My youngest son, who just completed his second year of college business courses, asked me the other day, “how are we going to pay for all of this government spending and when do we do something about inflation?” We visited about printing U.S. dollars, inflation, monopolies and businesses paying sign-on bonuses to bring people back to work. Taxes will increase as inflation rises, but tax rates will also increase to help pay for these programs and the higher interest rates that are on the horizon.
Inflation Is Higher, Interest Rates Are Next
The most stunning economic statistic I have seen in the past few months is this: “According to the Federal Reserve, 41% of all U.S. dollars ever printed, were printed in the last twelve months.” It shouldn’t surprise anyone, that we are all paying more for everything.
The Fed will raise interest rates to slow growth and reduce inflation. Higher interest rates reduce consumer spending because it increases the cost of borrowing. The Fed has been in a wait-and-see mode to confirm long-term inflationary impacts before increasing interest rates. It appears the Fed is starting to pay attention: in June policymakers updated their forecast for an interest rate hike to 2023 from 2024 at the earliest.
There is a window of opportunity to lock in a low, long-term interest rate before rates increase. High Plains Farm Credit staff went to work last year to help our farmers and ranchers lower their interest rates. As of June 30, 2021, out of the nearly 3,000 loans in our long-term portfolio, we have less than 250 loans with a rate greater than 5% in our portfolio. So if your rate is greater than 5% or your land is financed with a loan product that isn’t fixed for the entire life of the loan, give your local branch office a call today. Our lower, long-term rate coupled with our 1% patronage dividend will favorably position your operation in a higher interest rate environment.
It doesn’t matter which political party you are affiliated with or who you voted for, if you are a farmer or rancher you have to be concerned with some of the tax reform proposals that have been introduced. President Biden’s plan called for an elimination of the stepped-up basis. The step-up basis is important to family farmers and ranchers because land asset values appreciate over the years and it is only taxed if it is sold, not at inheritance. As an example, the American Farm Bureau Federation (AFBF) estimated that since 1997 the average cropland value in the United States increased by 223% ($1,270 per acre to $4,100 per acre). This means that based on national average cropland values in the United States, the average capital gains tax would exceed $560 per acre, according to the AFBF economic calculations. Forbes magazine reported the only way to pay that bill would be to sell off 40% of your farm. What you would be left with is a farm that can no longer support your family.
A few weeks later, the Biden Administration released a statement that family farms would be treated differently, but there weren’t any concrete details. Senator Bernie Sanders’ also proposed a tax reform bill, the “For the 99.5% Act”, which also brings the possibility of unprecedented changes to the tax and estate planning landscape. According to the House Ag Committee, the “For the 99.5% Act” would impose undue burdens on America’s farmers, ranchers and rural communities. If enacted, 44% of farms would face higher taxes to the tune of $2.1 million per farm nationwide. Rural America deserves better. High Plains Farm Credit has been meeting with legislators to explain these issues and protect your family farm.
Meat Packer Profits
I walked by the meat counter the other day and stopped in my tracks. Beef bones were being sold for $3.00 per pound! Think about it, most producers in the U.S. are barely getting $1.00 per pound for a steer, yet bones are bringing $3.00 and don’t forget the obscene cost for actual cuts of meat. The packers are reaching the point where they are about to crush the U.S. cattle producers.
Last year the USDA and Department of Justice investigated the meat packing industry after Tyson’s Holcomb plant fire and the pandemic’s initial market impacts. In a report dated July 22, 2020, USDA stated: “The investigation into potential violations under the Packers and Stockyards Act is continuing. USDA does not solely own investigatory authority over anticompetitive practices in the meat packing industry and has been engaged in discussions with the Department of Justice regarding allegations of anticompetitive practices in the meat packing industry.” To date, neither USDA nor Department of Justice has reported any findings or provided any updates on the investigation.
Cattle producers continue to face challenging market dynamics similar to those experienced last spring. Kansas cattle producers are also concerned with the historically wide gap between wholesale beef prices and fed cattle prices. While some of the historic price spread can be attributed to larger fed cattle inventories and constrained operational packing capacity, questions remain in the cattle industry as to if any illegal activity has occurred.
The bottom line is industry participants need to know if the current situation is simply a matter of supply and demand fundamentals, as referenced in the 2020 USDA report, or if it is a result of unlawful market behavior. As I explained to my son, monopolies have the ability to create cost-push inflation since they can set any price they want, they will raise costs for consumers for profit. It is time for the USDA and Department of Justice to provide a report of their findings.
As you discuss inflation, interest rates, taxes and corporate wealth at the coffee shop, I encourage you to be active and join your voices with ours on these important issues. My talk with my son hit a little closer to home the very next week when he sent me the following text: “My usual $5.38 value meal is now $6.22. So it begins…”.
So it begins, indeed.