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'Fiscal Cliff' and your farm

Jeff Caldwell 12/06/2012 @ 8:49am Multimedia Editor for Agriculture.com and Successful Farming magazine.

Members of Congress aren't exactly lighting the world on fire in their efforts to address the issues that could culminate in the nation falling off the "fiscal cliff" at the end of this month. The partisan inaction, if it continues, could lead to the expiration of tax cuts enacted over a decade ago and the implementation of federal budget cuts.

The rising cliff has several elements: Tax cuts enacted in 2000, federal economic stimulus spending expanded in 2008, and a stagnant gross domestic product (GDP) brought on by the global recession in 2007. These conditions have all added up to a U.S. economy that's struggled to grow enough to keep up with "a broad range of government fiscal policy to stimulate an economy that lacks international competitiveness in many industries," says Ohio State University ag economist Carl Zulauf.

As the issue gets more attention on a national scale and the political rhetoric grows in frequency and severity, the big question remains: How would falling off the "fiscal cliff" affect U.S. agriculture? Zulauf says the most immediate effect will be in the policy arena in the form of a likely delay in the farm bill, the ratification of which is already months behind schedule.

"Similar to the 1991 Farm Bill, the 2012 farm bill is entwined with a national debate over budget priorities and the federal debt," he says. "The U.S. House, in particular Republican House members, will have to decide the size of cuts they want from nutrition programs and the farm safety net. These cuts must then be negotiated with the U.S. Senate."

Staying on the policy side, the manner in which federal dollars are allocated to certain safety net programs like Medicare and Social Security is another major point of disagreement, and one that could lead to funding slashed for farm programs.

"The underlying problem is occurring at the same time that the U.S. is redefining its safety net, specifically the expansion of medical coverage to all Americans. The funding needed for this redefinition is a point of disagreement," Zulauf says. "However, if funding needs are on the high side, then spending on other safety net programs could be curtailed as we rebalance spending on the various safety-net programs. Such rebalancing could include the farm safety net, as well as other changes that may affect farmers, including an increase in the age of eligibility for Social Security and Medicare."

Another implication hits much closer to home for farmers' pocketbooks. While he says most pundits and policy experts believe that a combination of tax hikes and spending cuts is the ultimate answer in the long run, that's not going to be an easy pill to swallow for a lot of farmers.

"Tax breaks used by farmers, such as expensing and accelerated depreciation, as well as spending on crop insurance may be curtailed," Zulauf says.


Part of the root cause of the existence of the "fiscal cliff," as Zulauf points out, lies in lagging U.S. economic competitiveness. And, part of that equation lies in energy costs, something that's always a critical part of any farm's balance sheet. This is another area where agriculture could see some major change if the factors contributing to the "fiscal cliff" don't change one way or another.

"While speculative, resolution of the U.S. competitiveness problem could rest upon reducing energy costs, in particular from developing the large U.S. (and world) reserves of shale gas and oil. Lower gas and oil prices will benefit farms on the input side but likely dampen demand for biofuels," Zulauf says. "Animal producers will generally benefit while the impact on crop producers will depend on the relative rates of decline in input and output prices. A softening, maybe an end, of this period of farm prosperity could potentially result."

Finally, there's the debt itself. Though typically viewed as a political football in the context of discussions like the ones in Washington, D.C., regarding the "fiscal cliff," there is a limit to how much debt the nation can take on. And, if we exceed that limit, look out.

"U.S. interest rates will increase, the U.S. dollar will depreciate, and large cuts in U.S. government spending will be required," Zulauf says of the situation if the nation reaches its debt limit. "This is not a situation in which U.S. agriculture is likely to flourish. However, the U.S. has time to avoid these longer-term outcomes. Let's hope it finds the will to do so."

Behind the scenes, Congress still appears to be working to avoid the fiscal cliff.

Senator Tom Harkin (D-IA) said Thursday that Democrats "were were told the other day in our caucus that we will be here at least until December 23." And it's possible that Congress will be in session after Christmas, he said.

Harkin would like to see the House pass a bill approved in the Senate last July that extends Bush-era tax cuts on the first $250,000 of income for married couples filing a joint return.

But he conceded that some in Congress aren't that worried about going over the fiscal cliff.

"I think there are some undercurrents here about going into January and February," he said, in order to resolve differences on taxes and federal spending between Democrats and Republicans.

If the lower tax rates of the Bush tax cuts are allowed to expire at the end of December, then the next Congress would not be debating ways to increase taxes but to reduce them, he said

"That gets the Republicans off the hook," he said. "They will not have to vote to raise taxes."

At the bottom of that cliff, or slope as some are calling it, lies one of the more draconian changes for farms. It would be the expiration of the current estate tax exception of $5 million per spouse to the $1 million level that was in effect before the Bush tax cuts were passed. The rate would also increase from 35% this year to as much as 55%.

Harkin's Iowa colleague, Republican Senator Chuck Grassley, said earlier this week that he supports keeping the $5 million exemption and that he was pleased to hear of support from some Democratic senators as well. Grassley said he doesn't think Congress will allow the exemption (or unified tax credit) to fall to $1 million and that it likely wouldn't be lower than $3.5 million.

That's the level Harkin said he supports, which is part of a compromise of $3.5 million and a 45% rate supported by the Obama administration.

Even if the estate taxes go up (and the exemption falls), "it's something we could fix in January or February and make it retroactive," Harkin said. "I think there will be some compromise on estate taxes."

Farmers agree about the need to reach a resolution on the issue, but are more split about the influence the "fiscal cliff" could have on the ag commodities. Reaching or exceeding the debt ceiling will quickly trickle into grain prices and farmers' bottom lines, says Agriculture.com Marketing Talk adviser jrsiajdranch, but it may not be as bearish as some feel.

"This is a made-up deal by the politicians. This gives them cover to raise the debt ceiling by telling the general public the other options are just too difficult to contemplate," he says. "More borrowing means more printing. More printing leads to a weaker dollar. A weaker dollar leads to higher commodities."

The livestock sector's a different story, though. A new plateau in grain prices (that some say falling off the "fiscal cliff" may create) would cause even more pain for a livestock sector that economists have recently said could otherwise see the path to profitability clearing up.

"They (livestock producers) will pay more for less. Cut the herd numbers. Use less feed," adds Marketing Talk senior adviser kraft-t.


Editor's Note: Successful Farming magazine Business Editor Dan Looker contributed to this report.

   

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