Senators scramble to fix tax law provision that gives co-ops advantage over other grain buyers

Key senators and farm groups are trying to fix a provision in the federal tax overhaul that gave an unexpected tax break to farmers who sell their crops to cooperatives rather than private or investor-owned firms.

It shifts the playing field in the grain business and creates new winners and losers, some industry leaders say. It gives a new competitive advantage to the farmer-owned cooperatives that buy corn and soybeans at grain elevators throughout Nebraska, Iowa and other farm states.

And it could disadvantage non-cooperatively owned grain buyers, including livestock feeders, family owned local elevators and livestock feedmills. Omaha companies that deal in grain or its products, like Green Plains and Scoular, and global agribusiness giants such as Cargill and ADM, also could be dented.

Those private buyers could wind up paying more for crops than farmer-owned co-ops do. In the worst case, “It would put them out of business if we don’t do something,” Iowa Republican Sen. Chuck Grassley said Tuesday.

Lawmakers say they didn’t intend to give a competitive advantage to co-ops. But it’s not clear they can rework the legislation given the partisan divide on Capitol Hill.

Investor-owned ethanol producer Green Plains isn’t waiting for a fix from Congress. Rather than get beat by co-ops, Green Plains is joining them: It has formed its own farmer-owned cooperative in Kansas, where it has been approved for business by the state. Licensing for the co-op to do business in the other states where Green Plains is active is pending.

Smaller private grain buyers are relying on industry associations to fight on their behalf. They say the law must be changed.

“It needs to be resolved, and they will resolve it some way or another, because it’s clearly an inequity,” said Jim Meuret, an owner of Brunswick, Nebraska-based J.E. Meuret Grain Co., with eight elevators in Nebraska. “The legislation is picking winners and losers to a large degree.”

Cale Geise, who with his father owns Mid Plains Grain in Wayne, Nebraska, said he doesn’t know if he’s lost any sales yet because of the law. But he wants lawmakers to make a fix, fast.

“Time is obviously of the essence,” he said, because farmers will be looking to pre-sell some of their 2018 crop this winter and spring.

The provision, from Republican Sens. John Thune of South Dakota and John Hoeven of North Dakota, surfaced in the final days of the debate over the tax bill, which President Donald Trump signed last month. Thune and Hoeven wanted to replace a deduction that benefited co-ops in the old law, which was being dropped, and they wanted to make sure farmers didn’t wind up with a tax increase.

But the final language went further than maintaining the status quo.

“I think at the end of the day what it boiled down to is the staff didn’t know what they were doing. … They rushed this thing through,” said U.S. Rep. Collin Peterson of Minnesota, the ranking Democrat on the House Agriculture Committee.

Agricultural co-ops are typically owned by farmers. They provide members with help marketing crops, purchasing supplies and other services. They range from small, local co-ops to nationwide co-ops such as Land O’ Lakes and Sunkist Growers.

Omaha-based Ag Processing Inc., a large soybean producer owned by cooperatives, could benefit from the increased purchasing power. AGP didn’t respond to a request for comment.

The new provision lets farmers deduct 20 percent of their gross sales to co-ops, but only 20 percent of their net income, or profit, if they sell to other companies. The difference is big enough that farmers who sell to co-ops could entirely eliminate their tax bills.

Farmers who do sell to private companies may be able to command higher prices to help make up for the lower tax break.

Kristine Tidgren, assistant director of the Center for Agricultural Law and Taxation at Iowa State University, calculated that a farmer with $300,000 in income from grain sales to a non-co-op company and $180,000 in expenses would have $86,400 in taxable income for the year. But selling to a co-op, she said, the same farmer would have just $48,000 in taxable income. Of course, federal tax code is complicated and Tidgren’s example takes into account other deductions allowed under tax law.

Hoeven’s chief of staff, Ryan Bernstein, said the senators didn’t intend to give a competitive advantage to co-ops and their farmer-patrons. They’ve been working with the National Grain and Feed Association, the National Council of Farmer Cooperatives and other parties to find a quick solution, he said.

The Nebraska Grain and Feed Association is working with its national partner and also looks for an outcome that levels the playing field so the law doesn’t influence farmers’ grain-selling strategy, Executive Vice President Kristi Block said.

Greg Ibach, undersecretary at the U.S. Department of Agriculture and former director of the Nebraska Department of Agriculture, said that the tax code shouldn’t “pick winners and losers” and that the agency expects a correction.

Spokespeople for Thune and Sen. Pat Roberts of Kansas, chairman of the Senate Agriculture Committee, said they’re supporting efforts to fix the provision.

Omaha-based Scoular, a privately held grain buyer, said it is among the companies disadvantaged by the changes to the tax code and is working with trade organizations “with the goal of reaching the right solution for all stakeholders,” a spokeswoman said

At Green Plains, the second-largest ethanol producer in the country, C E O Todd Becker said anyone who wants to join the company’s new co-op for a nominal fee will get all the benefits of selling to a traditional co-op.

Becker said he expects the co-op part of the tax legislation to be repealed, calling it an “unintended consequence” that slipped by.

But not everyone wants a change. Some co-op advocates say the businesses deserve a break, especially one that could help farmers at a time when crop prices and farm income are low. Co-ops operate in about 380 rural communities across Nebraska, employing about 6,500 people, the Nebraska Cooperative Council said.

A fix won’t be simple. Bernstein, in Hoeven’s office, said Hoeven and Thune are looking at attaching it to must-pass legislation, probably a big spending bill expected to come up late next month.

This report includes material from the Associated Press.

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