CHICAGO (Reuters) – U.S. agricultural merchants are scrambling to register themselves as cooperatives after a blunder in the country’s new tax law gave farmers a tax break for selling grains to co-ops rather than private firms.
Private crop handlers – which includes the “big four” merchants Archer Daniels Midland Co, Bunge Ltd, Cargill Inc [CARG.UL] and Louis Dreyfus [LOUDR.UL] – fear they will struggle to buy grain supplies when the next harvest season comes if the provision is not overturned.
Lawmakers have admitted they made a mistake by including the clause in last-minute changes to the bill.
The new code has pushed the private companies to spend thousands of dollars to form co-ops or find alternative ways to get their hands on billions of bushels of U.S. corn and soybeans. In Minnesota, private handler Minn-Kota Ag Products is among the companies establishing a co-op so farmers can supply grain to the company and still receive the tax benefit. The move, which involves legal filings and setting up a board, could cost up to $100,000, Chief Financial Officer Dale Beyer said.
“It’s wasted money,” he said. “It makes us inefficient but it’s what we have to do for this law.”
President Donald Trump signed into law in December the Republican tax overhaul that allows farmers a 20 percent deduction on payments for sales of crops to co-ops, but not for sales to private or investor-owned grains handlers.
The provision is the latest challenge for merchants such as Cargill and ADM. They are also facing a supply glut that is making it tough to turn a profit on their core business: buying, processing and selling corn, soybeans and wheat.
Cargill is planning for ways to remain competitive under the tax provision, spokeswoman April Nelson said, without providing details. As it stands, the rule “would create a proliferation of co-ops,” she said.
ADM is also working on options to offset the rule, after suffering a minor commercial impact from it, the chief executive said last week.
Some farmers and grain companies believe lawmakers will craft legislation to fix what they call the unfair advantage for cooperatives. Still, many say they cannot wait to make alternative plans.
In Minnesota, farmer Kirby Hettver said he will start committing grain he will harvest this autumn to a local co-op, instead of to Cargill, if the tax issue is not fixed by the time he starts planting crops in April.
“It’s just creating turmoil and this uncertainty is just driving everybody crazy,” said Bob Zelenka, executive director of the Minnesota Grain and Feed Association, a trade group that represents co-ops and private companies.
CROPS FLOW TO CO-OPS
The provision was introduced to compensate co-ops and their farmer owners when Congress eliminated a part of the tax code that had benefited them for more than a decade.
On Wednesday, Republican U.S. Senator Orrin Hatch said he and other senators were working toward “a solution to this issue that does not choose winners and losers.”
Since the provision was approved, Chicago Board of Trade corn futures have climbed about 5 percent and soybean futures have gained about 8 percent, prompting farmers to increase sales of crops they harvested last fall.
Citizens LLC, a privately held grain elevator in Michigan, has seen its share of those sales fall as farmers have booked more deals with co-ops because of the tax rule, said Angie Setzer, vice president of grain.
Citizens is working on a deal in which its customers would technically sell crops to the company through a local co-op, she said. The arrangement would allow the elevator’s customers to receive the tax benefit. However, Citizens would have to pay the co-op a fee for each bushel of grain under the deal.
“It is not an easy fix and it is not a clean one so I hope we do not have to do it,” Setzer said.
U.S. ethanol producer Green Plains Inc, which buys about 3 percent of the nation’s annual corn harvest, recently obtained approval to operate a co-op in Indiana, Minnesota and Colorado, CEO Todd Becker said. It is awaiting approval in other states.
Green Plains has not yet activated the co-op because Becker is holding out hope lawmakers will address the imbalance. However, the company could do so quickly if business is suffering or it appears there will not be a legislative solution soon, he said.
“We can’t be at such a significant disadvantage to the cooperative down the street,” Becker said.
Reporting by Tom Polansek and Mark Weinraub; Editing by Caroline Stauffer and Lisa Shumaker