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February 2018
Hancock Farmland Research Brief
2017 Tax Reform: Implications for Agriculture and Farmland Investments
The potential impacts for U.S. farmland owners of the federal tax reform signed into law at the end of 2017 should, in
general, be favorable. The reduction in the corporate and individual tax rates is likely to lead to more disposable income
for U.S. consumers and businesses to spend on food and agricultural products, increasing domestic demand, and
potentially leading to rising prices. However, the tax bill is likely to lead to higher domestic inflation, which could place
pressure on the Fed to increase interest rates at a faster clip. This could have the impact of strengthening the USD versus
other agricultural producing countries’ currencies, which would impact U.S. exports negatively. Overall, the boost in
domestic demand is likely to outpace the reduction of U.S. competitiveness in the export market, and the U.S. farmland
market is likely to benefit from tax reform, at least in the short term.
Takeaways
The consensus view as reflected by the stock market two years. With the tax bill’s average cut of 3.2
points, the U.S. economy should realize extra growth
is that the recently enacted tax package promises to of 0.8% a year over the next two years from the tax
raise economic growth substantially. Cutting income cut alone. This growth effect is temporary but what it
taxes on individuals powers economic growth in the adds to the level of GDP is permanent.
short term, and substantially lowering tax rates for
businesses does the same over the long term. An
improved economic outlook has the potential to The recent legislation’s cuts to corporate taxes are
boost employment and disposable income, significant, with the main rate on corporation’s
supporting stronger domestic demand for food dropping from 35% to 21%. Corporations will also
consumption. benefit from changes to rules governing expensing
business investments. For equipment, the effective
The Tax Policy Center1 estimates that the weighted- expensing rate at around 80% is already high, and
the new law moves this rate up to 100%. The new
average marginal tax rate from individual income law does not change depreciation schedules for most
and payroll taxes will fall in 2018 by 3.2 percentage
structures, such as factories and office buildings.
points and that this downward adjustment will be
However, the lower corporate tax rate, when applied
delivered across most of the economic distribution in to the output associated with the investment in new
2018. This cut in individual tax rates is in the range buildings, effectively lowers the user cost of new
of magnitude of the major tax cuts of the past 50
structures and encourages investment. We believe
years: Kennedy-Johnson 1963-65, 3.6 points;
that this could lead to increased investment by
Reagan 1986-88, 4.5 points; and George W. Bush
corporate farms in the agricultural sector boosting
2002-03, 2.1 points
production and yields over the long term.
Robert Barro and Charles Redick in an article
With the new corporate tax code, companies will
published in February 2011 in the Quarterly Journal likely be more motivated to provide workers with
of Economics, estimated that cutting the average more equipment and structures to do their jobs.
marginal tax rate for individuals by 1 percentage Robert Barro’s rough estimate is that GDP per
point increases annual GDP by 0.5% over the next worker will rise by about 6% over the long run.2 This
1
Tax Policy Center, Microeconomic Analysis of the Tax Cut and Jobs Act, December 20, 2017 (Continued on page 2)
2
WSJ, Tax Reform Will Pay Growth Dividends, January 4, 2018
Hancock Farmland Research Brief February 2018
2017 Tax Reform: Implications for Agriculture and Farmland Investments (Continued from page 1)
productivity provides the basis for real gains in There will be winners and losers in the U.S.
wages and rising household income that are likely to agricultural sector as a result of the new tax
support increased food consumption. legislation unless some amendments are made to the
law. Section 199A of the new tax provision enables
Lower corporate tax rates should also reinforce and cooperatives to deduct 20% of all revenues generated
possibly accelerate the current wave of investment in from farm-related sales. This deduction is not
farmland and agricultural infrastructure. These provided to individual farmers or institutional
investments make it easier for consumers and investors. The net impact of Section 199A of the new
corporations to access raw materials for food tax provision means that cooperatives will be able to
consumption, as well as improve the cost-competitive produce crops more competitively unless Section
position of U.S. food production and agricultural 199A is amended.
commodities in global markets.
The 2014 Farm Bill is set to expire on September 30,
Although the federal tax reform looks positive for U.S. 2018. There is concern that the new tax provisions
farmland investments overall, there are also likely to be will lead to an expanded budget deficit which will
negative consequences for agricultural producers. These lead to cutting of government programs across the
include: board. If this were to occur, some provisions that
currently benefit the U.S. farm community will likely
The reduction in corporate taxes and individual be cut and some industries within the agricultural
income taxes is likely to have an inflationary impact space might be left behind. Potential programs that
on the U.S. economy. To balance increasing could see cuts include cotton, dairy and sugar
inflation, the Fed might have to increase rates more programs, the Conservation Reserve Program (CRP)
regularly which would assist in strengthening the and potentially changes to the Price Loss Coverage
value of the USD against currencies of other major (PLC) and Agricultural Risk Coverage (ARC
agricultural producing countries. The impact of programs, which provide price risk insurance
increasing rates and a stronger USD would likely coverage to farmers.
lead to a decline in the competitiveness of U.S.
exports and reduce global demand for U.S-based
commodity trade.
Hancock Farmland Research Brief February 2018 2
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This material, intended for the exclusive use by the recipients who are allowable to receive this document under the applicable laws and regulations of the relevant jurisdictions, was produced by and the opinions expressed are those of Manulife Asset Management as of the date of this publication, and are subject to change based on market and other conditions. The information and/or analysis contained in this material have been compiled or arrived at from sources believed to be reliable but Manulife Asset Management does not make any representation as to their accuracy, correctness, usefulness or completeness and does not accept liability for any loss arising from the use hereof or the information and/or analysis contained herein. The information in this material may contain projections or other forward-looking statements regarding future events, targets, management discipline or other expectations, and is only as current as of the date indicated. 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Neither Manulife, Manulife Asset Management™, nor any of their affiliates or representatives is providing tax, investment or legal advice. Past performance does not guarantee future results. This material was prepared solely for informational purposes, does not constitute a recommendation, professional advice, an offer or an invitation by or on behalf of Manulife Asset Management to any person to buy or sell any security or adopt any investment strategy, and is no indication of trading intent in any fund or account managed by Manulife Asset Management. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Unless otherwise specified, all data is sourced from Manulife Asset Management. Hancock Agricultural Investment Group Hancock Agricultural Investment Group is a division of Hancock Natural Resource Group, Inc., a registered investment advisor and wholly owned subsidiary of Manulife Financial Corporation. © Hancock Natural Resource Group, Inc. Manulife Asset Management Manulife Asset Management is the global asset management arm of Manulife Financial Corporation (“Manulife”). Manulife Asset Management and its affiliates provide comprehensive asset management solutions for institutional investors and investment funds in key markets around the world. This investment expertise extends across a broad range of public and private asset classes, as well as asset allocation solutions. The material issued in the following countries by the respective Manulife entities - Canada: Manulife Asset Management Limited, Manulife Asset Management Investments Inc., Manulife Asset Management (North America) Limited and Manulife Asset Management Private Markets (Canada) Corp. 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Manulife, Manulife Asset Management, the Block Design, the Four Cube Design, and Strong Reliable Trustworthy Forward-thinking are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license. HNRG Research Team Court Washburn Bill Devens Managing Director and Associate Director, Agricultural Chief Investment Officer Economics cwashburn@hnrg.com wdevens@hnrg.com Keith Balter Elizabeth Shestakova Director of Economic Research Economic Research Analyst kbalter@hnrg.com eshestakova@hnrg.com Mary Ellen Aronow Keith Goplerud, CFA Associate Director, Forest Economic Research Analyst Economics kgoplerud@hnrg.com maronow@hnrg.com Hancock Farmland Research Brief February 2018 3
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