Kiplinger Connection
Food Crisis • The Economy •Taxes

Food Crisis: What’s behind it and how long it will last.
Energy Prices: Credit loosening some, office vacancies up.
Taxes: IRS scrutinizing domestic production deductions.

Food Crisis
With demand racing ahead of supply ...
Food prices are going to stay high for years to come, both in the U.S. and abroad, exacerbating world hunger and political unrest. Underlying food inflation is a "perfect storm" of fast growth in China, India, and elsewhere, rapid urbanization, soaring energy prices, a weak U.S. dollar, hoarding, and weather woes, including the devastating cyclone in Myanmar.
A correction is in the cards. But ... Bringing supplies in line with needs will take time. A projected 3% increase in global grain output in 2008 will be a start. Later, policy changes and tech breakthroughs that will reduce demand for food stocks being used to make fuels are sure to help. Ditto, a greater willingness by many countries to grow and import genetically modified foods.

Long-term solutions spell some relief.
But they won’t ease the misery being endured by millions of starving people in large swaths of Asia, Africa and other volatile parts of the world. And they won’t be much consolation to U.S. consumers, who’ll see prices of eggs, cereal, and other staples climb higher before gradually moderating over the next several years. Overall grocery food prices ... up 5% in 2008.

Will the rush to increase global food supplies stem inflation?
No. At best, the aid will alleviate some immediate suffering. The U.S. and other developed nations aim to raise up to $2 billion soon for the UN’s World Food Program (WFP) to cover the most urgent needs.
The key challenge: Getting food to where it’s needed most. High fuel prices hike transportation costs, leaving less for food. Export bans aggravate the problem. The WFP strives to buy food locally ... from nations near distribution areas ... to control transport costs. But with more of them opting to restrict exports, the WFP will suffer.

The threat of increased food rioting is a major security worry in many countries, a big reason why food aid will be stepped up.
Of special concern to U.S. officials: Food insecurity in nations that have large armies significantly raises the risk of armed conflicts.
High food costs may push 100 million more people into poverty, wiping out worldwide gains in reducing poverty over the past seven years.
In Latin America alone, about 16 million people face destitution.
That will almost certainly boost illegal immigration to the U.S.

The Economy
Credit markets are finally showing some hints of a thaw. Banks are repairing their balance sheets, raising $212 billion this year. And spreads between Tiffany-quality Treasuries and other bonds are narrowing, a good sign that investors believe lending is less risky.
In addition, most stock indexes have recouped recent losses, another indication that investors feel more confident in the markets.
But the crisis isn’t over yet. Big banks are still tightening
adopting stricter lending standards as they wait for the U.S. economy to stabilize before easing up. That could take the rest of this year.
And rates on mortgages are declining at only a snail’s pace, despite seven Federal Reserve rate cuts totaling 3.25 percentage points. Inflationary pressures from energy and food aren’t helping, either.

Mortgage woes are taking a toll on commercial real estate, with deals falling to $40 billion in the first quarter, from $137 billion a year ago. The biggest problem: A freeze on buying and selling mortgage-backed bonds.
The market won’t pick up until well into 2009.

The weak economy will push up office vacancies. The vacancy rate will rise from 13% to 14.5% by year-end and 16.3% next year. All markets will feel it, even the strong, such as Boston, Houston, Seattle, NYC, and San Francisco. Hit hardest: Detroit, Phoenix, and Las Vegas.
Rents will go up just 2% this year, with no hike next year. Expect landlords to entice tenants with offers of a free month or renovations.
Demand for warehouse space will decline by smaller amounts, offset partly by higher exports. Last year’s 9.3% vacancy rate will grow to 9.8% this year and 10.3% in 2009. Best off: Cincinnati; Pittsburgh; Kansas City, Mo.; and Houston (because of its high energy activity). Weakest: Riverside County, Calif.; Orlando; and Las Vegas.

Taxes
Chances for a quick renewal of expiring tax breaks are fading.
Republican senators are balking at tax hikes, which Democrats say are needed to pay the cost of extending higher AMT exemptions, the R&D credit, and tax free direct payouts to charities from IRAs.
Most, if not all, of the breaks eventually will be renewed, but it may take a lame-duck session after the November elections. That will be too late to avoid another confusing, chaotic tax season.

The IRS is getting tougher on deductions for domestic production.
The agency thinks firms play fast and loose with the deductions, which are meant for net income earned from U.S. production activity, including manufacturing and construction. IRS auditors have been trained to spot violations. Make sure you have documents to back up any claim.

Uncle Sam is also cracking down on contractors who owe taxes. Rules taking effect this month force bidders on all federal contracts to disclose unpaid federal taxes or outstanding tax liens if the amount exceeds $3,000. The rule also applies to tax judgments against them.

Congress wants to close a loophole in health savings accounts.
It would mean more red tape for administrators and HSA holders. HSAs are tax free only if the funds are used for medical expenses. The IRS relies on owners to fess up if funds are used for other purposes, but a House-passed bill would require documentation for all payouts.
Critics are fighting the bill, saying it would be too burdensome.