Tax Cut Implications, Ag Bank Consolidation Impacts, and Returns to Farm Income: Update on Recent Ag Econ Research

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Key insights:

  • The Agricultural and Applied Economics Association annual meeting brings together the most recent in agricultural economics, with the most recent conference held in early-August 2018 in Washington, D.C.
  • One study found that, on average, the tax bill passed on December 2017 is expected to lower farm business effective tax rate from 17.2% to 13.9%.
  • Another study showed that the consolidation of agricultural banks is associated with increases in agricultural loan availability and volumes of operational and real estate loans. 
  • A third paper showed that data collected using USDA surveys may underreport true farm income, which can result in an underestimate of returns to farming by, on average, 39%.

Every year in late-July or early-August, the Agricultural and Applied Economics Association (AAEA) holds a meeting to gather agricultural economics to share and discuss the most state-of-the-art research in the field. This year, the meetings were held in Washington, D.C. with over 1,600 attendees. And while it’s simply impossible to attend every session and look at every presented poster, I did have an opportunity to learn about some really interesting research and wanted to highlight three of the studies.

The first study by a set of economists (James Williamson and Siraj Bawa) at the USDA Economic Research Service who sought to estimate the potential impacts of the 2017 Tax Cuts and Jobs Act on farm businesses. The study found that the largest impacts would stem from a new deduction for passthrough business income—the Section 199A provision—that lowers the marginal tax rate on farm business income. The research found that, on average, farmer would see their effective tax rate decrease from 17.2% to 13.9%. However, the largest reductions would be observed by midsize farms (a 5.8 percentage point reduction in tax rate) and the smallest tax reductions would be for very large operations. Across commodities, dairy producers would benefit the most (an average 4.3 percentage point reduction) but cattle producers are expected to experience the smallest reduction (2.6 percentage points).

The second study that caught my eye was by researchers (Chang Xu and Ani Katchova) at Ohio State University, who examined the consequences of consolidation by agricultural lending institutions. The researchers point out that since 1994, there has been a 56% reduction in the number of agricultural banks, while the number of branches of larger banks increased by 10%. However, the effects of these consolidation trends on the availability of loans to farm businesses was unknown. The research found that when banks consolidated at the county level, the availability and volume of loans increased. Specifically, operational loans tend to increase by 21.9% and real estate loans by 23.3%. The authors note that this finding could be a signal that bank consolidation increases the efficiency of bank operations and may lead to greater availability of loans.

The third work is also by a USDA Economic Research Service economist (Nigel Key) who was interested in understanding a simple question: if data consistently indicate that farm businesses have negative on-farm net income, why do these operations continue to operate? A hypothesis that Key poses is that this is not necessarily an indicator of actual negative net incomes, but due to the fact that on surveys, farm businesses underreport their gross incomes and overreport their costs. Using additional information about farm-level information, the author estimates the “true” on-farm income. The results indicate that for smaller farm businesses, 39% of on-farm income may be, on average, underreported. The author concludes that, after accounting for this underestimation, we can see that farms are much less likely to have negative on-farm income, providing a possible answer to why these farm businesses continue to operate. Perhaps more importantly, however, the author notes that when other researchers and policymakers continue to use self-reported farm income data, they must take care to consider the underreporting of net income because these data may lead to overestimating the degree to which assistance and credit support is needed.

While the results of these studies are intriguing, it is important to note that only the first work has been peer-reviewed (by other USDA economists), but the second and third papers are still works in progress.

What are your thoughts about the research efforts described above? What research would you like to see be done in the future?

(Photo by KJGarbutt is licensed under CC BY 4.0)

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About Author

Dr. Anton Bekkerman is an associate professor in the Department of Agricultural Economics and Economics at Montana State University, joining the faculty in 2009 after completing his PhD at North Carolina State University. Bekkerman's primary areas of research are grain marketing, basis and price forecast modeling, understanding how grain prices are affected by changes in supply chain infrastructures and quality demands, and analyzing the economic trade-offs of adopting alternative dryland cropping systems in Montana. One of his current projects is an investigation of how new grain loading technologies are affecting prices that Montana farmers receive for their wheat. Bekkerman is also examining the economic impacts that Montana's rapidly expanding dry pulse industry will have on the state's crop industry. Although Bekkerman grew up on the east coast, he has recently made a small step toward production agricultural after acquiring three backyard chickens.

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