Economic and Policy Update

University of Kentucky Department of Agricultural Economics

Economic & Policy Update Volume 15, Issue 10

Featured Articles: USDA Provides Production and Price Update as Harvest Enters Home-Stretch - Todd Davis Inheritance Tax - Suzy L. Martin UK CES & CEDIK: Strengthening Community Economic Development - Karen Fawcett Tobacco and the TTP - Will Snell Prospects for Winter Backgrounding in 2015 - Kenny Burdine and Greg Halich

Edited by: Will Snell & Phyllis Mattox

October 28, 2015

USDA Provides Production and Price Update as Harvest Enters Home-Stretch The August and September USDA Crop Production and WASDE reports have so far disappointed those who were looking for USDA to confirm their belief that this summer’s wet weather in several Eastern Corn Belt states significantly reduced yields and the size of the US corn and soybean crops. These reports have surprised and confounded some analysts and farmers who were expecting yields lower than projected

by USDA. Hope, however, springs eternal.

Those looking for production losses to spur the corn and soybean markets higher pinned their hopes on the October Crop Production and WASDE reports as they believed these reports would finally show lower yields and production. The October WASDE is important as it includes a larger percentage of harvest data as well as USDA:FSA Certified Acreage data. The Certified Acreage data is helpful in measuring the amount of prevented planted acreage or changes in intentions that wasn’t adequately reflected by the June 30th Acreage report. A pre-report survey of analysts expected the Crop Production report to project the U.S. corn yield to be reduced to 166.4 bu./acre from the September estimate of 167.5 bu./ acre. In addition, the analysts were also expecting the 2015 corn crop to decrease from the September projection of 13.585 billion bushels to an expected 13.461 billion.

USDA continued to disappoint those expecting a lower corn yield as the October Crop Production report projects the 2015 corn yield at 168 bushels/acre which is a half-bushel increase over the September projection. If realized, this would be the second largest corn yield on record. USDA did trim the size of the 2015 corn crop, slightly, from the September report. USDA reduced planted and harvested corn area

from the September report but the increase in yield mostly off-set the reduction in harvested area. The 2015 corn crop is currently projected at 13.555 billion bushels which is 31 million bushels lower than the September estimate. The 2015 crop, if realized, would be the third largest corn crop in history.

Analysts also expected USDA to lower the 2015 soybean yield slightly from the September report by an expected 0.2 bu./ acre to 46.9 bu./acre. USDA continued to surprise analysts & farmers by increasing the projected soybean yield from 47.1 bu./ acre from the September estimate to 47.2 bu./acre in October. The October report reduced 2015 planted and harvested area by 1.1 million acres from the September report. The impact of the lower harvested area was partially off-set by the increase in yield for a net reduction in production of 47 million bushels. USDA is forecasting the U.S. soybean crop to be 3.888 billion bushels which would be the second largest crop in history record, if realized, and would be 39 million bushels smaller than the record 2014 soybean crop.

USDA is currently projecting U.S. corn stocks to decline by 170 million bushels from the previous marketing-year to 1.56 billion bushels. The corn market will not be near the tight inventory levels that supported prices above $5/bushel in 2012 or 2013. USDA’s projected U.S. farm price for the 2015-16 marketing-year is $3.80/bushel which, if realized, would be $0.10/bushel greater than last year’s price.

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The soybean market is projected to experience a large increase in ending-stocks which are projected to increase from 191 million bushels for 2014-15 to 425 million bushels for 2015-16. This abundance of ending-stocks will limit price potential with the 2015-16 U.S. marketing-year average farm price projected at $9.15/bushel which would be $0.95/ bushel lower than last year’s price, if realized.

Are there usually big changes between October and January reports?

Should farmers expect the final projections in the January report to have large adjustments to corn and soybean production? USDA publishes a report describing the evolution of their production forecasts from August through the January final estimate and subsequent revisions from 1964 to date. Since 2000, there have only been four years similar to 2015 corn where USDA production projections were lowered each month from August to October. Of those four years similar to 2015, the change from October to January was, on average, a further 1% reduction in production (Table 1). In terms of the 2015 crop, this would be a further reduction of 134 million bushels (Table 1).

Assuming no adjustments in use, this would suggest a slight increase in the MYA price by $0.07/bushel. Alternatively, if USDA survey suggests that the corn crop shrinks by 1.7% (like in 2010), this would imply 232 million fewer bushels of corn and would boost the U.S. MYA price by $0.12/ bushel (Table 1).

There have only been three years since 2000 that have a pattern of production estimates similar to 2015 soybeans. On average, the percent change in production from October to January was a 0.1%

increase which would imply a 5 million bushel increase in the 2015 soybean crop. This would have a negligible impact on price. If the USDA surveys find that the soybean crop deteriorates from October through harvest, like in 2010, then a 2.3% reduction in production would translate into a 90 million bushel decrease and a potential $0.40/bushel increase in price. Alternatively, if USDA finds 2.9% more bushels in January, the additional 111 million bushels of soybeans could reduce the U.S. MYA price by $0.45/bushel (See Table 1).

The take-away message from Table 1 is that, barring an unusual surprise from USDA, those looking for lower corn or soybean production estimates in the January report to push prices higher are likely to be disappointed. If USDA follows the average change in production estimates from October to January for years similar to 2015, the production adjustments ought not to be significant enough to move prices.

Instead, farmers ought to focus their attention on the demand side of the balance sheet and pay particular attention to the export pace and quantity as exports are likely to be the wildcard for USDA’s projections for ending-stocks and price.

This issue, and other crop market related issues, can be explored in greater detail in the October Crops Marketing and Management Update newsletter posted online at www.uky.edu/ag/ agecon/pubs/extcmmm15v813.pdf.

Todd Davis, todd.davis@uky.edu Assistant Extension Professor

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INHERITANCE TAX

By Internal Revenue Service (IRS) definition, the Estate Tax is a tax on your right to transfer property at your death. Your gross estate could consist of a multitude of assets including but not limited to cash, securities, real estate, businesses, trusts, etc. In very simplified terms, the value of your estate is based on the fair market value of all your assets on the date of your death less any debts against those assets.

For the 2015 calendar year, if the net value of your estate is less than $5,430,000, there will not be any estate tax due nor will an estate tax return need to be filed. In addition, starting in January 1, 2011, the IRS has allowed for “portability” of any unused exemption to the surviving spouse of a decedent.

In other words, if you pass away in 2015 and your net estate is worth $3,000,000 then your estate can elect to pass on the unused portion of your exemption, $2,430,000 ($5,430,000 - $3,000,000), to your spouse. Portability is an election, which means that even if there is no tax due for the decedent, a timely estate tax return must be filed and the election must be made on that return. An estate tax return is considered timely if filed no more than 9 months after the date of death of the taxpayer.

For residents of the state of Kentucky there are three classes of beneficiaries that determine if there are any inheritance taxes owed by the estate.

• Class A beneficiaries include surviving spouse, parents, children (by blood, stepchildren, children adopted at infancy or adopted children who were reared by decedent during infancy), grandchildren (issue of aforementioned “children”) and brothers and sisters (both whole and half).

Class A beneficiaries are exempt from paying inheritance tax.

• Class B beneficiaries include nephew, niece, half-nephew, half-niece, daughter-in-law, son-in-law, aunt, uncle, or great-grandchild who is a grandchild of aforementioned “children”. For Class B beneficiaries there is a $1,000 exemption of their distributive share of the estate and the tax brackets start at 4% and can go up to 16% if their distributive share is greater than $200,000.

• Class C beneficiaries are all persons not considered Class A or Class B beneficiaries. For Class C beneficiaries there is a $500 exemption of their distributive share of the estate and the brackets start at 4% and go up to 16% if the distributive share is greater than $60,000.

The previous paragraphs summarize estate tax laws on both the federal and Kentucky level.

The reason for that is there are two things you will need to do as you start thinking about estate planning. One, you need to gather all the information you have on your assets. You’ll need all of your deeds, insurance policies, stock statements, retirement statements, etc. If you have a balance sheet, you will need to look over it very closely. What is the fair market value of your assets, particularly for machinery, buildings, grain facilities and land for farming operations? The second thing you will need to do is determine what your goals are for your estate planning. Who is going to inherit your estate? Once you’ve started to evaluate these two things, (what you have and who is going to get it) you (and your attorney, financial advisor, farm analysis specialist, etc.) can estimate if your estate will owe any taxes.

One myth of estate planning is that if you won’t owe any estate taxes there is no need for any estate planning. That is wrong. The way that you go about your estate planning might differ if you expect to pay estate taxes versus if you don’t. The best advice I can give for someone that is starting the estate planning journey is 1) surround yourself with a good team of advisors 2) you have to realize that fair and equal aren’t the same thing and 3) if it matters to you what happens to your assets, then you must make some tough decisions and, with the help of a good lawyer, put those decisions in writing.

Suzy L. Martin, SLMartin@uky.edu Farm Business Management Specialist

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UK CES AND CEDIK: STRENGTHENING COMMUNITY ECONOMIC DEVELOPMENT The Community and Economic Development Initiative of Kentucky (CEDIK) has been collecting success stories of University of Kentucky Cooperative Extension Agents facilitating economic development in communities. Here are two recent stories; the first focuses on main street efforts, and the second focuses on foreign investment and a small business incubator program.

The Heart of Scottsville Main Street Program continues to push forward with long-term economic development by investing in the historic Carpenter-Dent Building in the downtown public square. The 2,000 square foot, two-level building’s tin ceilings, wood floors, elevator access and exposed brick walls have been restored. The building is complete with clear window views of the downtown public square streetscape park areas.

Janet Johnson, Allen County Family & Consumer Science Extension Agent, has facilitated leadership and economic development for 15 years as Board Chair for the Heart of Scottsville Main Street Program. To match Scottsville’s prior downtown historic preservation design and economic restructuring, the building and restaurant incubator pilot program will strengthen the community’s existing assets while expanding and diversifying its economic base. Learn more at http://cedik.ca.uky.edu/files/october_2015_ success_story.pdf.

Butler County’s Entrepreneurial Coaching Team is led by Greg Drake II, Butler County Agriculture and Natural Resources Extension Agent, Richard Wan, Economic Ambassador for Butler County, and two volunteer leaders.

The team travelled to Washington D.C. in June to meet with a minister-counselor at the Chinese Embassy to discuss Chinese investment in Butler County. The committee expects a delegation from the Chinese Embassy to visit Butler County during the fall of 2015.

The Entrepreneurial Coaching team also operates the Morgantown/Butler County small business incubator program. Ensuring the future of the incubator, the program’s finances are now a part of Butler County government.

The incubator program supports individuals interested in starting small businesses. The incubator program offers entrepreneurial coaching, financial assistance and additional management support for the business owner.

Learn more at http://cedik.ca.uky.edu/files/ august_2015_success_story.pdf) Entrepreneur and business support at all stages of growth positively affect the local economy. Visit our website, http://cedik.ca.uky.edu, to read more about how CEDIK and Cooperative Extension are supporting economic development in Kentucky.

Karen Fawcett, Karen.fawcett@uky.edu CEDIK Program Associate

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Tobacco and the TPP The United States, along with eleven other nations (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam) recently approved provisions in the Trans Pacific Partnership (TPP) trade agreement which will could potentially impact consumers in approximately 40 percent of the world’s economy.

Agricultural organizations and commodity groups (along with many other industries impacted by the agreement) are now assessing its potential impact for their individual sectors. The Obama administration, along with congressional leaders, are weighing in on the net impact on trade and jobs in assessing the political support for this massive agreement before a straight up-or-down vote on the entire agreement (i.e, no amendments).

In the midst of the debate was how to “handle” tobacco. In general, U.S. tobacco farmers and multinational tobacco companies could benefit from improved market access and lower tariffs to boost sluggish export sales. Health officials and political leaders in several TPP nations favored “carving out” trade concessions for tobacco to benefit public health. Ultimately, tariff reductions were allowed for tobacco leaf trade, but the TPP includes new protections that will allow governments to adopt public health measures (e.g. regulations on the sale and packaging of tobacco products) relating to manufactured tobacco products, without facing the threat of legal challenges under the agreement.

Trade data reveals that the United States exported $378 million of tobacco to TPP nations in 2014, representing around 25% of total U.S. tobacco exports. U.S. cigarette exports accounted for over 70% of this total, with almost all of these exports going to Japan. It is important to point out that these products contain both U.S. and non-U.S (i.e., imported) leaf.

Focusing on tobacco leaf exports, the United States exported nearly $80 million of U.S tobacco leaf to TPP markets in 2014 which represented only 7% of global U.S. tobacco leaf exports. For U.S. burley, the total was $12.4 million (6% of total U.S. burley leaf exports) or approximately 6 million pounds. Adding the estimated amount of U.S. burley in U.S. cigarettes shipped to TPP markets to

to the U.S. burley leaf exports to TPP markets, results in an estimate of approximately 5% of U.S. burley production was shipped directly from the U.S. to TPP markets in 2014. What this estimate does not account for is the amount of U.S. burley that is exported to non-TPP nations which eventually is shipped in product form to TPP nations.

Currently, Japan is by far the most important TPP market for U.S. tobacco product trade.

USDA reports the trade agreement would eliminate all tariffs over an 11 year period on U.S. tobacco entering Japan, with the present tariff as high as 29.8%. Other, much smaller TPP markets, would eliminate all tariffs on tobacco over an extended time frame, generally exceeding 10 years. In addition, the U.S. would eliminate tariffs on tobacco which could have implications on future U.S. tobacco imports.

(USDA/TPP fact sheet on tobacco -- http:// www.fas.usda.gov/sites/default/files/2015-10/ tpp_details_tobacco_10-16-15_0.pdf).

While the current “carve” out provision is related to tobacco manufacturers, obviously, just like with the FDA agreement, any regulation/law impacting tobacco manufacturers will ultimately impact U.S. tobacco growers. Currently it is unclear what potential future regulations on the sale and packaging of tobacco products will occur in the TPP markets. Any provisions that impact the sale and consumption of “premium” tobacco products in these markets would likely put U.S. tobacco growers at a competitive disadvantage in these markets relative to lower cost/quality growers. While U.S. tobacco farmers arguably may not experience a dramatic short-term impact as a result of the TPP tobacco carve out provision, a larger concern perhaps looms as how tobacco will be treated in future tobacco agreements as well as setting a precedent for carving out items in future trade agreements that could impact other agricultural commodities.

Will Snell, Will.Snell@uky.edu

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Prospects for Winter Backgrounding in 2015 After enjoying a phenomenal market in 2014 and much of 2015, cattle prices fell sharply from summer to fall due to increasing slaughter weights, decreased exports, and growing supplies of pork and poultry.

Uncertainty about the market has left many winter backgrounders wondering if placing calves into winter programs would make sense this fall. University of Kentucky agricultural economists examined the potential profitability of winter backgrounding given the current calf market and expectations for feeder cattle prices in the spring of 2016. Given market conditions in mid-October, moderate profit potential was found to exist, but producers were encouraged to consider strategies to limit downside price risk.

Read the full article at www.uky.edu/ag/agecon/pubs/extBackwin201559.pdf.

Kenny Burdine, kburdine@uky.edu Greg Halich, greg.halich@uky.edu

University of Kentucky Department of Agricultural Economics: Economic & Policy View all issues online at http://www.uky.edu/Ag/AgEcon/extbluesheet.php

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