Hancock Farmland Research Brief - Hancock Agricultural Investment ...

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Hancock Farmland Research Brief - Hancock Agricultural Investment ...
February 2018

Hancock Farmland Research Brief
2017 Tax Reform: Implications for Agriculture and Farmland Investments
The potential impacts for U.S. farmland owners of the federal tax reform signed into law at the end of 2017 should, in
general, be favorable. The reduction in the corporate and individual tax rates is likely to lead to more disposable income
for U.S. consumers and businesses to spend on food and agricultural products, increasing domestic demand, and
potentially leading to rising prices. However, the tax bill is likely to lead to higher domestic inflation, which could place
pressure on the Fed to increase interest rates at a faster clip. This could have the impact of strengthening the USD versus
other agricultural producing countries’ currencies, which would impact U.S. exports negatively. Overall, the boost in
domestic demand is likely to outpace the reduction of U.S. competitiveness in the export market, and the U.S. farmland
market is likely to benefit from tax reform, at least in the short term.

Takeaways
 The consensus view as reflected by the stock market                                     two years. With the tax bill’s average cut of 3.2
                                                                                          points, the U.S. economy should realize extra growth
   is that the recently enacted tax package promises to                                   of 0.8% a year over the next two years from the tax
   raise economic growth substantially. Cutting income                                    cut alone. This growth effect is temporary but what it
   taxes on individuals powers economic growth in the                                     adds to the level of GDP is permanent.
   short term, and substantially lowering tax rates for
   businesses does the same over the long term. An
   improved economic outlook has the potential to                                        The recent legislation’s cuts to corporate taxes are
   boost employment and disposable income,                                                significant, with the main rate on corporation’s
   supporting stronger domestic demand for food                                           dropping from 35% to 21%. Corporations will also
   consumption.                                                                           benefit from changes to rules governing expensing
                                                                                          business investments. For equipment, the effective
       The Tax Policy Center1 estimates that the weighted-                               expensing rate at around 80% is already high, and
                                                                                          the new law moves this rate up to 100%. The new
        average marginal tax rate from individual income                                  law does not change depreciation schedules for most
        and payroll taxes will fall in 2018 by 3.2 percentage
                                                                                          structures, such as factories and office buildings.
        points and that this downward adjustment will be
                                                                                          However, the lower corporate tax rate, when applied
        delivered across most of the economic distribution in                             to the output associated with the investment in new
        2018. This cut in individual tax rates is in the range                            buildings, effectively lowers the user cost of new
        of magnitude of the major tax cuts of the past 50
                                                                                          structures and encourages investment. We believe
        years: Kennedy-Johnson 1963-65, 3.6 points;
                                                                                          that this could lead to increased investment by
        Reagan 1986-88, 4.5 points; and George W. Bush
                                                                                          corporate farms in the agricultural sector boosting
        2002-03, 2.1 points
                                                                                          production and yields over the long term.
       Robert Barro and Charles Redick in an article
                                                                                         With the new corporate tax code, companies will
        published in February 2011 in the Quarterly Journal                               likely be more motivated to provide workers with
        of Economics, estimated that cutting the average                                  more equipment and structures to do their jobs.
        marginal tax rate for individuals by 1 percentage                                 Robert Barro’s rough estimate is that GDP per
        point increases annual GDP by 0.5% over the next                                  worker will rise by about 6% over the long run.2 This
1
    Tax Policy Center, Microeconomic Analysis of the Tax Cut and Jobs Act, December 20, 2017                                 (Continued on page 2)
2
    WSJ, Tax Reform Will Pay Growth Dividends, January 4, 2018

Hancock Farmland Research Brief                                           February 2018
Hancock Farmland Research Brief - Hancock Agricultural Investment ...
2017 Tax Reform: Implications for Agriculture and Farmland Investments             (Continued from page 1)

    productivity provides the basis for real gains in                There will be winners and losers in the U.S.
    wages and rising household income that are likely to              agricultural sector as a result of the new tax
    support increased food consumption.                               legislation unless some amendments are made to the
                                                                      law. Section 199A of the new tax provision enables
   Lower corporate tax rates should also reinforce and               cooperatives to deduct 20% of all revenues generated
    possibly accelerate the current wave of investment in             from farm-related sales. This deduction is not
    farmland and agricultural infrastructure.      These              provided to individual farmers or institutional
    investments make it easier for consumers and                      investors. The net impact of Section 199A of the new
    corporations to access raw materials for food                     tax provision means that cooperatives will be able to
    consumption, as well as improve the cost-competitive              produce crops more competitively unless Section
    position of U.S. food production and agricultural                 199A is amended.
    commodities in global markets.
                                                                     The 2014 Farm Bill is set to expire on September 30,
Although the federal tax reform looks positive for U.S.               2018. There is concern that the new tax provisions
farmland investments overall, there are also likely to be             will lead to an expanded budget deficit which will
negative consequences for agricultural producers. These               lead to cutting of government programs across the
include:                                                              board. If this were to occur, some provisions that
                                                                      currently benefit the U.S. farm community will likely
   The reduction in corporate taxes and individual                   be cut and some industries within the agricultural
    income taxes is likely to have an inflationary impact             space might be left behind. Potential programs that
    on the U.S. economy. To balance increasing                        could see cuts include cotton, dairy and sugar
    inflation, the Fed might have to increase rates more              programs, the Conservation Reserve Program (CRP)
    regularly which would assist in strengthening the                 and potentially changes to the Price Loss Coverage
    value of the USD against currencies of other major                (PLC) and Agricultural Risk Coverage (ARC
    agricultural producing countries. The impact of                   programs, which provide price risk insurance
    increasing rates and a stronger USD would likely                  coverage to farmers.
    lead to a decline in the competitiveness of U.S.
    exports and reduce global demand for U.S-based
    commodity trade.

Hancock Farmland Research Brief                       February 2018                                                    2
Hancock Farmland Research Brief - Hancock Agricultural Investment ...
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HNRG Research Team

Court Washburn                               Bill Devens
Managing Director and                        Associate Director, Agricultural
Chief Investment Officer                     Economics
cwashburn@hnrg.com                           wdevens@hnrg.com

Keith Balter                                 Elizabeth Shestakova
Director of Economic Research                Economic Research Analyst
kbalter@hnrg.com                             eshestakova@hnrg.com

Mary Ellen Aronow                            Keith Goplerud, CFA
Associate Director, Forest                   Economic Research Analyst
Economics                                    kgoplerud@hnrg.com
maronow@hnrg.com

Hancock Farmland Research Brief                                                        February 2018                                                                                      3
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