Will AGI Rule Foul U.S. Ag? AgWeb.com March 30, 2007 The authors are Jeff Harrison, Combest Sell & Associates; Kent Thiesse, Government Program Analyst, MinnStar Bank, Lake Crystal, Minnesota, and Bud Holmes, Executive Vice President of Agricultural Lending, Plains Capital Bank, Lubbock, Texas. How the Proposed AGI Rule Fouls American Farm and Ranch Families. The current AGI rule has been dubbed the "Scotty Pippen Rule" because it is designed to prevent extremely wealthy, non-farmers, such as professional basketball players, entertainers, and media moguls, from receiving benefits under U.S. farm policy. Typically, these wealthy non-farmers were receiving large conservation payments, rather than farm safety net benefits. Ironically, the new proposed AGI rule would turn its sights directly onto thousands of real American farm and ranch families, who are already subject to payment limitations, and hardest hit would be beginning farmers and ranchers and farm and ranch families who need to share their risk in renting land. Some say that it is wealthy land-owners in DC or New York that would be hit - but, in fact, they will simply convert to cash rent, shifting even more of the risk and uncertainty in farming to the producer. The proposed AGI rule would make U.S. farm policy unpredictable, inequitable, and punitive for thousands of American farm and ranch families, especially tenant and beginning farmers and ranchers, as well as lenders, landowners, Main Street businesses, and rural communities. The proposed AGI rule would totally lock out thousands of real farm and ranch families from farm policy benefits based on an arbitrary AGI. The current AGI rule very effectively prevents extremely wealthy, non-farmers from receiving any U.S. farm policy benefits - farm safety net or conservation - by excluding persons with non-farm adjusted gross income over $2.5 million. The proposed AGI rule would not only drastically lower this number to $200,000 but it would fundamentally change the purpose of the rule by including real farm and ranch income in this number and by applying the new rule only to farm safety net benefits rather than safety net and conservation payments. The effect is that non-farmers with an AGI under $2.5 million could still collect conservation payments - while real farm and ranch families with a past - not necessarily current - AGI over $200,000 would be locked out of the farm safety net. The proposed AGI rule could make thousands of farm and ranch families eligible one year, ineligible the next, eligible again, then ineligible the next, and so on though producers certainly cannot hop in and out of farming and ranching. Although the proposed AGI rule would base eligibility in a crop year based on the previous 3-year AGI average, this in no way alleviates farm and ranch families from being rotated in and out of eligibility from year to year because that rolling 3-year average can toss the producer out in one year and bring the same producer back in the next year as the average fluctuates. How can farm and ranch families make any short term, much less long term, financial decisions based on this unpredictable rule that hinges on unpredictable future weather and price conditions? The proposed AGI rule manages to create a financial ride for farm and ranch families that may best be described as a revolving door-roller coaster combo but with make or break consequences. While some might suggest that the current AGI rule has not led to such problems, it is important to note that the current rule is nothing like the proposed rule, neither providing for AGI levels that hit thousands of real farm and ranch families nor including highly cyclical farm and ranch income that is tied to volatile weather and prices and depended upon by those earning it. Rather, current rules deal with extremely wealthy individuals who are very unlikely to have as cyclical of income and who do not depend on farm or ranch income - much less a farm policy safety net - for a living. The proposed AGI rule would base eligibility on past AGI - despite the highly cyclical nature of farm and ranch income from one year to the next - resulting in the ineligibility of farm and ranch families when they need a safety net the most. If one makes the faulty assumption that the AGI of a farm or ranch family of over $200,000 negates the need for a farm safety net, but that an AGI of less than $200,000 requires a safety net, then the proposed rule is self-defeating. By basing eligibility on the past 3-year year average AGI, farm and ranch families may be ineligible in a year when they actually had $0 AGI or even went deep into the red. Conversely, farm and ranch families may be eligible in a year when they enjoyed high prices and a bumper crop and their AGI ultimately proves higher than $200,000.   The proposed AGI rule would draw an arbitrary line - with eligible farm and ranch families on one side of the AGI and the ineligible on the other - despite the fact that sky high foreign subsidies and tariffs, bogus sanitary regulations that lock out U.S. farm products, and monopolistic state trading enterprises do not discriminate among U.S. farm and ranch families when doing their injury - all American farm and ranch families are injured. When 3 million manufacturing jobs were lost earlier this decade, Congress passed a $137 billion American Jobs Creation Act to stop the hemorrhaging, providing benefits to manufacturers, both big and small. There was no means testing - no equivalent to the proposed AGI rule - because this would have done nothing to stop the offshoring of jobs and would have actually undermined U.S. manufacturers trying to compete on a lopsided global playing field. According to former U.S. Trade Ambassador and now OMB Director Rob Portman, the global playing field for U.S. agriculture is even more lopsided than for U.S. manufacturing: "Agricultural tariffs are twice as much as industrial tariffs. That is why I focus so much on agriculture. Our tariffs in the area of agriculture are on average 12%. The global average is 62%. Our tariffs in the area of non-agricultural, industrial tariffs, is 3% on average. The global average is about 30% on average." U.S. agriculture creates 17% of U.S. GDP, $3.5 trillion in economic activity, and 25 million American jobs. As the December 17, 2003 Wall Street Journal article (Farm Belt Becomes Driver for the Overall Economy as Prices Rise, Spending Spreads to Tractors, Trucks), notes, "The present boom is proving that agriculture still matters in the U.S. Rising farm incomes are helping ease the blow of the loss of manufacturing jobs in the Midwest States." The article then quotes the chief economist of a major U.S. bank who states, "The farm sector is a significant source of strength in the U.S. economy." With such an important U.S. economic sector and jobs creator facing such unfair foreign trade conditions, why would anyone propose to tie the hands behind the backs of hard working U.S. farm and ranch families, all of whom are injured by these trading practices? The proposed AGI rule makes it difficult or impossible for lenders to measure with any certainty the future cash flow of thousands of farm and ranch families in order to make both short and long term lending decisions, uncertain whether the producer will be eligible for farm policy benefits. Lenders - whether banks, farm credit systems, equipment dealers, or others doing business on credit - need to be able to estimate cash flow with some level of certainty in order to make a loan. Weather and price volatility and unpredictability already make this an enormous challenge. Not even the U.S. Department of Agriculture or the Congressional Budget Office have been successful in anticipating prices 10, 5, even 2 years out, much less the vagaries of weather. Farm policy changes, especially those made midstream, between Farm Bills, also add great uncertainty to the process of making long term loans. But adding such a volatile element as an all-or-nothing farm and ranch-based AGI test will test the resolve of even the most committed lenders. This is an extraordinary risk. The proposed AGI rule even makes it technically difficult or impossible for lenders to know whether to lend to a farm or ranch family in a crop year, given the proposed AGI rule is based on the previous 3 years' AGI while taxes for the previous year may not be completed until April 15 of that same year, leaving farm benefit eligibility at the time of the loan making decision totally in doubt. Loans are usually made very early in the current crop year to allow farm and ranch families to make production decisions as well as the necessary purchases to follow through on those decisions, decisions that cannot wait until April 15. The proposed AGI rule is even more problematic when producers, for various reasons, elect to extend their filing deadlines to as late as October of the following year. The proposed AGI rule arbitrarily - and inequitably - applies to some farm and ranch families but not to others, depending on how the farm or ranch is structured. The proposed AGI rule would severely limit the ability of farm and ranch families to meet the principal debt repayment on large investments, including land and equipment. A farm or ranch family's AGI includes crop sales; crop input costs, such as fertilizer, labor, fuel, and seed; as well as interest - but it does not include principal debt service. Principal debt service must be made in after tax dollars. Considering the cost of land and equipment today (e.g., one implement can sell for as much as a quarter million dollars), the proposed AGI rule would make it extremely difficult for thousands of farm and ranch families to repay the principal on their loans. The proposed AGI rule could jeopardize the solvency of many lenders, particularly rural community banks with significant row crop-based portfolios, where the lenders already have outstanding 5,7,15, and 20 year loans extended to the thousands of farm and ranch families impacted by the new rule. Lenders expect to take some risk in extending short or long term credit - including future prices, weather conditions, as well as reasonable policy changes in Washington. But radical changes that make cash flows virtually impossible to gage and that effectively have retroactive impact raise serious concerns for lenders. At the time current loans were extended, neither lender nor farmer could have anticipated such a radical shift in policy that bases a producer's inclusion or exclusion from U.S. farm policy on such an unknown - future rolling 3-year average AGIs - which themselves are determined by yet more unknowns - weather and price. The proposed AGI rule makes it difficult or impossible for landowners to lease to farm and ranch families whose eligibility for any one year may be in doubt. And, if the landowner does decide to go forward with a lease, the landowner would likely force the farm or ranch family to cash rent, rather than the landlord sharing the production risks with the producer. This may be because the landlord has a high AGI, generated by non-farm income, and would not be eligible for farm policy benefits under a crop share arrangement. By forcing the producer into a cash rent arrangement, the landlord is insulated from the affects of the AGI rule - the landlord simply gets the rent without sharing the risks. Another route would be for the landlord to simply insist upon a higher share of the proceeds under a crop share arrangement, again putting the pinch on the producer. The people left holding the bag under the new AGI rule would be farm and ranch families and especially tenant and beginning farmers and ranchers who are confronted with these situations. If the effort of the current AGI rule is to prevent wealthy non-farmers from receiving farm policy benefits, the new AGI rule takes aim at a new target: real farm and ranch families, with beginning and tenant farmers hardest hit. The proposed AGI rule makes it difficult or impossible for farm and ranch families to lease land where their eligibility for any one year may be in doubt. Tenant farm and ranch families, particularly beginning farmers, would have to think twice about leasing farmland when they are uncertain of their eligibility for farm policy benefits in any given year. These farm and ranch families may also be denied the opportunity to lease the land given the uncertainty, or forced into a cash rent arrangement that might make the lease financially impracticable.   The proposed AGI rule excludes an important aspect of the current rule regarding farming and ranching income - a move that fundamentally changes the purpose of the AGI rule from a preventative measure to keep wealthy, non-farmers from receiving benefits into a punitive effort aimed directly at real farm and ranch families. Since the current AGI rule was aimed at weeding out wealthy non-farmers, as long as 75% of a person's AGI was derived from farming or ranching, the rule does not apply. The current rule acknowledges the realities of trying to farm and ranch today in an environment where a corn combine can cost $300,000 and a 6-row cotton picker can cost $400,000 - approximately 40% and 50% more, respectively, than the 2005 median cost of a home in the U.S., though a home is the largest single investment of most Americans and is a nest egg investment that will likely only increase in value and may well never have to be replaced. A full-time corn and soybean farm could easily borrow a quarter to a half million dollars per year in order to plant and harvest their crop - a crop that may never be successfully harvested, depending on the weather, and that may not capture even a break-even price, due to foreign subsidies and tariffs that are more than 5 and 6 times higher than those in the U.S., due to bogus sanitary and phytosanitary regulations, and due to monopolistic state trading enterprises, all of which lock U.S. farm products out of global markets they depend on for a decent price. The converse of the proposed AGI rule is occurring with respect to Congressional efforts to provide Alternative Minimum Tax (AMT) relief. Congress continues to work on AMT relief to ensure that a tax - intended to thwart efforts by extremely wealthy people to avoid paying any taxes at all - will not hit middle class Americans even though that "middle class" to be helped by AMT relief likely earns at least twice the median U.S. household income. Why? Because the AMT relief effort takes into account that cost of living requirements range depending on where one lives, works, and raises a family, etc. A similar understanding of the financial realities of farming and ranching in America today is appropriate in the context of the AGI rule. The proposed AGI rule would severely inhibit ordinary commercial activity involving the sale of land and other assets which would jeopardize benefit eligibility if carried out under the new rule. The potential gain incurred from the ultimate sale of land passed down through generations would not only be taxed but could potentially place the farm or ranch family's 3-year average AGI above the proposed level, knocking that family out of farm policy benefits for the following year. If the following year involves a failed crop or depressed prices or both, that farm and ranch family could face a serious financial crisis, they may fail to repay their loans and they may fail to receive financing for the next year. Ironically, the 1031 exchange proposal combined with the AGI proposal creates a whip saw effect on the producer. Producers exchanging land - perhaps to make the land they farm contiguous or more efficient - might choose to avoid using the 1031 tax free exchange in order to maintain farm policy benefits on that land. If they do, the sale of the one parcel of land would be counted toward the producer's AGI which, in turn, may lock them out of farm policy benefits just the same. Conversely, if producers use the 1031 tax free exchange, they would be locked out of farm policy benefits with respect to that land. The proposed AGI rule would clamp down on spouses who take off-farm jobs in order to help provide family income, especially in years where little or no take home pay is generated from the farm or ranch, in order to provide health insurance for the family, or simply in order to continue a profession, such as teaching. If a job in town with modest pay can cause the farm or ranch family to exceed the proposed AGI in one year but not be nearly enough to offset deep financial losses due to crop failure or depressed prices in the next year, the situation becomes a catch-22 for that family. The proposed AGI rule would exclude conservation benefits from the new AGI level due to the legitimate concern that the rule would undermine important efforts pertaining to water, air, soil, wetland, wildlife, and wildlife habitat. Unfortunately, the proposal ignores how the proposed rule would also undermine the ability of U.S. farm and ranch families to compete on a lopsided global playing field. The proposed AGI rule could seriously undermine farmer and local ownership of renewable energy facilities, including biodiesel, ethanol, and wind energy facilities, because any income derived by farm and ranch families through investment in these facilities could count against these producers, potentially locking them out of farm policy benefits. An important aspect of renewable fuels is both the opportunity for producers to add value to their products and to enhance investment by Main Street, as opposed to Wall Street, in order to ensure that any profits are reinvested in local communities. The proposed AGI rule threatens to undermine this goal. Doctors treating Medicare patients are not means-tested out of Medicare based on their AGI because it is the benefit to the patient - and not the AGI of the doctor - that is relevant. Means-testing doctors out of Medicare would undermine the purpose of the program, which is to ensure the provision of affordable and quality health care to elderly Americans. Similarly, farm and ranch families should not be means-tested out of farm policy based on their AGI because this, too, would undermine a fundamental purpose of farm policy: the provision of the safest, most abundant, most affordable food supply in the world to the American consumer. Finally, the proposed AGI rule is being advanced even though USDA, "[does] not have the data necessary to estimate the percentage of total production by producers who would be affected." Given that an important economic engine and jobs creator is riding on U.S. farm policy, a "look before you leap" approach is well advised. That's Why Applying the "Scotty Pippen Rule" to Farm and Ranch Families is No Slam Dunk Printed With Permission.