Friday, May 21, 2021
The first of two summer conferences focusing on agricultural taxation and farm/ranch estate and business planning sponsored by Washburn Law School is coming up soon on June7-8. The live presentation will be at the Shawnee Lodge and Conference Center near West Portsmouth, Ohio. Attendance may also be online because we will be broadcasting the conference live.
This year’s conference includes a component focusing on the farm economy. I want to focus on that presentation for today’s article. Understanding ag economics is critical to a complete ability to represent a farmer or rancher in tax as well as estate/business planning.
The farm economy and the upcoming Ohio conference – it’s the focus of today’s post.
The Ag Economy
As is well known the general economy is struggling. Of course, the struggles are related to the economy trying to recover from the various state-level shut-downs. But what about the ag economy? Understanding the economics that farm and ranch clients are dealing is critical for tax practitioners and those that advise farmers and ranchers on estate and business planning matters.
So, what are the key points concerning the farm economy right now that planners must understand?
Net farm income. For starters U.S. net farm income was higher in 2020 than it was in 2019. When government payments are included, net farm income was 46 percent higher than in 2019 representing the fourth highest amount for any year since 1970. That’s good news for ag producers, rural communities and the practitioners that represent them. However, it’s also important to understand that 38 percent of the total amount was from government payments and not the private marketplace. That’s also a record – and not a good one. What government giveth, government can taketh away.
Earlier this year, USDA projected net farm income to drop eight percent compared to 2020. But, even with that drop, net farm income would still be 21 percent higher than the 2000-2019 average. So far this year grain prices for the major row-crop commodities (corn, soybeans and wheat) have been soaring. These prices have been driven by strong export demand, tight stocks, weather concerns in South America and the U.S. economy coming out of the various state-level shutdowns.
Cattle market. So far this year, the cattle market has shown improved beef demand as restaurants reopen and exports have been strong. There is also a smaller 2021 calf crop. However, there are challenges on the processing side of the equation with capacity issues and higher feed prices presenting difficulties. In addition, drought in cattle country will always be a concern.
Dairy. As for the dairy industry, demand is showing greater strength and dairy prices are increasing. This can also be a resulting impact of the loss of numerous dairy farms in recent years that lowers production. However, feed cost is wiping out all of the impact of higher dairy prices.
Exports. In 2020, total ag exports were also seven percent higher than they were in 2019. U.S. ag exports to China alone were 91 percent higher in 2020 than they were in 2019, with total ag exports to China being higher in 2020 than at any point during the Obama Administration (or any prior Administration). China is a critically important market for U.S. ag producers. China has approximately 20 percent of global population but only seven percent of the world’s arable land. China must import food from elsewhere. The Trump Administration got serious with China’s global trade conduct, imposed tariffs and other sanctions against it to the benefit of U.S. agriculture. Whether this pattern continues is an open question.
So far in 2021, total U.S. ag exports are up 24 percent compared to last year. A large part of that is due to the increased level of exports to China. But, there are numerous other ag export markets around the world to keep an eye on.
Accounting. What about the farm balance sheet? How is it looking. For starters, U.S. farmland values continue to hold steady if not slightly higher. The primary influencers of land values are commodity prices, government support programs, the supply of land, interest rates and inflation in the general economy. Shocks to one or more of those factors could impact land values significantly.
Farm working capital has seen four straight years of increases after reaching a low point in 2016. However, total farm debt continues to inch upward the U.S. farm debt to asset ratio is at its highest point in about 12 years (though still far below where it was during the height of the farm debt crisis of the 1980s. Overall, farm balance sheets (especially for crop producers) have improved primarily because of higher government payments, higher commodity prices and strong land values.
Prognosticating the Future
What does the future hold for the agricultural sector in the U.S.? For starters, there is a different administration consisting largely of retreads that have been in the bureaucratic swamp for decades. They love to regulate economic activity. While taxpayer dollars may still flow to the sector, that doesn’t mean it will be to support traditional and “ad hoc” farm programs. It’s more likely that taxpayer dollars will flow to support “food stamps” (remember, a record number of people were on food stamps the last time the current USDA Secretary held the position) and “rural development” and conservation programs. Of course, with taxpayer dollars flowing to support conservation activities on farms and ranches comes regulation of private property.
The next Farm Bill comes up in 2023. What will be the focus of the debate? Of course, much depends on the outcome of the 2022 mid-term elections. Will there be an examination of the existing farm programs and how they apply to large farms compared to smaller ones? Will there be an even greater focus on the environment? Will the “waters of the United States” (WOTUS) rule be revisited yet again? What about efforts to regulate carbon? What about the illegal immigration issue and the current policy fostering a wide-open border? What about ethanol production? Recently, the Iowa Governor was quoted as saying, “Every day under normal circumstances hunger is a reality for one in nine Iowans.” Iowa prides itself is being the nation’s leader in ethanol production. In light of that, let the Governor’s quote sink-in. Also, recall where the current USDA Ag Secretary is from.
As noted above, ag trade and exports is in a rather good spot right now. There was an emphasis on bilateral rather than multilateral trade agreements. Will that continue? Probably not. It’s likely that there will be an emphasis on rejoining various multilateral trade agreements. What will be the impact on U.S. ag? What about China? It now has more leverage on trade deals with the U.S.
There are always external factors and policies that bear on the bottom-line of agricultural producers. What are those going to be? In 2015, the Congress passed, and the President signed into law, a $305 billion infrastructure bill. Now, the present (old) Administration is at it again wanting to spend taxpayer dollars on “infrastructure.” I guess that’s an admission that the 2015 bill didn’t work – or maybe the new push for another bill is just an attempt to throw money around to potential voters.
Another factor influencing farmers and ranchers is tax policy. The potential for increased income and capital gain rates, the removal of “stepped-up” basis at death, higher estate and gift tax rates coupled with lower exemptions, and a higher corporate tax rate is significant.
In the general economy, inflation and unemployment are lurking. Fuel (and other input) prices are up in some places by 50 percent since the beginning of the year – a significant input cost for ag producers. That, coupled with record taxpayer dollars flowing into the sector are being capitalized into higher food prices. Providing lower-income people with non-taxable cash has caused them not to seek jobs and has caused unemployment to be higher than what it otherwise would be. The economy is presently characterized by a high level of job openings and high unemployment at the same time. Let that sink in.
As the Congress tosses around trillion-dollar spending bills, it represents spending money that the government doesn’t have. So, the government just makes more by printing it (or borrowing it). The influx of money in the economy makes the dollars that are already there worth less. Remember, the promise was that “no one making less than $400,000 would have their taxes go up.” Ok, but the money you have in your pocket is worth less. Same difference? Not quite. Inflation deals more harshly with lower-income persons than it does with someone of greater wealth and with higher income. Even without factoring in the rise in fuel and food prices, inflation was at 4.2 percent in April, the sharpest spike since 2008.
What do these external factors mean for agriculture? Any one of them can be bad. A combination of them can be really bad. Now is not the time to be buying more things on credit. It’s time to be prudent with the income that is presently there. Pay-off debt. Tidy-up estate plans. Righten the “ship” and get ready. The ride could get rough.
Join us at the Ohio conference either in person or via the online simulcast and join in the discussion. You don’t want to miss this one. For more information and to register, you can click here: https://www.washburnlaw.edu/employers/cle/farmandranchtaxjune.html