Peggy Kirk Hall, Asst. Professor, OSU Extension Agricultural & Resource Law Program The Ohio Senate concurred with the House of Representatives yesterday to enact changes to Ohio’s Agricultural Commodity Handler’s law, commonly known as the Grain Indemnity Fund. According to … Continue reading
by Larry Gearhardt, OSU Extension Field Specialist, Taxation
In March 2010, President Obama signed into law new health care reform. One part of the legislation is known as the Patient Protection and Affordable Care Act. Many of the provisions contained in the law become effective in 2013 and the law will be active beginning in 2014.
While the primary purpose of this reform is to mandate that all U.S. residents obtain health insurance coverage, the law creates a host of tax credits and penalties on taxpayers and employers for failure to do so. In addition, there are several new rules that were created to raise the necessary funds to do so.
This article focuses on the employer’s obligations, especially on agricultural employers that hire seasonal help.
AM I RESPONSIBLE TO PROVIDE HEALTH INSURANCE TO MY EMPLOYEES?
Beginning in 2014, “applicable large employers” must provide affordable health coverage that provides minimum essential coverage. An “applicable large employer” is an employer that employed 50 or more full-time employees (FT) and full-time equivalent (FTE) employees in the preceding tax year. A business that employed fewer than 50 FT and FTE employees in the preceding tax year is not subject to a penalty for failing to provide affordable health coverage to its employees. Applicable large employer status is determined based upon data from the prior year.
WHO ARE CONSIDERED EMPLOYEES?
A full-time employee (FT) is one that works on average at least 30 hours per week or at least 130 hours per calendar month. Full-time equivalent (FTE) employees are determined by adding together all of the hours of part-time employees in a month (with a maximum of 120 hours per employee) and dividing the total by 120.
In calculating FT and FTEs, “seasonal workers” are to be included pursuant to the number of hours they worked per week (part-time or full-time).
EXAMPLE: Fred Farmer has 27 full-time employees who each work 40 hours per week, and 30 part-time employees who each work 25 hours per week over a 4 week period. Fred Farmer has 52 FT and FTEs calculated as follows:
• 30 part-time employees X 25 hours X 4 weeks = 3,000 hours for the month
• 3,000 hours / 120 hours in a month = 25 FTEs
• 27 FT employees + 25 FTE employees = 52 total FT and FTEs
Repeat the above calculation for each of the 12 months in 2013. Add the total FT and FTEs for all 12 months and divide by 12 to get the average number of FT and FTEs per month over the prior year (in this case, 2013). If that average number is 50 or larger, the employer is an Applicable Large Employer that must provide health coverage to its full-time employees in the next year (2014).
THERE ARE EXCEPTIONS
For the purpose of calculating FTEs, the following are not included:
• Seasonal workers who work no more than 120 DAYS.
• Sole proprietors, partners, greater than 2% shareholders in an S-corporation or any greater than a 5% owner of any business.
• A family member or any member of the household who qualifies as a dependent.
A CLOSER LOOK AT SEASONAL WORKERS
If the employer exceeds 50 or more FT and FTEs during a 120 day period, or less, then any employee who performed seasonal labor for no more than those 120 days is not counted toward the total number of employees in those months. If the employer has any seasonal employee on the payroll after 120 days, and in that month the employer also has 50 or more FT and FTEs, the seasonal worker exception is not applicable.
EXAMPLE: Fred Farmer has 40 full-time employees from January – December, and 80 full-time seasonal employees from October – December. Fred Farmer has an average of 60 employees per month calculated as follows:
• 40 FT employees X 9 months (Jan – Sept) = 360
• 120 FT employees X 3 months (Oct – Dec) = 360
• 360 + 360 = 720 / 12 = 60 employees average per month
BUT, Fred actually only exceeded 50 employees for the 3 months that he employed seasonal workers and they would not be counted. Since the seasonal workers were employed for less than 120 days, Fred is not an Applicable Large Employer. Be aware that several government agencies administer the PPACA and not all have agreed on one definition of “seasonal worker.”
However, the IRS has stated that an employer can, at least through 2014, utilize its own reasonable definition of “seasonal” to determine an employee’s full-time status looking at the last 12-month period. For determining which employees must be offered health care coverage, H2-A foreign agricultural workers should be treated like other seasonal workers to determine full-time status.
PENALTY FOR NON-COMPLIANCE
For a penalty to apply to an employer, it must first be determined if the employer is an Applicable Large Employer. An Applicable Large Employer is subject to penalties levied by the IRS if:
1. He does not provide health insurance coverage or provides coverage that does not meet the minimum essential coverage requirements, OR
2. He provides health insurance coverage that is not affordable; AND
3. At least one of the employer’s full-time employees receives a tax credit or subsidy through a State Exchange.
First, if the employer does not provide health insurance or provides insurance that does not meet the “minimum essential coverage” standard, and at least one of the employer’s full-time employees receives a tax credit or subsidy through the State Exchange, then the employer is subject to a penalty of $2,000 for each of the employer’s full-time employees. HOWEVER, for the purpose of calculating the penalty, the first 30 employees are not counted.
EXAMPLE: Fred Farmer has 50 full-time employees and does not offer minimum essential coverage. One full-time employee obtains a subsidy through a State Exchange. The penalty is $40,000 (50 – 30 = 20 X $2,000).
Second, if the employer fails to provide affordable coverage (this subject will be covered in a later article) and an employee receives a tax credit or subsidy to purchase health insurance through a State Exchange, then the employer is subject to a penalty equal to the lesser of:
• $2,000 for each of the employer’s full-time employees, not counting the first 30, or
• $3,000 for each of the employer’s full-time employees that obtain a tax credit or subsidy through a State Exchange.
Example: Fred Farmer has 50 full-time employees and provides insurance that covers only 40% of the value of the benefits. Ten full-time employees obtain a tax credit through the State Exchange. Fred Farmer is subject to a penalty equal to the lesser of:
• $2,000 X 20 full-time employees (50 – 30) = $40,000, or
• $3,000 X 10 full-time employees obtaining tax credit = $30,000.
To avoid having the Affordable Care Act apply, an employer should not have 50 or more employees in any month during the year, or for those employers that have 50 or more employees in a month, make sure that the number of employees 50 or greater are employed for less than 120 days and that they are doing seasonal work. Employers that average close to 50 employees per month should closely monitor their labor usage to avoid triggering the requirement to provide health coverage.
Larry Gearhardt, Asst. Professor, OSU Extension Much of Ohio’s forestland has been plagued by, first, the emerald ash borer, and more recently, the Asian longhorn beetle. Can you deduct the loss on your tax form when a major portion of … Continue reading
Catharine Daniels, Attorney, OSUE Agricultural & Resource Law Program The court’s decision was not exactly what a group of farmers, seed sellers, and agricultural organizations was hoping for, but they are nevertheless claiming partial victory against Monsanto in a recent lawsuit centered on genetically modified … Continue reading
Peggy Hall and Catharine Daniels, OSUE Agricultural & Resource Law Program It’s hay and straw season in Ohio, which creates both a high need to employ youth on the farm and the challenging task of understanding farm youth labor laws. For example, … Continue reading
Carl Zulauf, Professor, and Nick Rettig, Undergraduate Student
Ohio State University, May 2013
Overview: This post is the fifth in a series that contrasts and compares the farm prosperity of the 1970s with the current period of farm prosperity. It examines the response of corn, cotton, soybean, and wheat production during the two periods of prosperity, both in the U.S. and the rest of the world. These 4 crops are examined because they have the largest quantity and value of exports among U.S. crops. The previous posts in this series are available here, here, here, and here.
Analysis: These variables are examined for both the U.S. and world: (1) harvested area, (2) production, and (3) yield per harvested area. Source of the data is the United Nations, Food and Agriculture Organization, available at http://faostat3.fao.org/home/index.html. As with most posts in this series, a benchmark average value is calculated for 1968-1972 and 2001-2005. These periods predate the 1970 and current period of farm prosperity, respectively. Five year averages are used to dampen the variability that can exist if a single year is used as a benchmark. The latest year for which information is available is 2011, the 6th year after 2005. The 6th year after 1972 is 1978. There is no definitive way to decide when to start the period of prosperity or what period to use as a benchmark, but our choices are reasonable. While the current period of prosperity is still on-going, 6 years is long enough for an initial comparison.
World Production Response: Economic principles suggest production should expand more rapidly during a period of prosperity since revenue is higher. This implication is examined by comparing the average annual rate of growth in production between 1968-72 and 1978, between 2001-2005 and 2011, and between 1978-1982 and 2001-2005. The latter period spans the end of the 1970 period of prosperity and the period preceding the start of the current prosperity. In general, growth rates in production are higher during the two periods of prosperity (see Figure 1). World cotton production between 1968-72 and 1978 is an exception. In addition, the growth rate of world soybean production is basically the same during the current period of farm prosperity as between 1978-1982 and 2001-2005. One reason for the low growth rate of cotton production during the 1970 period of prosperity is below average U.S. yield in 1978. However, this situation also underscores that a general period of crop prosperity does not mean the degree of prosperity is the same for all crops.
Figure 1 also reveals that, excluding cotton, average annual increase in world production has been slower between 2001-2005 and 2011 than between 1968-1972 and 1978. In particular, soybean production has grown slower. This finding may come as a surprise given the attention devoted to Chinese soybean demand. A factor contributing to this finding is that world soybean production averaged 240 million metric tons in 2007-2011 vs. 44 million metric tons in 1968-72. Higher growth rates are easier to obtain when production is small for no other reason than production is expanding from a small base. In contrast, the annual increase in quantity of soybeans produced was more than double between 2001-2005 and 2011 than between 1968-1972 and 1978 (11.1 vs. 5.2 million metric tons per year). Nevertheless, the annual percent growth rate is so much smaller during the current prosperity that other factors are likely at work. The most likely is the growth in distillers dried grain from increasing ethanol production. Distiller dried grain can partially substitute for soybean meal in feed rations, with the amount of substitution varying by animal species and stage of development.
U.S. Contribution to World Production Response: Figures 2 through 5 present the share of increase in world production and in world harvested area accounted for by the U.S during the two periods of farm prosperity for each crop. Shares are presented for both production and harvested area because weather affects area less than production (yield) in a given single year.
The story that emerges for both production and area is similar. Therefore, the following discussion will focus on harvested area. Between 1968-1972 and 1978, the U.S. accounted for 24%, 38%, 51%, and 52% of the increase in world harvested area of wheat, cotton, soybeans, and corn, respectively. In comparison, the U.S. contribution between 2001-2005 and 2011 was -26%, -75%, 2%, and 18% for wheat, cotton, soybeans, and corn, respectively. Thus, a striking difference between the two periods of farm prosperity is the much smaller role of the U.S. in the world production response during the current period of prosperity. One reason for this difference is the smaller expansion in U.S. crop area during the current period of prosperity, which was discussed in a previous post available here.
A negative number means U.S. harvested acres declined. Thus, harvested area in the rest of the world had to increase more than for the world as a whole to offset the U.S. decline. To illustrate, area of cotton harvested in the U.S. declined by 3.3 million acres between 2001-2005 and 2011. Area of cotton harvested in the world increased by 4.4 million acres, meaning that harvested cotton acres increased by 7.7 million acres in the rest of the world.
Longer Term Perspective: A competitive advantage long held by U.S. crop production is its higher yield. However, this advantage has declined substantially since the late 1960s and has disappeared for wheat (see Figure 6). In addition, average soybean yield over 2007-2011 was slightly higher in Brazil than the U.S. The long term decline in competitive yield advantage has underpinned a drop in the U.S. share of world production, especially for soybeans (see Figure 7). The decline has continued during the current period of farm prosperity, reflecting the lack of expansion in U.S. harvested area. The decline in the U.S. role in world cotton production during the current period of farm prosperity is especially notable. The size of this decline in combination with the slightly higher U.S. share in 2001-2005 than in 1968-1972 is consistent with the argument that U.S. cotton policy was substantially distorting U.S. production during the early years of the 21st Century.
Summary Observations: A distinct difference between the current and 1970 period of farm prosperity is the much smaller role the U.S. has played in the expansion of world production of corn, cotton, soybeans, and wheat during the current period of prosperity. In addition, the yield advantage of U.S. crops has been in a long term decline. Consequently, the role of U.S. crop agriculture in world crop agriculture is smaller during the current than 1970 period of farm prosperity.
Everything else the same, a declining U.S. role in world production means that the natural hedge for U.S. production should decline. The natural hedge is that a decline (increase) in production by a country will cause price to increase (decline). These offsetting changes stabilize revenue. The more important a country’s role in world production the more likely that changes in its production will affect price, thus increasing the reliability of the natural hedge. Since the U.S. role is declining, the natural hedge should decline, causing the variability U.S. crop revenue to increase.
The long term decline in the long-standing competitive advantage of U.S. crop production resulting from higher yields needs to be discussed. Specifically, U.S. agriculture needs to ask itself what factors will maintain its international competitive advantage as its yield advantage declines. This discussion is critically important for wheat, but increasingly so for cotton and soybeans.
Even though it is declining, the U.S. currently has a sizeable yield advantage in corn. Nevertheless, it is reasonable to expect that, as the U.S. develops drought tolerant and short season varieties for its drought prone and northern production areas, it will also bring more land into corn production around the world and will increase production on existing corn land that has less than ideal production capability. The 2007-2011 ratio of U.S. corn yield to rest-of-the-world corn yield is 2.43. In comparison, the 2007-2011 ratio of U.S. corn yield to North Dakota corn yield is 1.30, suggesting that the rest of the world can significantly expand corn production even without increasing acres.
While the financial crisis and associated bankruptcies of the 1980s were a traumatic event for U.S. crop agriculture, the most important, long lasting impact of the 1970 period of prosperity on the U.S. crop sector likely was the stimulus it provided to produce soybeans in South America. Similarly, it is possible that the most important, long lasting impact of the current period of farm prosperity is the stimulus it is providing to produce corn around the world.
A declining competitive advantage for U.S. crops will ultimately reduce the relative advantage of U.S. farmland and thus the price it can command. History never exactly repeats itself. Just because U.S. farms have not taken on substantial debt (see previous post here) during the current period of farm prosperity does not mean that farmland prices cannot decline. As revenue per acre declines, the value of farmland will decline. Revenue per acre can decline because price declines but also because relative yield declines. In short, the U.S. crop sector may be as vulnerable as it was in the late 1970s. This time, however, the reason is not debt, but may be declining competitive advantage.
The next post in this series will examine the response of U.S. livestock production during the two periods of farm prosperity.
This publication is also available at http://aede.osu.edu/publications
By: Clif Little, OSU Extension
Individual Landowners working together in groups with a common purpose to secure more favorable lease terms and/or signing bonus and royalty have been forming throughout the shale regions of the United States for some time. The premise of the associations is that, many individuals representing a potentially large mass of oil and gas related resource gain leverage in the negotiation process. Landowner groups vary greatly in their structure and cost. While all members may benefit from such associations, it may be the individuals with small, oddly located parcels that benefit the most. The groups can be committee led with voting rights of members, attorney led groups, relator led, neighbor groups and a variety of other arrangements. Before joining any group there are several points for property owners to consider.
First conduct a thorough research of your property title and determine if you own your minerals. This can be done with the assistance of an attorney and possibly with the assistance of a title abstract company. There have been several individuals who have joined landowner groups thinking they own their mineral interest only to discover after a deal was struck and upon title research, they do not. When this happens it can appear that the landowner group is misrepresenting what they have to lease which ultimately cost all members.
Once you have a professional opinion of clear title, attend landowner group meetings and learn about the organization before joining. Some of the factors to consider are; what is the cost? Groups usually take from 1-7% of the signing bonus and some take a percentage of the royalty. How long is your obligation? Once you commit to the group how many years must you remain and how do you get out? How do you renew membership? Can you negotiate with companies the association has been meeting with and if so is there a cost? How does the group inform members? Some landowner groups meet regularly, some by email. Do you trust the leadership of the group? Is an attorney involved in lease development and review? Does the group have a successful track record of signing with companies? Can you review the final lease before signing and opt out? Landowner associations generally share with their group the lease they will attempt to negotiate. However, the lease is negotiable and will most likely be changed before finalized. Just because a landowner association has a good lease doesn’t mean it would be a good group to join.
Landowner groups may specify a minimum amount of acreage you must own mineral title to before you can join. This acreage requirement can range from 1 acre to 50 acres or more. If considering joining a large landowner group, can your acreage be cherry picked out or is it an all-or-none group? Leasing companies have areas they believe will yield better than others in terms of production and may want to pull out individual landowners or lease at a different value/terms depending on your location.
How large is the landowner group allowed to grow? Group acreage size ranges from hundreds of acres to tens of thousands of acres. Just remember, the larger the group, the fewer companies will have the resources to pay the signing bonus, meaning less competition for the groups acreage. How does the association deal with growth?
Many associations have web sites which post their lease and by-laws. When oil and gas leasing starts in your area, so will the development of landowner groups. Attend these association meetings; learn about leasing and the group structure. Make no rash decisions about joining. In general, well organized landowner groups have managed to provide property owners with better lease terms in general. It is not essential to join a landowner group to get a good lease. Negotiating a lease on your own can be a slow and exhausting process which may take months or years to complete. For some, landowner groups have removed this burden. Finally, be sure and consult with your attorney before signing onto a landowner association group.
Carl Zulauf, Professor, Ohio State University, June 2013
Overview: This post examines the potential for market distortions caused by the price support programs currently proposed in the House and Senate 2013 Farm Bills. It is common for discussion of market distortion to focus on the level of price supports, but the degree of distortion reflects the interaction of all of a program’s parameters. One of the hot topics in business today is the role of product design. In many respects, this post is a discussion of policy design and the potential consequences of design decisions. The post builds on two recent posts by Nick Paulson, “Expected Price Support Payments for Corn and Soybeans” on June 6, 2013, available here, and “Comparison of Approaches to Price Support for the 2013 Farm Bill” on May 23, 2013, available here.
Comparison of Price Support Targets: Both the House and Senate Farm Bills propose price deficiency payment programs — programs that make a payment when the market price is less than a target price. Both bills replace the historical term, target price, with a new term, reference price. Moreover, the House renames the counter-cyclical target price program the Price Loss Coverage program. The Senate renames it the Adverse Market Payment program. These changes likely reflect a decision that the existing names have either acquired a negative connotation or send an undesired message. Part of good product design is the appropriate naming of the product.
In a deficiency payment program, the setting of the support prices is a critical policy design feature. In general, the House and Senate take different philosophical approaches in designing the level of the reference prices. The Senate largely takes a market-oriented approach. Excluding peanuts and rice, the reference price is 55% of an Olympic average of the 5 most recent crop marketing year prices (an Olympic average removes the low and high values when calculating the average). In contrast, the House takes the usual, historical approach of setting the reference price at a value that is fixed for the life of the farm bill. Fixed prices are largely determined by budget constraints and the political desire to assist some crops more than others. Thus, fixed prices have the potential to create outcomes that differ from the market.
One conclusion from years of research by academics into price forecasting accuracy is that a reasonable, often the best, forecast of future price is the current market price. Moreover, market price is a key determinate of the use of resources. This market-determined use of resources may or may not be seen as acceptable by policy makers. Therefore, a reasonable initial comparison is to compare politically-determined prices with recent market prices.
Figures 1 and 2 present the reference prices in the proposed House and Senate Farm Bills as a percent of the Olympic average market price from 2008 through 2012. A value of 100% means the reference price equals the Olympic average market price. The higher the percent the more likely the reference price will offer support above the market level. Thus, the House reference prices favor peanuts, barley, and rice. The price ratio is smallest for corn, then soybeans. While the rationale is not known why these two crops having the lowest ratio, it is possible that this policy design decision reflects the fact corn has been the primary beneficiary of the renewable fuels mandate, with soybeans potentially becoming a beneficiary if and when the biodiesel market expands.
The Senate reference prices favor peanuts and rice. Note that the Senate references prices have the same relationship to market price for all of the program crops except peanuts and rice, for which the Senate replaces its market-oriented formula with a fixed price.
The design decision to favor peanuts and rice in both bills is an attempt to address the concerns of southern farms about the loss of direct payments and their assessment that crop insurance does not provide adequate risk protection for them.
Other Program Design Considerations: Table 1 summarizes the key design parameters for the House and Senate proposed price support programs. Bolding is used to highlight key difference. Due to limited space, only one other design difference is discussed. Specifically, the House Farm Bill makes payments on 85% of planted acres while the Senate Farm Bill makes payments on 85% of historical program base acres. This difference can have substantial importance.
Given that the proposed reference prices are below the current market prices and vary in their relationship to current market prices, it is reasonable to postulate that a general decline in crop prices would result in the proposed price programs favoring the crops with the highest reference price relative to current market price. However, farms would have to be able to shift acres to the favored crops for the program impacts to be realized. By making payments on planted acres, the House facilitates the shifting of acres to crops with relatively higher reference prices. In contrast, by using historical base acres, the Senate bill potentially limits the ability to shift. For example, while the Senate Bill allows updating of peanut base acres, base acres of peanuts in 2010 were only 194,000 acres larger than the average of 1.3 million acres planted to peanuts in 2009 through 2012. For rice, base acres in 2010 are 1.4 million acres larger than the average of 3.0 million acres planted in 2009-2012. The base acre constraint on expanding rice acres is less binding than on peanuts but could still be effective if prices stayed low for a long enough period of time. On the other hand, the use of base acres is less of constraint for most of the other crops. For example, barley, the other crop favored in the House price support program, had 2010 base acres that were 5.2 million larger than the average of 3.2 million planted in 2009-2010. Thus, farms with barley base acres would have substantial leeway to expand barley acre in response to favorable farm policy prices.
Summary Observations: It is widely recognized that farm program support prices can affect the planting decisions of farms when market prices are less than the support prices. However, for these distortions to occur, farms have to be able to shift acres to the crops favored by the support prices. Both the proposed House and Senate reference prices potentially favor some crops, in particular peanuts and rice. However, market prices have to decline from current levels and stay low. The House proposed price support program facilitates the shifting of acres by making payments on planted acres. The Senate Bill constrains the ability of farms to shift acres by making payments on historical base acres. This constraint especially applies to peanuts but also rice. Base acres provide less of a constraint on distortion for the other crops that are favored in the House Bill. However, a policy design option to substantively limit distortion exists: require all farms to update base acres to the average acres planted in 2009-2012. Conventional thinking is that updating base acres is distorting. This view applies when market prices are below the support prices. However, updating base acres limits distortion when market prices are above the support prices by limiting the ability of farms to shift acres. Such a change would represent a radical change in policy design.
This publication is also available at http://aede.osu.edu/publications.