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Farmers hustle to avoid "fiscal cliff" blowback

P.J. Huffstutter and Tom Polansek, Reuters | Updated: 12/24/2012

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As the United States inches closer toward the "fiscal cliff," Iowa farmer Brian Van Meetern is hurriedly selling his grain before year's end and buying a new $50,000 sprayer for his farm.

Van Meetern, who works at an accounting firm during the winter, might have to pay a higher income tax and get a lower deduction in depreciation for farm equipment in 2013 if there is no deal in the budget battle before the new year.

It's a strategy that is being mimicked across the nation's heartland where farmers and ranchers are plowing back profits into their operations in the face of less favorable tax policies that may take effect next year due to the stalemate over the budget talks in Washington.

Some farmers are buying new drainage tubes for their fields and digging new wells for irrigation systems. Others are moving up their plans to buy seed and other inputs like fertilizer.

Unless the U.S. Congress acts, an estimated $600 billion in tax hikes and federal spending cuts will begin to take effect in January, with a potentially devastating impact on the economy.

Problematic too is that the country's agricultural policies and economic safety nets have remained in limbo since the last U.S. Farm Bill expired in September.

Driven by such fears, Van Meetern, who works for accounting firm Cain Ellsworth to help other farmers with their taxes, has been advising growers to accelerate grain sales because of the economic uncertainty.

"We know the tax rates aren't going to get any less," Van Meetern said. "If we would go back to the old tax-rate brackets, we're all going to have to pay more tax next year."

UNCERTAIN FUTURE

Though the autumn grain harvest is now safely tucked into bins and barns, concerns are mounting that the government's price supports and other farm policy tools will automatically revert to antiquated rules dating back to 1949 if a new farm bill is not passed by the end of the year.

The uncertain future, coming at the end of what has been a difficult growing season after the worst drought in half a century, has left some farmers torn over how to minimize tax bills.

Soaring land prices, along with the prospect of higher taxes next year, have prompted some farmers to sell off their land and get out of the business altogether. The drought drove feed prices sky high, forcing pork producers and cattle ranchers to drain their savings or send record numbers of animals to slaughter.

U.S. soybean prices this week saw their biggest weekly drop in three months. Corn hit a near six-month low.

"It's got me trying to figure out what to do with my soybeans," said David Miller, a grain farmer in Iowa and director of research at the state's Farm Bureau. "Do I sell now, much earlier than I expected to? Or do I hang on to them and hope for the best?"

Other farmers are refusing to wait, particularly on equipment purchases. There are, they say, some favorable deductions available this year.

Farmers can deduct up to $139,000 for equipment purchases in 2012, but the limit is slated to drop to $25,000 next year unless Congress crafts new rules, said Paul Neiffer, a certified public accountant who does financial planning for farmers.

"People are OK with planning," he said. "They just want to know what the rules are, and right now we just have no idea what the rules are."

Neiffer said he has increasingly been advising his clients to sign flexible deals when they sell grain to elevators in case Congress does not reach an agreement.

MOVING INCOME

Under the deals, known as prepaid sales contracts, farmers who deliver grain to elevators this year with agreements to be paid for it in 2013 have the option to count the payments as part of their 2012 income.

Traditionally, farmers would count the income for 2013, which will be the year in which they receive the money, said Neiffer, a partner at CliftonLarsonAllen.

"They can move income into 2012 to soak up that lower tax rate if they want," Neiffer said.

Other practical issues - from estate planning to land purchases - have farmers hungry for a resolution of the farm bill issue. But earlier this week, Agriculture Secretary Tom Vilsack warned that there was a serious risk the deeply divided U.S. Congress will not complete work on a new five-year farm bill by year-end.

House Republicans and Senate Democrats remain deadlocked over how to best achieve major savings in farm programs, with debate centered on the levels of crop subsidies and cuts to the food stamp program for the poor. Discussions of an extension of the previous farm bill have been somewhat lackluster, say agricultural lobbyists.

Among the more hotly debated issues are a heavier reliance on crop insurance programs, levels of support for commodity crop subsidies, and reform of the subsidy program for cotton amid threats of trade retaliation from Brazil against some $800 million in U.S. exports.

As lawmakers debate these issues, the agricultural sector is preparing for the worst.

Dairy farmers are expected to feel the impact first. If the lack of a farm bill reverts the country's farm policies back to 1949 rules, Washington will be forced to purchase milk at far higher rates, fueling industry fears that the retail price of butter could double and a gallon of milk could jump to $6 a gallon or more.

That might spark a massive consumer backlash against dairy products in the New Year, caution trade groups.

By early next year, winter wheat farmers - whose grains often are used in the baking of bread and pastries - would be impacted by a lack of federal safety nets, said Chandler Goule, a lobbyist for the National Farmers Union.

It has been a rough season for these farmers. Historic drought, along with recent warm weather and a lack of rain, have left the new wheat crop in the worst condition in decades. Earlier this month, agricultural experts cautioned that farmers might abandon more than a quarter of the new wheat crop due to devastating weather.

"The repercussions of all this are going to become very serious very fast," Goule said about long-delayed deals for a farm bill and an economic plan.