Wednesday, May 30, 2018

Estate Tax Evasion, Trade Wars and Ag Debt Collapse - all tied together.

As most of you may be aware, unlike the average Asian or African farmer who is a product of five or more generations of farmers - the average American farmers professional heritage is only a two or three generations deep. This reflects in the deeply unsustainable nature of US agriculture (Ag). While Americans celebrate the "taming of the land" as a great national achievement - few ask the true cost of this.

Today US Ag is stuck in a cycle that expands the size of land holdings in a bid to produce higher yields that struggle to keep ahead of falling produce prices. A relatively simple flag of this growing crisis is the perception about the viability of Ag debt. Farmers in the US today keep planting higher yield varieties on larger and larger pieces of land and using ever more expensive equipment to cultivate it while struggling to sell their produce in a market where the surplus of food drives prices ever lower. They keep having to borrow more and more money to keep this vicious cycle going and most farms today struggle to keep a balance of payment situation that makes sense.

One major issue that cropped up during the 2016 election was the farmers concerns about estate taxes. By enlarging the size of their holdings, and adding expensive equipment (bought on loan) to their asset lists - the full market market value of the average farm had risen to several million. Despite the fact that the asset itself was only marginally productive and in many cases the farmers were really not making enough money to cover their costs. As the Boomer generation of farmer sought to transfer their farms to their children - the high value of the farms exposed them to Estate Tax. This meant that their kids would be on the hook for 45% of the full market value of the farm as tax. And neither the Boomers nor their kids wanted to pay that.*

So in hundreds of interviews with dozens of different news media - these farmers openly admitted that they supported Trump only because he promised to relieve their estate tax burden. As these people are usually the core of the rural economy and the "red state" political districts are ruthlessly gerrymandered to give their areas a disproportionate representation, these farmers were able to drag their family, friends and farm associated businesses (everyone who would be affected by the profitability of the farm) along with them. Despite warnings from everyone else that Trump was not who he claimed to be, these people voted for Trump.

It seems they have gotten their "thirty pieces of silver" (it only seems that way because if you read the fine print - nothing has really changed - but they don't make 'em smart back there so...). But the predictions of the others have come true. Trump is out to get rich - which means he is trying to shake down China. Unlike Trump - China actually knows what it is doing. So when Trump shakes down China for brand royalties for himself, China will pass the costs to the US Ag sector.

By reducing orders from the US Ag, China will boost its domestic Ag sector *and* create a surplus in the US markets. While avoiding all talk of a "trade war" which will tank the market immediately, the Chinese will be able to quietly force the US Ag sector into a situation where the falling soft-commodity prices will degrade the quality of US Ag debt.

US Ag debt is a complex entity - but it is a large part of the overall debt in the US and it feeds in complicated ways into the derivatives markets as commodities trade is usually carried out with a set of futures. So any decline in Ag debt will be felt in numerous other sectors even if we don't address the issue of any direct securitization of the same.

These things are all tied together - which means the likelihood of Trump or any of his guys getting it - is extremely low. These people don't have the ability to comprehend that level of inter-connectivity- if they did they wouldn't be such useless folks.

And remember folks - stupid is as stupid does.

* I don't understand why they didn't want to pay it. There are ways around this which would easily reduce the burden to the point where the burden could be easily shouldered. But I guess no one likes to pay taxes.


At 2:37 PM, Blogger quantum chaos said...

what do you make of agro situation back in Desh? I can't place a finger on it but peasant groups in Punjab Haryana appear very distressed by what they call cheating of government. Many want to leave farming as well or purchase land abroad. Is there some good book/article/ monograph you can recommend where one can read about Indian agricultural issues of late?

At 6:02 AM, Blogger Ralphy said...

keep in mind that small family farms, 300 acres or less, are side operations, usually they have some kind of regular day jobs.....unless thy purchase huge chunks of equipment and do share cropping on other peoples' land also. a lot of farms are corporate and operate on 1000's of acres of land....its sorta like get big or go get a day job kind of thing. subsequently only a few million people actually farm for a nation of 350 million people. thanks to science, mechanization and high finance, farming productivity is almost stratospheric in scope. but the most powerful aspect is probably government support programs generously by the us taxpayer to farmers and corporations like archer daniels midland. the federal trough is wide and deep.......and keeps canadians crossing the border to buy our subsidized milk and grain alcohol supplemented gasoline.

At 3:02 PM, Blogger maverick said...

Dear Quantum Chaos,

I am seeing signs of Ag debt being in trouble all over the place. There is overproduction and it is difficult to see this sustaining for very long. Perhaps a correction of sorts is coming.

I am not aware of any monograph on the issue, if I see it I will put up a link here.

In the US the dairy sector is in trouble. The suicide rate is up and it is difficult to see how the "family farm" will endure as dairy prices remain so low.

At 3:16 PM, Blogger maverick said...

Hi Ralphy,

In my travels through the Midwest and CA I got the distinct sense that Ag productivity though high is a fragile affair. That "Old MacDonald had a farm" picture I carried in my head is at least a hundred years out of date.

Today US farmers cannot hope to remain solvent if they do not plant high quality high yield seeds over large areas. Bringing larger areas or higher yields out requires the use of large amounts of machines (pumps, harvesters, combines etc...), fertilizer and water.

Those operating small farms are under constant pressure to keep up with technologies that cost ever more each day. In Montana a major fight over the right to repair this technology is brewing. Major tech corporations are attempting to force farmers to remain dependent on dealerships for the smallest repair.

Those working in "corporate" setups are subject to a very weird process of "selection" -the ones that return high yields get a reward in the form of better seeds. This applies to animals, vegetables or grain. In such corporate setups is very common to see farmers experiencing food security anxiety even though they have a field full of grain.

And to top that off, the farmer of a medium sized holding is often reduced to using a variety of subcontractors (quite a few of whom tend to Mexican immigrants). Without these Mexicans depressing the price of farm labor, most of these medium to small size operations would not be economically viable.

The ability of the Federal government to provide relief whenever the market price is mismatched with cost of production. There are subsidies that are provided from time to time, but all that piles up as a kind of welfare debt in the Federal budget. It gets shoved under the rug by GOP loudmouths who keep talking about subsidizing blacks and single mothers when the biggest mouths on the proverbial teat is the farmers.

I tend to follow Market Journal religiously - and I am becoming alarmed by the state of affairs in the US. With this talk of tariffs against Canada, Mexico and the EU at the same time... I just can't get my head around how this is going to be okay.

Whatever else happens, Trump has done a number on these people - he is simultaneously going to rob them of their money and their dignity and there doesn't seem to be a damn thing anyone can do about it.

They are still cheering him back there in rally after rally and I can't figure out when the fuck they are going to get what is really happening.

At 3:23 PM, Blogger maverick said...

Dear Quantum Chaos,

I typically follow Devinder Sharma's blog for Indian Ag and the Market Journal for a deeper view of US Ag.

Also Modi government is convinced that playing Hindu card in urban areas is key to securing 2019 - so they don't give a shit about farmers. Most BJP guys seem to privately abuse them, and the Indian RW boomers seem to support the idea that the Farmers have been given too much already.


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