Here's a quick monitor of Washington farm and trade policy issues from DTN's well-placed observer.
Senate Agriculture Committee Republicans Want USDA Analysis On Tax Plan
Republican members of the Senate Agriculture Committee are calling on USDA Secretary Tom Vilsack to make public a detailed explanation and any supporting economic analyses that clarifies how the Biden administration's proposed tax increases will affect farm estates.
The panel's Ranking Member John Boozman, R-Ark., authored a letter to Vilsack that questioned USDA's analysis of President Joe Biden's proposed changes in capital gains tax rates and the modification to stepped-up basis on America's family farms and ranches.
The letter specifically asks for an explanation of how USDA arrived at the conclusion 98% of farm estates will not be impacted by the proposed tax changes.
“The proposed tax impacts are dependent on a number of factors, including but not limited to appreciation in farmland assets prior to a property owner's death, size of the farm operation and associated assets, income of the heirs, and the farm's ownership structure. Given these factors, we are writing to seek a detailed explanation and supporting economic analysis clarifying how these tax provisions will affect farm estates, including specifically how USDA arrived at the conclusion that fewer than 2% of farm estates will be impacted by the proposed tax changes,” the senators wrote.
USDA Ups Grocery Store Price Outlook
Upward revisions to food at home (grocery store) price forecasts for several food categories prompted USDA's Economic Research Service (ERS) to up their forecast rise in grocery store prices to an increase of 1.5% to 2.5% in 2021 versus 2020--the midpoint is right in line with the 20-year average of 2.0%.
Overall food price inflation is still forecast at 2% to 3% (2.4% 20-year average) with food away from home (restaurant) prices seen rising 2.5% to 3.5% (2.8% 20-year average) from 2020 levels.
So far this year, overall food prices are up 1.7% from the same period in 2020, with grocery store prices up 1.2% and restaurant prices up 2.4%.
“Forecast ranges for meat categories, poultry, eggs, dairy products, fats and oils, and fresh fruits were also revised upward,” USDA noted, with only fish and seafood forecasts left steady with the month-ago outlook. “Forecast ranges for cereals and bakery products, nonalcoholic beverages, and other foods were revised downwards” compared with USDA's month-ago forecasts.
“The meat and poultry price increases were driven by high feed costs and strong domestic and international demand,” USDA said. “In addition, winter storms and drought disrupted the beef supply, and high prices for sows dampened pork production.”
Washington Insider: Fed Says Taper Talk Coming
The U.S. central bank is poised to start at least talking about when it will start to adjust its monetary policy as the U.S. economy continues to climb from the depths of the pandemic.
The Federal Reserve has set the target range for the key Fed funds rate, the interest rate that governs costs of borrowing across the economy, at a range of 0% to 0.25%, in a bid to provide low-cost money so that the economy can recover from the COVID-19 pandemic. The Fed is also purchasing some $120 billion in bonds in a bid to keep interest rates low.
As the economy recovers, a reduction or tapering of those bond purchases is expected as the Fed's first action to tighten monetary policy as it seeks to not let the economy grow too fast to spur inflation that would cause damages across the economy and curtail economic activity.
For months, Fed Chairman Jerome Powell has said it is not yet time for the Fed to start “talking about talking about” tapering the bond buys. That comment he made months ago has become a source of questions nearly every time he has met with reporters, and he has maintained that it is not yet time for that to happen.
But that time is getting closer. The April 27-28 meeting of the Federal Open Market Committee (FOMC), the meeting of Fed officials where they set monetary policy, indicated that to be the case. The recap of the meeting issued last week noted that FOMC members thought that if the U.S. economy continues to make strong progress, “it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.” That is “Fed speak” for talking about tapering.
This mention is important because coming out of the financial crisis, the Fed also embarked on purchasing securities/bonds in a bid to keep interest rates low. A comment from then-Fed Chairman Ben Bernanke in congressional testimony that the Fed was talking about reducing those bond buys spooked investors and roiled stock and financial markets, a response that was called the “taper tantrum.”
Bernanke responded by emphasizing over and over in following appearances that the Fed was not ready to take such a step. In fact, the Fed did not take that action for several months after Bernanke's comment. Powell, it seems, learned from the Bernanke experience. That is why he has taken grate pains to emphasize that the Fed does not think things have reached a point where the bond buys need to be reduced.
Powell also pledged that when the Fed does take such a step, it will not be a surprise to markets. He wants to avoid another “taper tantrum” from unfolding in the markets. So, based on the minutes from the April meeting and comments from Fed officials in recent days, we're getting closer to the discussion taking place on tapering those bond purchases.
This sets the stage for the U.S. central bank to tighten its easy monetary policy. That will mean borrowing costs will start to increase. That will start a new chapter for the U.S. economy as it will start to increase costs for consumers to do many things, like buying a home, buying a car, and using credit cards and more.
So we will see. The process of raising interest rates has begun as the economy recovers. And, it means that agriculture will be seeing a rising cost component in the form of higher interest rates. While any increases are not expected to be large, this is still situation which needs to be watched closely, Washington Insider believes.
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