WASHINGTON, December 28, 2012 ― According to the US Drought Monitor, the US is experiencing the greatest drought since the Dust Bowl of 1939, with the USDA designating more than two thousand US counties as disaster areas in 2012.
The drought has affected more than just crops; the Mississippi river is expected to hit an all time low by January 13, with massive disruptions in barge transportation expected.
The drought has caused major damage to crops, particularly field corn and soybeans in the Midwest. This leads to higher feed costs for livestock, as well as higher prices in the grocery store on processed foods such as cereal, flour and the like. The prices of those items will lag behind somewhat, but the price rises are expected to be evident in grocery stores by mid 2013.
Herd culling due to higher feed prices has kept meat prices artificially low, but the price of milk and meat are about jump substantially, and in the case of milk, it could go as high as $8 per gallon.
The US government has set dairy prices for a very long time. The current price point legislation will expire at the end of the year, automatically reverting to the Agricultural Act of 1949. The formula in that act would set prices at about double what they are now on January 1, 2013.
While that may sound like a good thing for farmers, it is not. Dairy sales would slump severely, with many viewing things like cheese, ice cream and yogurt as luxuries. The number of industries this would affect is quite large. The number of pocket books it would affect is much larger.
That is far from the entire story, unfortunately. If a fiscal cliff deal is not made that addresses estate and capital gains taxes, passing a bought-and-paid-for farm to your surviving family members may be next to impossible.
The fiscal cliff automatically raises estate taxes from 35 percent to 55 percent, as well as drastically lowering the estate value that puts it into that tax bracket. The dollar value is being reduced from over $5 million to just $1 million. While that may sound like a lot of money, what if you are a farmer, who has a farm that is worth $1 million, but is earning $50 thousand per year?
Could you afford a tax bill of $550,000?
It gets worse.
Most farmers who find themselves in this situation are forced to sell off large portions of their farms to cover the tax bill. Bring on the increased capital gains tax rate of 20 percent and the new Obama-care tax for capital gains of 3.8 percent, and the farm that was bought and paid for yesterday is now up for sale just to pay the tax bill.
In some areas, property values are such that a farm could be sold in its entirety, leaving the surviving family member with no farm, and a capital gains tax bill they cannot pay. If this happens, the family farm will be a relic of the past. Only corporate farms will survive.
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