Feb 17, 2012
Unrealistic expectations

The National Cattlemen’s Beef Association (NCBA) said their primary issue this year was going to be a strong attempt to eliminate estate taxes. Last week, President Obama revealed his budget proposal of $3.8 trillion for next year. Unfortunately, many of his tax and spending ideas are not in line with many folks in agriculture, especially estate taxes.

However, just because he proposed a $3.8 trillion budget doesn’t mean he is going to get it. As a matter of fact, he has never had a budget pass during his administration. When this guy talks about money, Congress seems to cut him off pretty quickly.

Some of the conversations I have had with my D.C. sources say there isn’t a lot of enthusiasm in Congress about this budget and this will not play well during an election year.

Last week, NCBA’s new president, J.D. Alexander, a Nebraska cattle feeder, said that the president’s take on the estate tax threatens job creation and punishes the producers of food and fiber. In a last minute negotiation at the end of 2010, Congress set the estate tax at a $5 million exemption for an individual, and a $10 million exemption on couples, with a maximum tax rate of 35 percent. Obama’s budget proposes a $3.5 million exemption level and a 45 percent tax on the remaining estate.

Obama is diligent about pursuing his ideas of taxing the rich and spreading the wealth. Most cattlemen and farmers who have been in the business awhile have watched their asset base grow over the years, but still deal with thin cash flow. Estate taxes have had a habit of forcing many in agriculture, which have not had adequate estate plans, to sell their farm or ranch holdings in order to pay the tax, ultimately forcing many out of business or reducing their operating scope. Agriculture has always been an asset-rich, cash-poor industry. Estate taxes have made it difficult to pass the assets along to family members who wish to continue farming or ranching.

Alexander said, “This outdated tax is escalating the depopulation of rural America. People need to be aware that Obama’s budget is only a suggestion and the actual budget will be determined by Congress. We will be engaging the members of Congress over the next several months to ensure a permanent fix to the estate tax is achieved.”

Obama has said many times that he wants to improve opportunities in rural America, but he has a strange way of going about it. Also in his budget was a proposal to raise federal lands grazing fees by $1 per AUM, which demonstrates that he is listening to environmental groups rather than agriculture. I don’t think he can change the grazing fee formula without an act of Congress.

This episode is more amusing than anything, especially when you realize this president has never had a budget endorsed. His Chief of Staff Jacob Lew said that this budget will actually close the deficit gap because it will represent a smaller portion of gross domestic product, which suggests these guys expect the economy to grow rapidly over the next year, which may be a bit unrealistic. It’s perplexing that these guys can actually justify a fifth year of a trillion dollar plus deficit spending, especially after Obama said that he will halve the deficit by the end of his first term.

About the only positive thing I see about this administration’s spending is that it will certainly keep the dollar at a low value relative to other currencies. This should keep export trade strong, which has been one of the major elements holding this beef and cattle market up.

USDA came out with a long term projection for many commodities last week and they are expecting to see meat exports continue to expand. Beef production will continue to contract for a couple years, then by 2015, they expect to see beef production grow.

USDA also expects to see a much larger corn crop this next year and forecasts call for corn planting to expand to 94 million acres, with expected yields of 164 bushels per acre, based on trend line forecasts. If that does happen, we will be awash in corn next fall. Some market analysts have already suggested a possible corn carryover of 1.6 million bushels. This could move corn prices to the $4 range and put some of the profitability back in livestock feeding. However, I would have to say that this forecast is perhaps as optimistic as Obama’s budget passing the Congress. — PETE CROW