Kruse talks trade, corn and bean costs
With income barely covering expenses, one shock could ‘create a crisis’
From the 1980s farm crisis to the high point of $7 per bushel corn just a few years ago, David Kruse talked ups and downs in the agriculture economy during his talk at the 2017 Farm News Ag Show Thursday.
Farmers may be on track for another “down,” said Kruse, who is president of CommStock Investments and whose column appears in Farm News.
“Somebody told me they don’t want any bad news. I don’t have that bad news as we stand here right now, but we’re probably one event away from it,” Kruse said. “One really negative shock, one train or truck hits us at this point in time would create a crisis.
“We’re kind of on the edge. What happens from here is whether or not we get pushed over.”
That’s why Kruse is concerned about talk of ending NAFTA, which would plunge the agricultural states into a recession, Kruse said.
Along with trade agreements and tax policy, Kruse also addressed grain price trends, future predictions, the expected La Nina weather patterns and how that might impact corn growth in South America, farmland prices and debt to a standing-room-only crowd of around 140 people.
Farm costs and farm revenues are very close right now, Kruse said, and farmers are barely making enough to cover expenses.
“We’re not really making any money right now. We’re just living off of equity,” said Kruse. “I don’t think it will surprise anybody here when I say we’re seeing some record tight margins right now.”
Mexico is the number one buyer of corn and pork, the number two buyer of beef, and the number three buyer of soybeans.
“Like I said, we’re one major push off the ledge to this becoming a crisis,” he said. “Is NAFTA and trade pushing us off the edge? It could very well be. I’m worried about it. I’m trying to figure out ways to protect my balance sheet that don’t cost too much money.”
One thing he thinks is more sure–tearing up NAFTA will cause a recession in Mexico, he said. It will cause a recession in Iowa and other ag states, but probably not in the U.S. overall.
As Mexico’s economy falls, this may lead to a resurgence of illegal immigration into the U.S., he said.
And President Donald Trump is looking to change trade relationships with other countries as well, Kruse said, which could leave the U.S. left out.
“We’ll make South American agriculture great with this trade policy,” he said. “I think if we build trade barriers here, if we build walls and get rid of trade agreements we have, China is going to go other places. They have a lot more potential in Brazil to invest in infrastructure.”
Farmers should watch the new tax plan closely, Kruse said. For one thing, it caps state and local tax deductions at $10,000.
“We’re still trying to figure out if they mean farmland property taxes or not. I’ve been told both ways,” Kruse said. “I had an accountant who said no, they don’t mean business taxes like for farmland, property taxes; and I’ve had another who said they did not see that exclusion there. That it, $10,000.
“You take a guy out in Nebraska, they get $100 an acre property taxes out there. If you can’t go and deduct that, that’s a pretty material issue. I hope they get this right.”
The new law limits how farmers could carry forward losses, he said.
“Agriculture has always been cyclical. Sometimes we make money, and some times we lose money. I thought that was an important provision for us,” he said. “They’re trimming us back and I don’t know why.”
The tax plan also isn’t favorable to farmers who serve as pass-through entities.
“I’m a pass-through entity. I think a lot of you in the room probably are,” he said. “We go back to what was promised and what we’re getting. When Donald Trump was in Iowa he said farmers will pay a 15% tax rate. That got my attention.”
That’s not in the final bill, though; pass-throughs end up paying a higher rate than large corporations.
“Basically you are getting a lower tax rate on a slice of your pass-through income. So you’re still going to be at sub 30 while corporations have it at 20,” Kruse said.
“What I got out of Donald, when he came out and said everybody would pay 15 percent, I thought for the first time, here’s somebody who is going to give us the same tax rate as the corporations. The small businesses are going to get treated the same. Well, that didn’t last.”
With farm production so high, farmers need high demand for their crop, Kruse said.
He believes ethanol is one of the needed uses for corn, but said it’s been a challenge to keep ethanol supported in the past year.
EPA Administrator Scott Pruitt tried different ways that would have harmed ethanol production, including lowering the RFS numbers.
“Everyone was assuring me that Donald Trump supports ethanol, but that didn’t stop Pruitt from trying,” Kruse said.
He said Iowa Senators Joni Ernst and Charles Grassley fought for the renewable fuel standard.
“Grassley said he was lied to. When Pruitt came in to get his confirmation hearing he stood in both their offices and promised he wouldn’t do exactly what he was doing,” Kruse said.
So far their efforts have been successful, he said, “but I never heard Trump tweet it. It’s not official until it’s a tweet. But it did get pushed back.”