Month: November 2012

2012 Agricultural Tax Issues Workshops to be held across Ohio on December 17, 2012

by: David Marrison, OSU Extension Educator

Tax practitioners with an interest in farm income taxes will have an opportunity to attend a one day farm tax workshop scheduled for Monday, December 17, 2012 from 8:30 a.m. to 3:00 p.m. in ten locations across Ohio. This workshop will be taught by Dr. Phil Harris, Professor of Agricultural Economics, University of Wisconsin via tele-conference.

This program has been designed for tax practitioners who have a significant number of farm clients and therefore need a substantial amount of information on agricultural tax issues. Participants will hear an audiotape of a live lecture given by Phil Harris, supplemented with a showing of the slide presentation Dr. Harris used during his lecture. Dr. Harris will be available for questions during two conference calls during the day, and OSU faculty will be in the meeting rooms to answer questions. Registrants will receive a valuable 203 page supplemental book.

The summer drought caused havoc across Ohio for crop producers. This year’s tax school will examine how to handle crop insurance and disaster payments as well as the special provisions to delay income from weather related sales of livestock. Some of the additional topics which will be included in discussion are: Repairs versus capital improvements; Improvements by a tenant; Sale of sand and gravel; Depletion; Information reporting issues; and Income in respect of a decedent.

The Agricultural Tax Issues program has been accepted for continuing education credits by the Accountancy Board of Ohio, and the IRS Office of Professional Responsibility. The locations for the 2012 Agricultural Issues Workshops are: Caldwell, Chillicothe, Columbus, Greenville, Jefferson, Ottawa, Upper Sandusky, Urbana, Wapakoneta, and Wooster, Ohio. The cost for this program is $125 per person and includes continuing education credits, lunch, refreshments and the agricultural tax manual.

Complete workshop information and on-line registration are available at the OSU Income Tax Schools’ website located at: http://incometaxschools.osu.edu or can be obtained by contacting David Marrison at (440) 576-9008 or marrison.2@osu.edu. The Agricultural Tax Issues Workshop is sponsored by OSU Extension.

Click here for the Ag Issues Brochure

Get Ready to Pay More–Tax Reductions Set to Expire in 2013!

by David L. Marrison, Associate Professor

One change that all taxpayers should be aware of is on January 1, 2013 the tax rates will be increasing for all Americans. What? Didn’t our candidates say they would not be raising taxes? Actually, Congress did not vote to increase your taxes, but rather are allowing the Bush-era tax reductions enacted in 2001 to expire. Thus higher rates will return in 2013.

When you file your federal income tax return before April 15, 2013, you’re filing your taxes using the 2012 income tax brackets so these changes will not be felt then. Instead you will notice them on your first paycheck or monies you earn in 2013. In 2013, the tax brackets will increase to 15, 28, 31, 36 and 39.6 percent from the present levels of 10, 15, 25, 28, 33 and 35 percent. As you can tell this increase will affect the top four marginal brackets and eliminate the 10% bracket, resulting in higher taxes for nearly everybody unless there’s a political solution.

Employers will also have to deal with changes in the payroll tax as well in 2013. A cut in the payroll tax that funds the Social Security pension program was extended earlier in 2012. The current 4.2 percent rate paid, down from the previous 6.2 percent rate, expires on December 31. And it seems highly unlikely that Congress will extend this payroll reduction. This cut had boosted the take-home pay of the average worker in 2012 by about $85 per month, or $1,000 per year.

The capital gains rates will also be changing in 2013. In 2012, there was not a tax on long-term capital gains earned by those in the two lowest rate brackets of 10 percent and 15 percent. Beginning on January 1, 2013, taxpayers in the lowest two brackets will pay 10 percent on long-term gains. For filers in the four higher tax brackets (25%, 28%, 33% and 35%), the long term capital gains rate will revert back to 20% in 2013 from its current level of 15%.A new 3.8% medicare surtax will also take effect in January. This tax will apply to investment income for taxpayers with adjusted gross incomes of either $200,000 or more (if single) or $250,000 or more (if married).

My biggest concern going into 2013, is not the new tax rates, payroll tax or capital gain rates, it is the Federal Estate Tax. If nothing is changed on January 1, 2013 the estate tax exemption is due to drop from $5.12 million to $1 million and the estate tax rate will jump from 35% to 55%. This could affect hundreds of farms, small businesses and recipients of oil & gas lease payments. It is not hard for many of our farms to be valued at over $1 million dollars. Can you afford to pay a 55% estate tax on the value above $1 million when a family member passes away? This could be a nail in the coffin for many small farms trying to transition their farm to the next generation.

Of course with any tax legislation, it is very likely that all of the fore-mentioned changes could be averted by Congress in 2013 which will leave individuals and businesses scrambling to keep up with the changes. Hang on tight as 2013 will be a bumpy tax year!

Farmland Value and Rent Outlook 2013

Barry Ward, Leader, Production Business Management, OSU Extension, Department of Agricultural, Environmental and Development Economics

Cropland values in Ohio have increased again in 2012. Data from the Oho Ag Statistics Service shows an increase of 13.6% for bare cropland in Ohio for 2012. According to their data, bare cropland averages $5000/acre, up from $4400/acre the previous year.

An OSU Extension survey conducted in December 2011 estimated that the increase in value of Western Ohio cropland in 2012 would be 7.5-9.1% depending on region and land class. The Chicago Federal Reserve Bank and Purdue University both conducted surveys in June 2012 and found that cropland values in Indiana had appreciated 10-18.1% from one year ago.

Crop profitability prospects were positive in 2011 as they have been for the most part since 2007. Profit margins in 2012 were highly variable across Ohio due to moderate to severe drought. Crop insurance proceeds will alleviate much of the yield shortfall and financial stress associated with the 2012 drought. This period has seen some of the most profitable years in the last 50 years of crop production. These profit streams and healthier balance sheets have led many farmers to seek an investment option for these profits and many have chosen to invest in land. Investors outside of agriculture have also been strongly considering and looking to farmland as an investment alternative.

With many dollars and buyers chasing farmland, it isn’t a surprise to see land values increase again substantially in 2012. Crop profitability along with low interest rates have been the primary drivers in this unprecedented run-up in cropland values. The relative scarcity of farmland has also been a driver in cropland values.

So all of this begs the question, “Where are land prices headed in 2013?” The projected numbers for 2013 point towards higher cropland values for 2013. Projected budgets for Ohio’s primary crops for 2013 show the potential for strong profits. The Federal Reserve has indicated that it plans to maintain current low interest rates through mid-2015.

Returns to Land (Gross Revenue minus all costs except land cost) are projected to be $309-$627/acre for Ohio Corn in 2013 depending on the land production capabilities. Budget projections for 2013 soybeans show “returns to land” to be $179-$396. Wheat budget projections for 2013 find “returns to land” to be between $135 and $312 per acre. This is assuming current prices of inputs and present December, November and September 2013 futures prices, respectively. These projections are based on OSU Extension Ohio Crop Enterprise Budgets available online at: http://aede.osu.edu/programs-and-research/osu-farm-management/budgets

With strong balance sheets in spite of the drought many farmers will continue to be in the land buying mode.

The Income Method of Capitalization, an appraiser’s method of valuing assets, yields high land valuations based on 2013 projections for returns to land and interest rates. For example, using a $287.50/acre “return to land” (the midpoint of the projected soybean “return to land” for 2013) and a 4% capitalization rate, farmland would be appraised (valued) at $7187.50/acre. This is only an example and is not meant to reflect the land value for your area. Lower “returns to land and/or higher interest rates would yield lower “appraised” land values using this approach.

There should be a note of caution in deriving budgets and using the Income Method of Capitalization for valuing cropland for 2013 and beyond. Assumptions used to formulate these budgets and appraisals may change. Crop prices could fall and input costs may increase. Interest rates, currently at very low levels, may increase.

The latest OSU Extension Survey of Cropland Values and Cash Rents found that cash rents were predicted to increase 5.7 to 11.5% in 2012. Cash rental rates will see continued upward pressure as higher commodity crop prices and good prospects for profit in 2013 drive competition in local markets. Producers that want to continue to operate their existing rented land base will have to pay at or near the market rate for their area. See the “Western Ohio Cropland Values and Cash Rents 2011-12” Factsheet online at: http://aede.osu.edu/programs-and-research/osu-farm-management/publications to see data on yields and cash rents for various land classes.

To manage risk of volatile crop and input markets, producers and landowner should also strongly consider flexible cash leases.

Producers and landowners should also understand and attempt to quantify in some way the non-cash benefits provided by the producer to the landowner and vice-versa.

Outlook information presented here was developed with data from AEDE research, the Energy Information Administration, USDA, other Land Grant research, futures markets and retail sector surveys. While gauged to the best of this author’s capabilities, forward looking statements contained in this document may prove to be incorrect due to changes in supply and demand and other political and economic related events.

Some of the Major Changes in U.S. Agriculture and the Forces Influencing the Agricultural Economy in the Past Half Century

By: Luther Tweeten, Emeritus Chaired Professor, Department of Agricultural, Environmental, and Development Economics, Ohio State University

The era of falling real price of food is over.

Two “megatrends” are underway, one on the food supply side and another on the food demand side.

  • First look at food supply. I measure excess production capacity in U.S. agriculture as the surplus of production over market utilization at politically acceptable prices–calculated by adding up production removed by government acreage diversion, net stock accumulation, and the portion of exports due to government subsidies. U.S. excess production capacity totaled 6 percent in 1962 and averaged near that proportion throughout the 1960s (Tweeten 1989). In sharp contrast, excess production capacity in U.S. agriculture today is near zero. As argued later, the rest of the world also has little excess production capacity. World agricultural resources will be challenged indeed to provide food, fiber, and bioenergy in future years without major price increases!
  • The 2012 drought is transitory, but, if the preponderance of today’s climatologists are correct in their judgments, global warming is secularly underway with attendant unusual weather events such as storms and drought.
  • Of greater concern is the falling percentage rate of increase in agricultural yield and productivity. Yields of cereals such as corn, wheat, and rice that supply two thirds of our calories increased at a trend rate of 3.2%/yr. in 1962 but by only a 1.2%/yr.trend rate in 2012 (See Tweeten and Thompson, 2009)! Overall world crop and livestock productivity per hectare for crops and per animal unit for livestock increased at a trend rate of 2%/yr. in 1962 and 1%/yr. in 2012!
  • Arezki et al. (2012) claim in an IMF publication that there are 1 billion acres of world land that are not now but potentially could be cropland, most of it in Africa (496 million acres) and South America (304 million acres). But those acres will not go into gainful crops without substantial investment in roads, irrigation, fertilizers, drainage, property rights, law and order, etc. Those investments will not be forthcoming in the absence of higher crop prices. Meanwhile, about as much cropland will be lost to urban development, soil degradation, depleted water tables for irrigation, biofuel crops, etc. as is likely to be added each year.
  • Now look at the demand side. Given the above supply trend, another megatrend of great importance is declining global birth and population growth rates in the past half century—a trend expected to continue and relieving some pressures on the faltering global supply of food.
  • Food demand grows mainly from population and income growth. World population growth increased at the trend rate of 1.9%/yr. in 1962 and by only 1.1%/yr. in 2012. Total food demand growth, a trend rate of 2.1%/yr. in 1962, gradually fell to a trend rate of 1.3%/yr. in 2012.
  • In short, unless there is an unexpected increase in global cropland, future food demand is likely to grow faster than food supply—a considerable turnaround from 1962 when food supply growth sharply outstripped demand growth. Real prices of farm food ingredients projected to rise on average by1%/yr. in future decades contrast considerably with real farm prices decreasing 1%/yr. on average in the 1960s.In conclusion, the above is no counsel of Malthusian despair—American consumers will hardly notice the trend reversal, but living standards will be retarded especially in poor countries.

Another major change is in the national economic environment in the past half century.

  • U.S. farmers operated in a supportive national economy in 1962. Unemployment was only 5.5% in 1962, a considerable contrast with 8.2% in 2012. The nation’s inflation rate was 1.1% in 1962 and 2.0% in 2012.
  • In 1962 federal debt was $303 billion ($248 billion of that owed to the public rather than to government agencies). Federal debt was $16.35 trillion by 2012, $11.58 trillion of it owed to the public. Federal debt as a proportion of GDP was 53% (44% for publically held debt only) in 1962, proportions that had increased to 105% and 74% respectively in 2012.
  • The federal government deficit of $7.1 billion in 1962 had ballooned to $1.3 trillion in 2012. The former constituted a 2.3% annual growth rate, well below the 7.5 % growth in national income (GDP). Hence federal debt was a declining share of national income so that servicing that debt constituted less and less burden over time. In 2012, federal debt grew at a rate of 8.0%, well above the 2%/yr. rate of GDP growth. Thus, current fiscal policy is unsustainable—if debt continues to be accumulated at the current rate, interest on the federal debt will in time consume the entire national income. The economic dead end is much sooner if account is taken of contingent liabilities to future recipients of Social Security, Medicaid, and Medicare.
  • Congress and President seem hell-bent on a fiscal course whose end game is best illustrated today by the “Greek tragedy” playing out in Europe. The proximate cause of the present political course is “Washington” but the root cause is Americans who demand a high level of government services they are unwilling to pay for. “Borrow and spend” policies rule.
  • I have often said that the greatest economic problem facing U.S. farmers is risk and uncertainty. Continuation along the nation’s current fiscal path adds to the risks. As national debt rises to multiples of national income, interest rates rise to attract and hold government bond buyers, giving rise to a cost-price squeeze on indebted farmers and other debtors. A country with critically burdensome debt is likely to print money (quantitative easing) to finance government. Consequent inflation brings real wealth losses to current holders of financial securities and raises interest rates as investors withhold investment for fear of falling bond values. High interest rates compensate for inflation.
  • The federal government eventually will be forced by circumstances to cut spending (including on farm commodity supports?), raise interest rates, end the biofuel mandate, and otherwise enact policies that will adversely impact American agriculture.
  • The farming industry has shown some restraint in bidding for farmland and otherwise responding to the prosperity of recent years. (Livestock and poultry producers are a notable exception to the prosperity.) Farmer’s debt-asset ratio was 14 percent in 1962 and 11 percent on 2011 (latest available data). The return on equity in farming was 5.74 percent in 1962 and 6.75 percent in 2011. Whether the strong current financial situation for farmers can be maintained depends heavily on two conditions. One is for Washington to bring runaway, unsustainable fiscal policy under control without massive collateral damage to the economy. A second condition is that investors in farmland (in majority, farmers) show restraint in bidding for land.  While the longer term outlook for the farming economy is bright, current low interest rates and high commodity prices are transitory. As farmers bid (and most farmland buyers are farm operators) high current land earnings into land values, they collectively risk creating  a bubble very likely to burst with attendant trauma to farm and  nonfarm investors in farmland.
  • Farmers currently receive 80-90 percent (large farms much less) of their household income from off-farm sources. High unemployment attending nationwide fiscal austerity constitutes another future burden and uncertainty facing farmers.
  • A bright spot in this otherwise bleak fiscal outlook is the stimulus to farm exports induced by a falling value of the dollar in international exchange. Unable to borrow easily in international financial markets, a cheaper dollar will expand American exports to pay for imports. As an industry of strong comparative advantage, U.S. agriculture will benefit through expanding exports.

In conclusion, American agriculture has undergone massive changes in the past half century and on the whole has remained internationally competitive and prosperous. Long-term supply-demand trends favor agriculture. Possible roadblocks include dangers of excessive prices of U.S.farmland and an irresponsible fiscal policy currently headed toward a worldwide financial debacle. American agriculture has much to gain if the current fiscal trajectory is corrected. Properly timing the turnaround in current policy is critical if harsh adjustment pain is to be avoided.

References

Arezki, Rabah, Klaus Deininger, and Harris Selod. ”Global Land Rush.” In Finance and Development, March 2012, p.46.

Council of Economic Advisors. Economic Report of the President. Washington, DC: U.S. Government Printing Office, 2012.

Tweeten, Luther and Stanley Thompson. “Long-term Global Agricultural Supply-demand Balance, and Real Farm and Food Prices.” Farm Policy Journal. 6,1 (February 2009): 1-15.

U.S. Department of Agriculture. Agricultural Outlook. Washington, DC: Economic Research Service, 2012.

Accelerating Economic Recovery

By: Luther Tweeten, Emeritus Chaired Professor, Department of Agricultural, Environmental, and Development Economics, Ohio State University

Conclusion: After elections, Congress and the President will attempt to address the nation’s fiscal problems. Farm commodity program spending will be scrutinized as never before.

At the annual economic symposium sponsored by the Kansas City Federal Reserve Bank and held this summer at Jackson Hole, Wyoming, bankers and economists wrung their hands in frustration over the persistent torpor of the American economy.  Neither monetary nor fiscal policies– traditional means to avoid or ameliorate downturns in the business cycle–have succeeded in lowering the stubborn 8 percent unemployment rate. This brief addresses policies including reforms in fiscal policy institutions to overcome the nation’s economic lethargy. Click here to download the pdf.