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DAVID KRUSE
January 5, 2018

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For all of the talk how strong the U.S. economy has performed this year, the ag sector is feeling like it missed the party. Commodity markets have not participated in the same mode as the stock/equity markets (except for Deere stock). Stock market investors should post some good profits that they should be able to bank next year at a lower tax rate. States in which the Ag sector are a substantive part of their economy are not having a great year. It was noted that the GDP in both Iowa and South Dakota declined from quarter to quarter due to the large portion of their economies made up of Agriculture. The 3 percent growth rate is concentrated in non-farm economy states. Low net farm income and low commodity prices actually benefit non-farm states because they hold down food prices for consumers.

Competition among grocers and lower margins run by Amazon have also contributed to lower consumer food prices. While there have been instances of higher individual food commodity prices, the net increase in consumer food prices in November was up only 0.6 percent. Even the turkey was cheaper for Thanksgiving than a year ago. Grocers have tended to absorb some price spikes such as in bacon. The WSJ says that food merchandizing has gotten so competitive that overall food prices have localized relative to the competition. In places where they have new stores opening, food prices have fallen 1-6 percent. The restaurant trade is more sensitive to transportation and labor costs so are seeing modest price increases.

The bottom line is that not only are farmers not participating in the general economic growth that the country as a whole is enjoying but are making a contribution to it by providing consumers great value through lower cost food. Farmers are taking an even smaller share of the food dollar.

Much of any price increase for food has been voluntary as consumers demand more labeling, dictating more expensive types of animal housing, limiting use of antibiotics or paying more for organic food with significantly higher costs of production. The better the general economy gets, the more that they can pay for food. While employment is strong, so is farm productivity. If the Trump Administration trade policy limits U.S. farm exports, food will get cheaper still for U.S. consumers. They are getting a bargain and don't appear to know it.

Given all the talk of the tax cuts increasing the U.S. debt by roughly $1.5-2 trillion over the next decade, one could get the miss-impression that that was the total increase in the federal debt forecast. Hardly. The increase from the tax cut is on top of the forecast that the Federal debt would increase $8-9 trillion. The current debt, now near $20 trillion, would rise toward $30 trillion by the end of the next decade. The debt also becomes a larger percentage of US GDP which is what Fed Chairman Janet Yellen is so concerned about. One of the reasons that the Federal debt has not been more of a problem than it has been is that interest rates were dropped to zero for a period of time.

As the economy strengthens, the interest rate will increase, which along with a larger principal, will significantly increase the portion of taxes that are needed to service the debt. By reducing revenues with the tax cut and increasing the cost of servicing the debt as the principal and interest burdens grows, there will be more pressure to reduce government spending to avoid having to reverse the tax holiday. This "happy days are here" mentality that the GOP is selling as its tax cut could very well turn out to be fraud. If the Federal government actually had $1.5 trillion of free cash laying around to allow it to reduce revenues, a tax cut would be strong economic stimulus. However, when they have to go out and first borrow $1.5 trillion from someone/somewhere in order to reduce the tax obligation to the wealthy, what will they invest it in? Likely Treasury Bonds as the interest rate climbs. So in other words, they will be taking less revenue from taxpayers, able to do so because they are borrowing more money from them that they will then pay them more interest on adding to the Federal debt with the entire process.

In my perspective, this benefits the wealthy in this country by insulating them from the growing Federal debt as they finance it coming and going, while transferring the entire liability to the 99 percent. The 1 percent will finance the Federal debt owed to them by the 99 percent. Likely no greater regressive piece of tax legislation has ever been enacted. It is a reward for the donor class which is the same thing as the 1 percent who will own the Treasury paper financing the government. The 1 percent pay less tax and will own the Treasury paper obligating the taxpayers en masse to the Federal debt. I don't see how the wealthy can lose out on this deal with all of the risk it would appear to me to be borne by the 99 percent. The GOP theory is that tax cuts will be invested creating new economic growth. There will be some positive impact on growth but they have to borrow the money from somewhere which could have otherwise been invested in the economy.

I fear that the tax cut will have mostly a placebo effect. The U.S. economy has come a long ways since the Great Recession. This is when tax revenues should have grown to the point in the business cycle where there is no deficit. Instead, deficits are projected to go up from here. We have never tried funding stimulus with borrowed money near the top of a business cycle before. I will benefit from this tax cut at the expense of my kids and grandkids

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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