The Big Mac and the Dollar . . .

Economic Tidbits 12.18.17

“The Big Mac and the Dollar” may read a bit like the title of a children’s fairy tale (i.e. Jack and the Beanstalk), but it isn’t.  Instead, it’s an agricultural economist’s not-so-clever way of introducing a discussion on the value of the dollar.  Nebraska agriculture relies on exports, and the value of the dollar is a key determinant in determining the competitiveness of Nebraska agricultural products in international markets.

The Economist magazine created the Big Mac index as a way of measuring the value of the world’s currencies relative to the U.S. dollar.  The Economist states, “The index is based on the idea of purchasing-power parity, which says exchange rates should move towards the level that would make the price of a basket of goods the same in different countries.”  The basket of goods chosen by the magazine to compare across countries is a McDonald’s Big Mac.  The cost of the hamburger in different countries is converted into U.S. dollars and the local cost compared to average U.S. cost to determine the relative value of each currency.  Countries where the hamburger costs more compared to the U.S. have currencies more expensive than the dollar; and countries where it costs less have currencies less expensive relative to the dollar.

The Economist found the average cost of a Big Mac in four U.S. cities was $5.28.  According to the index, the cost of a Big Mac in Switzerland, Norway, and Sweden is greater than the cost in the U.S., thus these countries’ currencies are more expensive relative to the U.S. dollar.  In all other major countries, particularly in some major agricultural competitors (i.e. Canada, Brazil, Australia, and Russia) the Big Mac costs less, indicating a currency cheaper than the U.S. dollar.  Based on the index, the value of the dollar remains high but the gaps between the dollar and other currencies narrowed since the last time The Economist calculated its Big Mac index, a positive sign for U.S. exports.

Big mac and dollar

Most observers believe the U.S. dollar will continue to drop in value through 2018.  Economic growth in other countries is relatively strong, putting upward pressure on other countries’ currencies.  Also, the dollar continues to remain relatively high historically, suggesting its due for a correction.  All in all, a continued decline in the value of the U.S. dollar in 2018 should work to support growing U.S. agricultural exports.  (The big Mac index: The Mac strike back, the dollar’s decline is a small victory for burgernomics, The Economist, Jan. 20th, 2018.)

 
Jay RempeJay Rempe is the senior economist for Nebraska Farm Bureau. Rempe’s background in agricultural economics, years of experience in advocating at the state capitol, and a firm grasp of issues allow him to quantify the fiscal impact of a regulatory proposal, and provide an in-depth examination of key issues affecting Nebraska’s farmers and ranchers.

2016 Farm Program Payments . . .

Economic Tidbits 12.18.17

Nebraska crop producers received $646 million in Price Loss Coverage (PLC) and Agriculture Risk Coverage—County (ARC-CO) payments last fall for the 2016 crop year.  In total, the USDA distributed $6.9 billion in payments to participating producers under these two programs.

The maps below show the final payment rates in each county for combined yield, irrigated, and non-irrigated rates under the ARC-CO program for corn, soybeans, and wheat.  In Nebraska, 97 percent of farms producing soybeans participate in ARC-CO, 95 percent of farms producing corn participate, and 65 percent of farms producing wheat participate.  The average ARC-CO payment per base acre for the 2016 crop year was $53.89 per acre for corn, $5.65 per acre for soybeans, and $11.46 per acre for wheat.  As shown on the map, many farmers were in counties which did not receive payments under ARC-CO for soybeans.  In addition, farmers in many counties with separate irrigated and non-irrigated corn yields did not receive payments for non-irrigated corn.

 

Dr. Brad Lubben, agricultural economist at the University of Nebraska-Lincoln, expects payments under ARC-CO for the 2017 and 2018 crops to be much less because average prices for program commodities have fallen.  He projects no payments for soybeans or sorghum for this year, but the lower prices will trigger substantial payments for those wheat and grain sorghum producers who enrolled in the PLC program.  Lubben projects total crop program payments for this year (2017 crop) will equal $200 million and will be less than $100 million for the 2018 crop year.

 

Jay RempeJay Rempe is the senior economist for Nebraska Farm Bureau. Rempe’s background in agricultural economics, years of experience in advocating at the state capitol, and a firm grasp of issues allow him to quantify the fiscal impact of a regulatory proposal, and provide an in-depth examination of key issues affecting Nebraska’s farmers and ranchers.

What’s Ahead for 2018 . . .

Economic Tidbits 12.18.17

The USDA expects prices for corn, cattle, and soybeans to be off a bit in 2018.  Prices for wheat and hogs are expected to be higher.  Given the large production levels of all these commodities in recent years, prices, while soft, have been stable due to relatively strong demand, boosted in part by robust export markets.  The strong demand needs to continue, and, thus far, signs point to demand remaining strong.  For example, Jim Robb, director of the Livestock Market Information Center, recently said the average American is expected to eat 219 pounds of red meat and poultry this year, the highest level since 2007.

bigstock-field-5378624.jpgIn years past, crop producers could count on farm program payments to help offset the sting of lower prices.  This won’t happen in 2018 as payments will be substantially lower.  Dr. Brad Lubben, an extension economist at the University of Nebraska-Lincoln, estimates program payments received by Nebraska producers could be $400 million less next year.

Recent forecasts suggest Nebraska net farm income for 2018 will grow 5.9 percent.  Dr. Lubben expects net farm income to settle between $4.0 and $4.5 billion through 2020.  All this suggests the continued need for cost cutting, working with financial institutions, strategic marketing, and financial planning to help continue to navigate through the soft prices.  Several factors will influence the profitability of agriculture in the coming year:

U.S. Economy:  The U.S. economy has momentum.  The unemployment rate, 4.1 percent, is at the lowest rate since 2007, hourly earnings were up 2.5 percent in December compared to the prior year, personal income levels are growing, and the country’s GDP is expected to grow 2 percent in 2018.  A growing economy means growing demand for food, especially meats.  The positive outlook for the U.S. economy should be a plus for agriculture.

World Economy:  World economic growth is expected to be around 2.7 percent in 2018, helping boost export demand for U.S. agricultural products.  Pay special attention to the economies of Canada, Mexico, China, Japan and South Korea, typically Nebraska’s largest customers for agricultural goods.  The economies in each of these countries are expected to grow, with China expected to grow at around 6 percent.  These growing economies should provide opportunities to sell Nebraska agricultural products.

Trade Policy:  The biggest potential threat to agriculture remains the trade policy of the Trump Administration.  The U.S. is negotiating with Canada and Mexico to modify the North American Free Trade Agreement (NAFTA).  President Trump has threatened to withdraw from the agreement if he is not satisfied with the outcome of the negotiations.  President Trump has also said he wants to renegotiate the U.S. trade agreement with Korea (KORUS).  These trade agreements have been important contributors to growth in Nebraska’s exports.  Watch the actions of the Trump Administration on trade policy.

Value of the Dollar:  Changes in farm income tend to run counter to changes in the value of the dollar.  The value of the dollar today is roughly 10 percent less than it was in early 2017.  No doubt the drop contributed to the competitiveness of U.S. agricultural products and helped boost exports.  A growing economy and higher interest rates will tend to push the dollar higher.  Watch the dollar in 2018 to see if the decline in value continues.

Federal Taxes:  Congress passed, and President Trump signed, major tax reform legislation last month.  Early signs point to the reform legislation resulting more dollars in producers’ pockets through tax savings.  The extra dollars will help offset the cash flow squeeze.

 

Jay RempeJay Rempe is the senior economist for Nebraska Farm Bureau. Rempe’s background in agricultural economics, years of experience in advocating at the state capitol, and a firm grasp of issues allow him to quantify the fiscal impact of a regulatory proposal, and provide an in-depth examination of key issues affecting Nebraska’s farmers and ranchers.

To Sell, or Not to Sell to Coops, That is the Question

Economic Tidbits 12.18.17

Two tax code changes in the tax package passed last December by Congress are receiving much attention in the countryside.  The first change concerns the tax treatment of producers’ sales to coops.  The second concerns the loss of the Section 1031 exchanges for farm machinery and equipment.  Let’s examine these changes in more detail.

Section 199A of the tax code contains two deductions which could affect taxes paid by farmers and ranchers: a “regular” deduction and a “coop” deduction.  Under the regular deduction, producers can deduct 20 percent of any “pass-through” income from a Schedule F, Subchapter S, or partnership from taxable income.  Limits to the deduction apply to incomes above $315,000 for those filing joint returns, and the deduction is limited to 20 percent of the net of taxable income less capital gains and cooperative distributions.  Under the coop deduction, producers who sell to a coop, and are members of the coop, can deduct 20 percent of total payments received from coops from taxable income.  The deduction is limited to 100 percent of the net of taxable income minus capital gains.  Note, the deductions are only applicable if a producer has taxable income and producers can only utilize one of these deductions, and not both.  Finally, the Section 199A deduction does not reduce self-employment income.

The future of the coop deduction is very much in flux.  The IRS has not issued final rules and private grain companies are lobbying Congress hard to remove the provision.  The Congressional authors of the deduction have admitted it was not their intent to give coops a competitive advantage and have pledged to find a solution.  Yet it remains to be seen whether the political leverage can be mustered to enact a change in Congress.

The federal tax bill also eliminated Section 1031 exchanges on personal property including tractors, combines, tillage equipment, etc.  Removal of the 1031 exchange was a trade-off to the increased expensing levels contained in the bill for bonus depreciation and Section 179.  There are a couple implications of this change that producers should be aware.  First, the elimination of 1031 exchanges on equipment can have implications for self-employment taxes.  Since the trade-in value received on equipment will now be treated as ordinary income, and the depreciation expense is still reported on Schedule F, there will be a reduction in self-employment taxes.  Second, because of how Nebraska determines the taxable value of personal property, the removal of Section 1031 exchange will increase the taxable value on new equipment purchases and consequently, the amount of personal property taxes paid.

As always, changes in the federal tax code will affect each taxpayer and farm or ranch operation differently given their unique circumstances.  Before making any dramatic changes to a farm or ranch operation or marketing plans, producers should always discuss such changes with a tax preparer or accountant.

 

Jay RempeJay Rempe is the senior economist for Nebraska Farm Bureau. Rempe’s background in agricultural economics, years of experience in advocating at the state capitol, and a firm grasp of issues allow him to quantify the fiscal impact of a regulatory proposal, and provide an in-depth examination of key issues affecting Nebraska’s farmers and ranchers.

Federal Tax Reform: Property Taxes Would Still Be Deductible . . .

Economic Tidbits 12.18.17

Lawmakers moved forward on federal tax reform after negotiators agreed to language in a conference report.  Both the House and Senate are voted on the conference report this week.  Many farmers and ranchers continue to ask whether property taxes paid on agricultural land, buildings, and equipment in their farm or ranch operations could still be deducted.  Yes—the conference report does not change the ability to deduct property taxes as a business expense by farmers and ranchers on Schedule F, Schedule E, or Schedule C.  The report does establish a $10,000 limit on the deduction for state and local income and property taxes, but the limit only applies to itemized deductions claimed on Schedule A filed by individual filers.  Even though most farmers file income taxes as individuals, business income from a farm or ranch is reported on Schedule F, E, or C, where property taxes can still be deducted as a business expense.

 

Other tax provisions of interest to agriculture include:

  • Doubles the standard deduction for individuals to $24,000 for joint filers; maintains seven tax brackets; adjusts tax rates; eliminates personal exemptions.
  • Increases the Section 179, small business expensing, limit to $1 million and increases the level at which the deduction begins to phase out to $2.5 million. Indexes limits to inflation.
  • Allows businesses to fully and immediately write off business investments through 2022. After 2022, provision is phased out until it is eliminated in 2027.
  • Shortens the depreciation period for farm equipment and machinery to 5 years.
  • Limits the interest deduction for businesses with more than $25 million of gross receipts.
  • Reduces from five to two the number of years net operating losses can be carried back.
  • Doubles the estate tax deduction to $11 million per individual and indexes the exemption for inflation. Provision sunsets Dec. 31, 2025.
  • Continues stepped-up basis.
  • Continues like-kind (1031) exchanges for real property, but eliminates it for equipment and livestock.
  • Allows individuals operating pass-through businesses (sole proprietorships, partnerships, or Subchapter S), to deduct up to 20 percent of the income generated by a pass-through entity from taxation with some limitations. Provision sunsets Dec. 31, 2025.
  • Reduces to zero the ACA tax penalty for individuals without health insurance.

 

Many farmers and ranchers should see reduced taxes under the provisions of the tax reform bill.  Most farmers and ranchers file as individuals, and roughly 78 percent of farm filers currently claim the standard deduction.  The doubling of the standard deduction, then, would reduce the income subject to taxation.  However, the loss of the personal exemption would offset some of this benefit, especially if a filer has multiple children, but the doubling of the child tax credit could help.  Excluding 20 percent of pass-through income, along with the equipment expensing provisions, would also reduce the amount of income subject to tax.  Both could be helpful in helping producers cash flow their operations given the state of today’s agricultural economy.  Finally, the doubling of the exempt amount for estate taxes would reduce the number of farmers and ranchers’ estates subject to the tax, and reduce the planning expenses for others.  One negative in the plan, though, is many of the provisions are temporary due to sunset in 2025, meaning another debate in a few years over many of the same tax issues.

 

Jay RempeJay Rempe is the senior economist for Nebraska Farm Bureau. Rempe’s background in agricultural economics, years of experience in advocating at the state capitol, and a firm grasp of issues allow him to quantify the fiscal impact of a regulatory proposal, and provide an in-depth examination of key issues affecting Nebraska’s farmers and ranchers.

Federal Tax Saga Enters Next Chapter . . .

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The federal tax reform saga has turned a page and is moving into the next chapter in the U.S. Congress.  On the House side, the Ways and Means Committee advanced H.R. 1, the Tax Cuts and Jobs Act, to the House floor with a committee amendment.  The full House is expected to take up the bill later this week.  On the Senate side, Senate Republicans last week released a draft of a reform proposal which differs markedly in some provisions with the House plan.  The Senate plan will be taken up by Senate Finance Committee this week.

U.S. Capitol night2The Ways and Means Committee amendment . . . Perhaps the most significant change in H.R. 1 for farmers and rancher with the committee amendment concerns the treatment of pass-through income.  The initial draft of H.R. 1 created a 25 percent rate on a maximum of 30 percent of pass-through income.  The committee amendment instead creates a 9 percent rate, phased in over five years starting with 11 percent, on the first $75,000 in pass-through income for any person earning less than $150,000 in income from the business.  The 9 percent rate is phased up to 12 percent (the lowest rate for individuals under the proposal) for income levels above $75,000 and fully phased out at $225,000.  The committee amendment also clarifies farmland rental income would not be subject to self-employment taxes.

The Senate plan . . . For individual filers, the plan would maintain seven tax brackets and adjust the rates slightly.  It would repeal the deduction for state and local taxes, including property taxes, claimed by individual filers on Schedule A.  In tax year 2015, Nebraska individual filers claimed deductions of $145 million for state and local taxes-of this, $30 million was for real estate taxes; $1.2 million for sales taxes; and $109 million for state income taxes.  Itemized deductions for home mortgage interest for homes valued up to $1 million and medical expenses would be maintained.  The plan would also double the standard deduction and double the estate tax exemption.

The Senate plan . . . For businesses, the Senate plan lowers the corporate tax rate to 20 percent, but not until 2019.  The bill would also establish a 17.4 percent deduction for pass-through income based on the Section 199 domestic manufacturing deduction.  It is unclear how these proposed changes would affect farm and ranch taxes, particularly as the plan also repeals the Section 199 deduction.  More information is necessary to fully analyze potential impacts.  The Senate bill would allow equipment put in service before 2023 to be fully expensed, and expands the Sect. 179 business expensing to $1 million in property.  The present limit is $500,000.  And finally, cash accounting would continue for businesses with less than $25 million in gross receipts and businesses would be able to deduct state and local taxes paid by the business as an expense.

Both Houses of Congress have pledged to have legislation passed before the end of the year.  No doubt there will be several more page-turning chapters left in the federal tax reform saga.   Stay tuned for how the twists and turns could impact agriculture producers’ bottom lines.

 

Jay RempeJay Rempe is the senior economist for Nebraska Farm Bureau. Rempe’s background in agricultural economics, years of experience in advocating at the state capitol, and firm grasp of issues allow him to quantify the fiscal impact of a regulatory proposal, and provide in-depth examination of key issues affecting Nebraska’s farmers and ranchers.

Property Taxes Can Still Be Expensed . . .

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Last week the House Ways and Means Committee released its long-awaited federal tax reform proposal.  The proposal would change how farmers and ranchers are taxed both as individuals and as businesses.  Many farmers and ranchers are wondering if property taxes paid on land, buildings, and equipment could still be expensed as business expense under the proposal.  Yes-the ability to deduct property taxes as a business expense by farmers and ranchers on Schedule F would continue.  The changes made to the state and local taxes deduction only applies to itemized deductions claimed on Schedule A filed by individuals.  The deduction for state income or sales taxes would no longer be allowed, but property taxes of up to $10,000 on the principal residence could be deducted.  The limit would, however, apply to any property taxes deducted on a farm or ranch residence claimed on Schedule A.  The average tax rate paid on residential property in Nebraska was roughly 2.0 percent in 2016.  At that rate, the limit on property tax deductions would affect Nebraskans with homes valued at more than $500,000.

Wheat Field2One of the bigger changes proposed under the plan affects “pass-through” entities like sole proprietorships, partnerships or S-corporations.  Today, income from pass-through entities is reported on individual returns and taxed at individual rates.  Under the proposal, such business entities could claim 30 percent of the pass-through income as a “return to investment” and be taxed at a maximum rate of 25 percent. The remaining 70 percent would be taxed at individual rates like today.  It is unclear whether the 25 percent tax rate is a flat-rate, or if rates would phase-up until reaching that level.  This provision could potentially reduce taxes on farm business income depending on where individuals fall in terms of brackets and rates.  It has been suggested that nearly one-half of the farm and ranch operations in Nebraska could experience tax reductions with this provision.

A couple other provisions in the proposal are worth noting.  First, the plan would allow businesses with less than $25 million in gross receipts to use cash accounting for tax purposes and deduct interest as a business expense.  According to USDA data, only 0.40 percent of farms have gross receipts which exceed $25 million, so a large majority of farm and ranch operations would continue to be able to use cash accounting and deduct interest expenses.  Second, the plan would double the exemption for estate taxes and eventually repeal the tax in 2024.  At the same time, the plan would maintain the stepped-up basis for heirs.

The Ways and Means Committee is expected to mark up the bill yet this week and the full House will consider it shortly thereafter.  The U.S. Senate will have its turn at the wheel as well.  Stay tuned as Congress hopes to have a package passed by the end of the year.

 

Jay RempeJay Rempe is the senior economist for Nebraska Farm Bureau. Rempe’s background in agricultural economics, years of experience in advocating at the state capitol, and firm grasp of issues allow him to quantify the fiscal impact of a regulatory proposal, and provide in-depth examination of key issues affecting Nebraska’s farmers and ranchers.