Immature birds and eggs are not eligible for the 179 expensing election. IRC Section 195 Some ratite producers were not in the business of farming prior to acquiring their birds. There are conflicting opinions as to the applicability of IRC section 195 to "new" farmers. Some authorities feel that a taxpayer is not yet engaged in the animal breeding business until the animals are placed in service as breeding stock. Thus, if the taxpayer acquires ratite chicks to be raised for breeding, farm expenses are capitalized until the animals are ready for breeding. This issue is unsettled (See IRC section 195, Treas. Reg. section 1.162-12, and the repeal of the capitalization rules under Section 263A for pre-productive expenses on animals in the Technical and Miscellaneous Revenue Act of 1988). - Return to Table of Contents -   IRC Section 469 In the (former) Omaha District, we have seen taxpayers investing in ratite farms as joint venturers, partners in limited partnerships and even a limited liability company. IRC section 469 (passive activity loss) rules apply. - Return to Table of Contents -   Alternative Livestock Introduction In addition to ratites previously discussed, there is a never ending stream of specialized animals being produced on farms in various parts of the country. Many of the animals are marketed for pets, sport, or show animals. Some are marketed as work or food animals while others have limited marketability due to restrictions related to the classification as "endangered" species. Others are strictly raised by those interested in the animal for no economic purpose. A few of the animals you may encounter on the "alternative livestock" farms include miniature donkeys, miniature horses, the llama family (vicuna, guanaco, alpaca, and llama,) deer, elk, reindeer, bison, miniature pigs, sport sheep, lemurs, big cats, wallabies, wallaroos, monkeys, parrots, alligators, and munchkin cats. The list is endless. Specialized publications are available for buyers and sellers of these animal varieties. Auctions for these animals are limited to a few locations throughout the country resulting in high travel and transportation costs or alternative marketing methods (video, INTERNET, and nation-wide advertising.) Costs of beginning operations is high depending on the special requirements of the species in housing, feed, medical attention, and (potentially) import fees and related expenses. Risks of loss are resultantly high. Additional sources of income are derived by the active farmer with facilities for feeding and boarding animals in which others have invested. These investors will likely be subject to passive activity loss limitations and should be the subject of Form 5346, Examination Information Reports when encountered through audits of active farms. - Return to Table of Contents -   Issues IRC Section 1231 Determine if the animal qualifies as "livestock" within the definitions provided in the code. Look at considerations of whether the operation qualifies as a "farm." IRC Section 61 Watch for all possible sources of income. Depending on the animal, fees for tours may be a source of income. Feathers from some birds may bring income as decorator and designer item. IRC Section 168 Animals not specifically described in any asset class default into the 7-year GDS class-life category. The ADS recovery period is 12-years. If purchased for resale, the animals are not eligible for any depreciation. - Return to Table of Contents -   IRC Section 179 Immature animals purchased for breeding are not eligible for IRC section 179 expensing election. Determine the date the animal was placed in service. IRC Section 195 See discussion under Ratites for this consideration. IRC Section 469 IRC section 469 (passive activity loss) rules apply and should be carefully considered - Return to Table of Contents -

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