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.

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.

Forecast State Receipts Adjusted Downward . . .

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The Nebraska Economic Forecasting Board (NEFAB) on Oct. 27 adjusted its state revenue forecasts downward resulting in a budget shortfall of roughly $195 million for the current budget biennium.  NEFAB revenue forecasts are used by state senators to set the state spending.  Senators adopted a biennial budget earlier this year, but because they are required by the constitution to balance the budget, the decrease in forecast revenue means budget adjustments will be necessary during the 2018 legislative session in order to balance.

NEFAB revenue forecasts declined $100 million for the current fiscal year and $123 million for fiscal year 2018-19.  NEFAB projects revenues to grow, but at a slower rate than it forecast in April when it last met.  In April, it projected revenues to grow 5.6 percent in FY2017-18, and 5.4 percent in FY2018-19.  Most of the slowdown in revenues is due to lower individual income tax revenues.  Actual revenue growth averaged 0.3 percent over the last two fiscal years.  Historically, state tax revenues have grown at an average rate of 4.7 percent.  The chart below shows the state’s percentage revenue growth since 1982.  Note, the chart still reflects the NEFAB forecasts made in April.
tax receipts and budget

The state’s revenue growth is generally thought to be a good reflection of economic activity in the state.  The Legislative Fiscal Office said in its August budget report, “Beside inflation, this revenue growth over time reflects the ebb and flow of economic activity and economic cycles.  It reflects new businesses created and existing businesses that close.  It reflects new products and services added to the tax base and existing products and services that are eliminate or expire.  The key is the net impact.  The new or expanded businesses, products or services more than offsets those that decline or disappear.”  In looking at the chart, it’s easy to spot the economic downturns which have occurred in the past, 1986, 2002-03, and 2009-10.  The most recent decline in revenue growth, though, is different in that it has occurred while the state’s overall economy continues to grow.

So how does the latest NEFAB forecasts reflect on the Nebraska economy?  First, it’s probably reflective of the ongoing struggles in agriculture, which accounts for over one-fourth of the state’s gross domestic product.  While there are signs farm income may have hit a bottom, nobody is forecasting robust growth in near future for agriculture.  Second, it’s probably a reflection that the Nebraska’s economy is like the overall U.S. economy.  Economic growth is expected to continue, but at sluggish pace.  Thus, the projections of revenue growth greater than 5 percent like those made by NEFAB in April just isn’t in the cards.

 

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.

SALT & Taxes . . .

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The Chairman of the House Ways and Means Committee, the tax writing committee of the House of Representatives, announced a draft of the federal tax reform bill will be released November 1.   Leaders in both the House and Senate have expressed hope a tax package could be passed by Thanksgiving.  One taxing concern on the minds of many farmers and ranchers is the fate of the deduction for state and local taxes (SALT).  The concern is especially acute in Nebraska given the large amount of property taxes paid by agriculture, roughly $1.3 billion in 2016.

Captiol at night

Under the unified framework for tax reform, the Trump Administration and Republican Congressional leaders said they want to simplify the federal tax code by repealing all itemized deductions, except deductions for home mortgage interest and charitable contributions.  Itemized deductions are claimed by individuals on Schedule A filed with Form 1040.  Most farmers and ranchers file taxes as individuals-the 2012 USDA Census of Agriculture showed 85 percent of Nebraska farms filed taxes as either an individual or family.  Additionally, only 28 percent of farmers and ranchers itemize deductions.  It is these operations who itemize deductions the loss of the ability to deduct state and local taxes could affect.  The average annual deduction for state and local taxes reported by farm sole proprietors on Schedule A for 2009-2015 (excluding 2013) was $128.4 million.  Presumably, the deduction is for state income taxes, property taxes on farm residences, and taxes on personal vehicles.  For these operations, the loss of the deduction could increase federal income taxes an estimated $18 million per year if not offset by other changes.

Corn harvest in Illinois - SeptemberFarmers and ranchers also deduct state and local taxes paid as a business expense for their operations, be it as sole proprietors, partnerships, or corporations.  It is here where most of the property taxes paid by agriculture on land and machinery are likely reported and losing the ability to expense state and local taxes would result in a significant increase in federal taxes.  Fortunately, according to the lobbyist for American Farm Bureau, the ability to expense state and local taxes as a business expense will continue.  Congressional leaders have indicated the repeal of the state and local taxes deduction would only apply on individual returns, and not affect the expensing of taxes by businesses.  But stay tuned, the reform discussions are now beginning in earnest, and no one can predict what might happen.

 

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.

Northeast Nebraska Counties Lead the State . . .

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As was the case in 2016, counties in northeast Nebraska had the highest average cash rental rates for agricultural ground in 2017.  Dixon County had the top average rental rate for irrigated ground in 2017 at $312/acre, surpassing Cedar County by $1/acre.  Last year Cedar County topped all Nebraska counties with a cash rent of $324/acre on irrigated land.   Knox, Wayne, Cuming and Platte Counties all had irrigated cash rents above $280 per acre in 2017.  Counties in Northeast Nebraska also led the state in cash rents on non-irrigated land in 2017.  Dakota County led the way at $266/acre, $5/acre less than last year, followed by Cuming, Thurston, Cedar and Wayne Counties.  Pierce and Cuming Counties had the highest 2017 rents for pasture ground at $73/acre.

The maps in the slideshow below, provided in a recent CropWatch released by the UNL Institute of Agriculture and Natural Resources, provides average cash rental rates for irrigated cropland, non-irrigated cropland, and pasture ground across the state. The data comes from surveys of Nebraska farmers and ranchers by the USDA-NASS.

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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.