According to The Kiplinger Letter, we can expect a slow-growth economy in 2023. This may come as no surprise to you, as many producers are feeling the effects of inflation on their inputs, groceries, and everything in between.
The U.S. housing sector has already shown signs of a slowdown with housing starts decreasing. To further exacerbate the problem at home, Europe’s and China’s problems will affect our domestic exports, causing a further deterioration of the U.S. GDP.
We can anticipate that the Federal Reserve will continue to watch inflation very closely, and it’s likely that we’ll see two or more short-term interest rate hikes into early 2023.
Term rates — which are driven by what investors think the economy will do — look to steady and have eased a bit off our highest levels.
The outlook for corporate America appears slightly negative as well given labor shortages, increased health care costs, and a labor market that is expecting a pay increase to compensate for a higher cost of living.
This certainly doesn’t bode well for overall corporate profitability and reinvestment/expansion.
However, the outlook for agriculture — at least in the short term — looks fairly positive. Even with a short crop, many producers are looking to take advantage of an excellent grain market and will be rather profitable compared to recent memory.
Obviously, the higher input costs will cut into profit in 2023, but the ability to lock in a profit as we head into next year remains. The livestock markets, while volatile, offer many producers this same opportunity.
One interesting and concerning statistic is that food price inflation will finish the year at around 9%, which is the highest annual reading since 1979, according to The Kiplinger Letter.
This will no doubt put pressure on some of our higher-priced commodities as consumers struggle to make ends meet.
Given the headwinds the overall economy is facing, it is ever more important to be cautious as we plan for 2023 and beyond. This rings especially true as we look to defer taxable income without creating additional debt obligations that may be more difficult to meet if/when margins shrink.
As a method of helping defer taxable income “without any carry in the market, deferred pay contracts should be considered,” says Heath Kooiman, CPA, an FNBSF Ag Advisory Board member and partner/owner of the Woltman Group.
Heath strongly advises that you consult your tax advisor because you have the option on each deferred pay contract to choose which year it’s included in taxable income.
So, it’s always a good idea to break up your deferred pay contracts into many smaller amounts, rather than one contract, in order to give yourself the best flexibility.