General Economy and Agricultural Economy
Archie Flanders and Fred White
Modest economic expansion is expected in 2003. Also, net farm income in 2003 should be slightly higher than in 2002.
U.S. General Economy
The Economic Research Service of the USDA estimates 2003 U.S. Gross Domestic Product (GDP) growth at 2.7 percent, slightly higher than the rate of 2.5 percent in 2002. In comparison, growth was 0.3 percent during the well-documented slowdown of 2001. Although these rates are modest when compared to the unusually accelerated rates of the late 1990s, growth rates for 2004 and beyond are expected to be above 3 percent, which would be closer to the historical trend.
Several factors indicate a continued economic recovery in 2003. Data from the U.S. Department of Commerce shows orders for durable manufactured goods increasing while inventories of durable goods continue to decrease. Low inventory levels are a result of the economy working through surpluses. These surpluses that accumulated during the rapid expansion of the late 90s were largely to blame for the slowdown of 2001.
Worker productivity is expected to increase in 2003, helping corporate profitability. Manufacturing productivity or output per worker, has been increasing largely because of technological innovations. The downside of this is that as demand increases for manufactured goods, fewer workers are required, although at higher wages. Thus, unemployment will be slow to decrease as the economy expands. Eventually, economic growth and unemployment rates will stabilize at normal levels, and productivity will be at a new high.
There will be only slight increases in inflation and interest rates during 2003, with levels remaining low by historical standards. Fixed investment in the economy will increase by 3.4 percent in 2003, after declining by 3.8 percent in 2002. Fixed investment growth is expected to continue for 2004.
Georgia Economy
According to the Economic Forecasting Center at Georgia State University, Georgia’s economy will trend in the direction of the national economy, but recovery may lag. Georgia was an economic leader before the recent slowdown, and the low point of decline was not as drastic as in many regions.
For example, metro Atlanta has a current unemployment rate one percentage point less than the U.S. rate. In the metro area, the economy is dominated by services related to transportation, technology and hospitality (business conventions and tourism). Many lost jobs in transportation and technology are permanently lost due to redirection of personnel or efficiency gains. Also, Georgia is now facing increased competition from other states for convention business. Due to lost economic multiplier effects, other areas of Georgia are impacted by diminished economic activity in Atlanta.
U.S.
and Georgia Agricultural Economy
Even though domestic demand for agricultural products is not sensitive to changes in the national economy, factors relating to the economy do impact the profitability of agricultural production. Continued low interest rates will lead to low cost of capital. Low inflation keeps general input prices from rising. Energy prices are expected to remain stable, or possibly decline in 2003, and this benefits farmer input costs for fuel, fertilizer and pesticide purchases.
Export demand is sensitive to economic strength in purchasing countries. The ability of developed countries to purchase U.S. products will be enhanced by general economic growth. USDA predicts developing countries of Asia to have 2003 GDP growth rates that are twice that of developed countries. China and India will have high growth rates in 2003, and with large populations, these countries are attractive export markets. However, the strength of the U.S. economy leads to a high value of the dollar when compared to other currencies, making exports expensive for purchasers. Total value of U.S. agricultural exports is forecast to increase by 7.4 percent in 2003.
U.S. crop prices are expected to increase in 2003. Beginning stocks in 2003 for most major field crops are substantially lower than in 2002. Total red meat production is also expected to decline in 2003, leading to a 10 percent increase in cattle prices and a 7 percent price increase for hogs. Broiler prices will increase 5 percent despite increased production. The net effect of red meat and poultry production changes will be about a 1.4 percent decrease in total meat production.
U.S. and world agricultural circumstances have a bearing on the outlook for Georgia farmers. Exports of U.S. broiler meat are anticipated to increase by 14 percent in 2003, with developing countries likely being the primary buyers. Cotton prices should increase due to tighter supplies, while exports should increase to meet world demand. Increased world consumption of cotton and decreased global production will lead to higher cotton prices for Georgia producers.
Farm
Financial Conditions and Outlook
Cesar Escalante
U.S. net farm income from 2002 is expected to be down approximately 16 percent. This decline is due primarily to smaller crop and livestock cash receipts that annually contribute 43 percent and 36 percent, respectively, to total farm revenues.
Significant drought conditions in certain areas in the country, including Georgia, reduced the yields of crops grown over the summer months. Although market prices for certain crops (such as feed grains and soybeans) were substantially higher in 2002, aggregate cash receipts from all crop production remained low by historical standards.
Livestock operations, however, were even more financially depressed than crop enterprises as large carryover stocks of animals for meat and milk forced prices lower.
In the end, each state’s mix of crop and livestock production will determine the full impact of the expected drop in the level of local net farm incomes for 2002.
In Georgia, livestock revenues accounted for about 46 percent to 54 percent of total farm revenues during the period 1991-2001. During this eleven-year span, the average crop-livestock mix leaned more heavily on livestock cash receipts at 51 percent than crop revenues at 35 percent. Thus, once the final numbers are in, projected net farm income for Georgia’s farm economy could be much lower for 2002, potentially dropping by more than the forecast 12 percent decrease for the U.S.
Sources of Cash Receipts of Georgia Farms, 1991-2001
Source:
Economic Research Service, USDA
On a positive note, higher cash receipts from government programs and the sale of forestry products and other auxiliary farm products/services could temper the sharp decline in the state’s farm income levels. Specifically, preliminary 2002 forecasts of state farm revenues indicate the following:
· 3.8 percent reduction in crop sales - $1.815 billion
· 8.5 percent drop in livestock revenues - $3.224 billion
· 18.6 percent increase in direct government payments - $507 million
· 6.27 percent increase in revenues from sale of forestry products and auxiliary farm services - $856 million
These projections add up to a 3.6 percent or $6.403 billion decline in gross farm revenue for 2002 as compared to 2001. With farm production expenditures generally expected to remain flat, net farm income for 2002 is expected to post a 10.5 percent decline from 2001, approaching a $2.06 billion loss from the previous year
The prospects for farm income enhancement in 2003 hinge on significant upswings in farm commodity prices as well increased off-farm employment opportunities. Unfortunately it appears that in 2003, supplemental income from off-farm employment and investment activities will be necessary for many farm families.
Preliminary farm real estate valuations compiled by USDA indicate that the average farmland value in Georgia has gone up by an annual rate of 9.5 percent. In January 2002, average farmland values were estimated at $2,300 per acre while the average annual rate of increase in cropland and pasture values was about 8.5 percent (increasing to $1,660 and $2,600 per acre, respectively, for the same period). These high rates of value increases, however, would not be sustained throughout the rest of the year. The projected decline in 2002 farm income level will slow down the accelerating growth in farmland values.
In spite of the expected large drop in farm profitability, a modest increase of 1 percent in the value of farm assets, especially farmland, should be realized for 2002. This can be attributed to a favorable credit environment where attractive mortgage rates are instrumental in stimulating growth in the housing sector. This translates into stronger demand for land for urbanization and recreational purposes. The passage of the 2002 Farm Bill, which reduced uncertainty concerning future farm program payments, also contributed to recent gains in farmland values. The growth in farm asset values can be sustained in 2003 through significant improvements in farm profitability and the economy finally delivering a solid performance.
Farm business debt for 2002 is expected to show a 2 percent increase as many farmers fully utilized their available credit lines in 2002 to improve business liquidity conditions. A USDA study that examines the debt and income profiles of various farm enterprises suggests that livestock producers as well as tobacco, cotton and peanut farmers are expected to experience greater difficulties in meeting their debt servicing obligations given the poorer income prospects for these enterprises. The greater concentration of these farm operations in Georgia, therefore, indicates potential debt repayment problems for the state's farm borrowers making payments for 2002.
Economic momentum, if indeed realized by 2003, could aggravate the financial conditions of borrowing farms with existing debt servicing problems as growth usually ushers in a period of higher interest rates. This potential problem could be mitigated by substantial improvements in market prices and production levels.
In the end, a smaller increase in farm asset values, relative to projected farm debt growth, would be enough for the Georgia farm economy to realize modest increments in its net worth. This is a result of the accumulation of a large farm asset base through the years, prudent debt management practices (especially in the late nineties) and healthy, historical leverage positions consistently improving since 1997.
Bill Givan
Georgia farmers annually spend $3.7 billion to $4 billion to produce the state’s agricultural output. Feed is the largest single cost item due primarily to the state’s poultry industry. In 2001, purchased feed amounted to about $1 billion, excluding the value of on-farm grown feed for livestock.
The 2002 crop year was the first in many where farm production costs declined. Although the decrease was less than 1 percent, it still was a welcome relief from the cost increases of recent years. Low grain prices, lower interest rates, declining fertilizer prices and generally stable energy prices (which affect chemical costs) all contributed to the input cost decline.
Most Costs Stable Next Year
Fertilizer prices are presently at 2002 levels, which were dramatically lower than 2001 prices. Especially lower are nitrogen prices and there is little on the horizon that indicates these prices will increase.
Interest rates have been generally stable or declining in recent months, and the Fed is not likely to increase them next year without the threat of inflation. If annual operating loans are priced at prime plus some value, then we may see these interest rates around 6 percent per year.
Seed costs are likely to stay flat, and some may actually decline in price.
Machinery Sales (especially tractors) are speculated to increase next year, due mainly to increased government farm program payments. But these payments are highest in major grain and oilseed producing states. At this point, it is hard to determine if increased sales will strengthen sales prices, and if this will extend to the Southeast.
Not All Cost Will Be Stable Next Year
Feed costs are expected to be higher in 2003 due to higher grain and soybean prices. This follows 3-4 years of relatively flat grain prices and will amount to a moderate increase in feed supply costs. But, the costs to produce this feed, fiber and other farm commodities currently appear relatively stable.
Unknowns - and Uncertainties
The price of crude oil is the biggest unknown, as is the case every year. Much depends on the situation in Iraq. Any conflict there would cause a sudden spike in prices, which may or may not be short lived.
The length of any conflict plus the willingness of other producers to fill any production gap will determine prices. Also of concern is the fact that crude oil prices are a major determinant of farm chemical prices.
We are told the stronger market prices for many commodities plus government payments are instrumental in keeping farm input suppliers in business. Yet we keep seeing firm mergers and rumors of future mergers and/or sales of these firms. When these occur we usually see people downsizing. The farm input business faces the same uncertainties as do farmers. In periods of lean times, they tend to lower input prices to try to control market share.
All this points to a slight decrease in crop production costs in 2003, but higher feed costs will affect livestock producers.
Income
Tax Outlook
Keith
Kightlinger
Income Tax Rates
The Economic Growth and Tax Relief Reconciliation
Act of 2001 introduced a 10 percent income tax bracket for individual
taxpayers. For tax years 2001 through
2007, the first $12,000 of taxable income of a married couple filing jointly
(MFJ) and $6,000 for single individuals and married filing separate (MFS) is
taxed at the 10 percent rate. In 2008,
the bracket ceiling increases to $14,000 (MFJ) and $12,000 (Single and
MFS). Beginning in 2009 the ceiling of
the 10 percent tax bracket will be adjusted annually for inflation.
The 15 percent tax rate continues unchanged, except for
annual adjustments. The higher individual
income tax rates, however, are being reduced beginning in 2001.
Individual Income Tax Rates
|
“Old” Tax Rates |
28% |
31% |
36% |
39.6% |
2001 Rates
|
27.5% |
30.5% |
35.5% |
39.1% |
|
2002 – 2003
Rates |
27.0% |
30.0% |
35.0% |
38.6% |
|
2004 – 2005
Rates |
26.0% |
29.0% |
34.0% |
37.6% |
|
2006 and later
Rate |
25.0% |
28.0% |
33.0% |
35.0% |
“Marriage Penalty” Relief
“Marriage penalty” relief is being accomplished by
making the 10 percent income tax bracket for married taxpayers filing jointly
twice as large as it is for single individuals.
Major relief begins in 2005, with the increase of the standard deduction
for married taxpayers filing jointly. In 2009, the standard deduction amount
for married taxpayers filing jointly will be twice that of the standard
deduction for single taxpayers.
Married Filing Joint Standard Deduction as
a Percent of Single Standard Deduction
Tax Year
|
Percent |
|
2005 |
174 |
|
2006 |
184 |
|
2007 |
187 |
|
2008 |
190 |
|
2009 and after |
200 |
Additional 30 Percent First-Year Depreciation
The Job Creation and Worker Assistance Act of 2002 permits an additional 30 percent first-year (AFY) depreciation deduction for assets used in a trade or business purchased after September 10, 2001 and before September 11, 2004. The asset must be placed in service before January 1, 2005. Only the original user of the asset may claim the 30 percent AFY deduction and used property is disqualified. In the case of breeding livestock, female animals are eligible if acquired before delivering their first offspring, whether or not they were bred when acquired. For male animals, the test is whether or not the animal has previously been used for breeding purposes.
Peanut Quota Buyout Program
The Farm Security and Rural Investment Act of 2002 (Farm Bill 2002) abolished the quota system of peanut production and marketing. Peanut quota owners are eligible to receive a buyout of their 2001 base quota. The quota buyout can be taken either as a single payment of 55 cents per pound, or in a series of five annual payments of 11 cents per pound.
Peanut quota is considered by the Internal Revenue Service to be an interest in land. As such, its cost or other basis is recoverable by the taxpayer only when the asset is disposed of. As an interest in land, peanut quota is considered to be real property. It is also usually considered property used in a trade or business, whether or not held by a producer. Under Section 1231 of the Internal Revenue Code, the disposition of property held for more than one year and used in a trade or business is treated as follows:
· Gains are long-term capital gains, taxed at the long-term capital gains tax rates
· Losses are ordinary losses, included in full on the taxpayer’s return for the sale year
Direct and Counter-Cyclical Payments
Farm Bill 2002 uses direct payments and counter-cyclical payments to producers to replace the production flexibility contract payments and market loss assistance payments of the 1996 Farm Bill. Producers have some flexibility in determining when they will receive these payments, and payments are included in the taxpayer’s income in the year they are received. Payments are subject to both self-employment tax and income tax if the recipient is a material participant in a farm business. Share-rent landlords are not subject to self-employment tax on this or any other farm income, if they do not materially participate in the farm business and are eligible to report their farm income and expenses on Form 4835.
Conservation Reserve Program
The taxation of payments received by landowners under the Conservation Reserve Program (CRP) has been an issue of debate since the mid-1990s. The position of the Internal Revenue Service has been that CRP payments are agricultural program payments subject to self-employment tax if received by a material participant in a farm business. This position was upheld in Ray v. Commissioner, T.C. Memo 1996-436.
In the case of Wuebker v. Commissioner, 110 T.C. No. 31 (June 23, 1998), however, the Tax Court agreed with the taxpayer that the payments were rent rather than agricultural program payments. The court further agreed that the payments were not subject to self-employment tax under the rule that rent paid for land used in agricultural production is subject to self-employment tax if the lessor is a material participant in agricultural production on the rented land. The court based this part of its decision on the fact that the CRP contract requires that enrolled land be taken out of agricultural production. The Wuebker Tax Court decision was reversed by the Sixth Circuit Court of Appeals in 2000. The Court of Appeals held that the payments were not rent, since the government did not occupy the land. While Circuit court decisions are not binding law outside the circuit making the ruling, the Sixth Circuit ruling is the highest substantial authority at this time on the issue, and it supports the previous position taken in Ray.
2003 Cotton Outlook
Don Shurley
The 2003 cotton price outlook, at this juncture, is encouraging. This is a “cautiously optimistic” statement to make given the price struggles cotton producers have had to contend with the past four growing seasons (1999-2002). Since 1999, U.S. cotton prices each crop year have averaged less than 50 cents per pound (actually much less than 40 cents per pound for 2001). 2001-2002 saw the lowest cotton prices since 1985. To compound the price problem, many producers have also experienced low yields and poor grades. This has resulted in increased production cost per pound of lint in combination with significant price discounts, a sure recipe for financial disaster.
But on a much brighter note, the supply/demand facts simply can no longer be ignored. Price recovery “may” be on the horizon.
World cotton production for 2002 was 87.4 million bales, down 11 percent from 2001 and the lowest level since 1998. Production (acres and/or yields) declined in several major countries including the U.S., China, India, and Australia. At the same time, world cotton demand is estimated at a record 96.4 million bales, up 2.4 percent from 2001 and 4.7 percent since 2000. World stocks at the end of the 2002 crop marketing year are currently projected to be 38.9 million bales, down 18 percent from 2001. If realized, this would be the lowest level since 1995.
The U.S. textile mill industry has declined 34 percent since 1997 but has been more than offset by expansion in China and other foreign countries. U.S. cotton exports have increased significantly the past two years and more than offset the decline in U.S. mill sales. Total off-take (mill use plus exports) still stands at over 18 million bales, a very respectable level. But look at what has happened to the price of cotton. It is this fundamental shift in off-take, trade and market share that perhaps represents the most challenging obstacle to further strength in cotton prices.
World
Cotton
Production,
Consumption, and Ending Stocks
1992-2002
If foreign production increases in 2003, even if foreign mill business remains strong, this will likely place pressure on U.S. export potential and keep a lid on prices. If world cotton consumption (foreign mill business) remains strong and foreign production remains at 2002 levels, the A-Index (world price) should remain strong and provide continued support and further strength to U.S. prices as well. U.S. and foreign production, foreign mill demand and U.S. exports are clearly the keys to the 2003 price outlook.
Cotton Prices, LDPs and Program Payments
The following table illustrates the relationships between cotton prices and payments. The only payment made on actual production is LDPs (loan deficiency payments) or marketing loan gains (MLGs). Because LDPs are tied to the A-Index and because the A-Index and U.S. prices tend to move together, total Crop Income Per pound does not vary as price changes. What producers lose on price is gained back on LDPs. In other words, the base quality cotton or better producers are assured of 55 to 60 cents per pound with very minimal risk.
|
Farm bill program payments (DP and CP) are not dependent on acres planted or yield produced. These payments are tied to historical production (base) and program payment yield. On acres planted equal to, or less than 85 percent of base (payment acres), total money received will be 78.6 cents per pound at the farm’s payment yield. Acres planted in excess of payment acres receive only 58.2 cents per pound. For “all acres planted”, producers must still be able to produce for the cash price plus LDP or loan redemption with MLG because payments are not tied to actual production.. |
Peanut Outlook
Nathan
Smith
A close watch will be kept on the balance between supply and demand as the peanut market adapts to a new peanut program. The supply of peanuts is more uncertain without the quota allotment to determine domestic supply. A new market price system for farmer stock peanuts is being developed with the implementation of the marketing loan for peanuts. In addition to the price offered by the shellers, producers will need to pay close attention to the “ National Posted Price”, which determines the loan deficiency price (LDP) or Market Loan Gain (MLG). The market price plus the LDP or MLG determines the net price received on production. In relation to peanut base, the Average Season Price (12 month marketing year beginning August 1 and ending July 31) will determine the counter-cyclical payment.
Supply appears to be adequate to meet domestic, export and crush needs for the 2002-2003 marketing year. A higher than normal level of stocks was carried over into 2002 due to an excellent crop produced in 2001. However, estimates of the 2002 peanut crop have shrunk since August due to disease, pests and poor harvest conditions. The estimated yield for the U.S. has dropped from 2,885 pounds per acre to 2,579 pounds per acre. Georgia’s yield estimate has dropped from 3,000 pounds per acre to 2,600 pounds per acre.
The U.S. planted acreage remained the same in 2002. Some producers adjusted acreage in anticipation of a new farm bill and peanut program. Georgia increased peanut acreage in 2002 by 35,000 acres to 550,000 total. The Virginia-Carolina region and the Southwest cut back acreage by 16 percent and 20 percent, respectively.
Harvested acreage is estimated at 518,000 acres in Georgia and 1.36 million acres in the U.S. resulting in 3.5 billion pounds of production or 1.75 million tons. This is an 18 percent drop from last year’s total production of 2.14 million tons.
The result of the smaller crop is a squeeze on peanut profitability. Perhaps the biggest adjustment to the new peanut program is cash flow as producers and lenders have to adjust to later timing of income from loan peanuts and direct and counter-cyclical payments.
Demand improved last year as total edible use increased by 3.8 percent. This is an encouraging sign that will help peanut prices if the trend continues. Early estimates for the 2002/2003 marketing year show a drop of about 2 percent in edible peanut use for the first three months. However, the long term projection is still for domestic use to increase by 5 percent. Other uses of crush, seed, exports and residual are projected down from last year. Part of this is due to the smaller crop size.
The main factor for exports is that the U.S. price is above the world price for peanuts. The National Posted Price is reflective of a domestic shelled price and is not competitive with export price bids reported in Europe. The National Posted Price will have to come down below $300 per ton to be competitive in the export market.
Heading into 2003, an encouraging factor for producers is that consumption will outpace production. Carryover stocks are projected to be down by almost 30 percent to 525,000 tons, the lowest level since 1997. Another drop in production would push prices higher to insure that domestic needs are meet. As it looks currently, producers should use the $355 per ton loan price floor to plan for the 2003 and look for opportunities to lock in a higher price through contracting or utilizing the marketing loan.
Bill Givan
Flue cured tobacco, Georgia’s third ranked crop for single crop receipts continues to face uncertainties. Although it still provides significant income for localities where it is grown, tobacco continues to be a big, fairly easy target. At last count, eight states have cigarette excise taxes in excess of $1 per pack and 17 states increased their state cigarette excise tax in 2002.
At the farm level, tobacco quota has been reduced over 40 percent since 1997, although the 2002 quota was up slightly at just less than 60 million pounds. This quota is assigned to farms and commands a support price based on a formula for each grade of leaf. In effect, tobacco growers, while having tobacco production reduced in recent years, still have the confidence their crop will be sold for, at least, the level of support.
2003 Basic Quota Less Than 2002
The 2003 flue-cured basic quota, announced December 15, will be 526.3 million pounds, 9.6 percent less than the 2002 quota of 582 million pounds. Manufacturers indicate they intend to buy 283.3 million pounds, compared to 310 million in 2002.
The other major contributor to 2003 quota is exports. For the period 2000-2002 exports were 4.8 million pounds less than the 1999-2001 average. Also, the reserve stock adjustment will be minus 11.7 million pounds. However, Georgia growers had a 14 percent production shortfall in 2002, and if they play “catch-up” in 2003, they will be producing a slightly larger effective quota.
While production has been reduced, most growers have received prices well above support prices. About 95 percent of Georgia tobacco sold in 2002 was at buying stations under direct contract with tobacco manufacturers. Average contract prices were about five cents greater that those paid at the few remaining auctions.
But these support levels have generally priced U.S. leaf above prices of offshore tobacco. Given the uncertainty of the crop’s future, grower interest in a quota buyout is at an all time high. Quota owners see this as an opportunity to exit with, hopefully, a generous payment. And some growers seem willing to give up the security of the price support safety net for greater freedom in making production decisions and selling directly to manufacturers.
A Quota Buyout Has Been Discussed...
Since 1997, several buyout bills have been introduced, the first one by Senators McCain (R-AZ) and Ford (TN). Since then, nearly a dozen bills have come along, most proposing to pay quota owners $8 per pound for quota loss, and $4 per pound to active growers to help replace lost income. In 2002, two similar bills were proposed for not only a quota buyout but to provide tobacco growers benefits similar to other program crops, i.e., direct payments, counter cyclical payments and target prices.
A primary concern with these proposals is funding. Current federal budget deficits effectively prohibit any public monies being used. So most bills propose this be funded by tobacco manufacturers, which would be passed on to consumers in the form of a user fee. Total costs of the proposals range from $15 billion to $19 billion.
Buyout monies would be paid over a five-year period. Most bills propose elimination of the program, but retain the rights (non-transferable) to grow tobacco, which would be placed in the hands of growers. In effect, any quota cost would be eliminated, effectively reducing the cost of production for those who currently lease quota.
Growers appear pleased with contracting, but express concerns that should the tobacco program be terminated and price supports removed, would buyers substantially lower prices paid for leaf?
Actions in the Political Arena
At this writing (December 2002), Congress is adjourned for the holidays. A quota buyout will have to achieve a lot of support from representatives and senators from states that will not directly benefit from buyout money, and essentially impose higher prices on their tobacco-consuming constituents.