'Unintended consequence' of new tax law could hurt Cargill, small grain elevators

Both farmer cooperatives and private grain trading companies are working together in an urgent attempt to change a provision in the massive new tax law that many fear could put small grain elevators out of business.

The provision in the law passed last month gives farmers a 20 percent tax deduction on gross sales of crops to farmer-owned cooperatives, but a much smaller deduction on farmer sales to private grain handlers, whether they be small independent grain elevators or giant companies such as Cargill.

"It's a game-changer on a lot of things, not just for grain elevators but also for the entire farm industry," said Brad Stenzel, owner and manager of Matawan Grain & Feed Inc., which has been in business for more than 40 years in the south-central Minnesota town of New Richland. "It would change the whole playing field, and it could close a lot of the privates down."

Lawmakers are considering ways to undo the provision, and one of the quickest avenues could be an attempt to attach new language to the continuing resolution measure that Congress needs to pass this week in order to avoid a government shutdown, according to trade groups.

The concern is that farmers will sell billions of bushels to cooperatives such as CHS Inc. and Land O'Lakes in 2018 and beyond to take advantage of the more lucrative tax deduction, putting private firms at a disadvantage or even pushing them out of business.

Because farmers would have a financial incentive to sell to cooperatives, Stenzel said, private grain businesses like his would not be able to compete successfully for the grain. Elevators make much of their money by buying grain from farmers, drying and storing it, and later reselling it when they can make a profit.

Bob Zelenka, executive director of the Minnesota Grain and Feed Association, said about half of his 250 members with grain elevators are cooperatives, and half are private operators. The independents are greatly concerned about losing business soon if the tax provision is not changed, he said.

The U.S. Department of Agriculture (USDA) acknowledged the problem, and said in a statement last Friday that "the unintended consequences of the current language disadvantage the independent operators" of the industry.

"The federal tax code should not pick winners and losers in the marketplace," said Greg Ibach, USDA undersecretary for marketing and regulatory programs.

Large co-ops and private firms have said little about the issue. Cargill and Inver Grove Heights-based CHS Inc., two of the largest players, declined to comment.

Land O'Lakes President and CEO Chris Policinski said that the Senate authors of the provision worked hard to ensure that tax bills of co-op farmer members did not rise as part of the tax reform, so that producers could continue to help stimulate the economy.

"Unfortunately, as the authors and the USDA have publicly stated, there was an unintentional consequence that could potentially alter the competitive landscape in agriculture," Policinski said in a statement. Land O'Lakes is working with other co-ops, agribusinesses and legislators to fix the problem, he said.

"Our stakeholders are committed to reaching a solution in a thoughtful and expeditious manner, and to working with Congress to address this issue promptly," said the National Council of Farmer Cooperatives and the National Grain and Feed Association in a joint statement last week.

The two groups have been working with others to revise the provision with Sens. John Hoeven, R-N.D., and John Thune, R-S.D., who crafted the section during final House-Senate negotiations on the tax bill last month.

Congress could try to add a rewritten provision as a rider to a continuing resolution or appropriations bill, Zelenka said.

It could also take up the measure as part of a corrections bill for other things in the new tax code, he said, but many feel that it would be difficult to garner the necessary 60 votes in the Senate for passage. Another option is that the Internal Revenue Service, which would implement the new law, has not yet provided guidance for how the provision would be implemented.

Steve Fischer, owner and manager of Wabasso Grain & Feed in southwestern Minnesota, said farmers are very aware of the new law, and are watching closely to see what happens.

Even though he's been in business for 40 years, Fischer said he couldn't blame farmers for selling to cooperatives if they could save thousands of dollars on their income taxes.

That could begin to happen soon, he said, as farmers sell grain in 2018 that's subject to the new tax code.

"Fortunately there's not a lot of grain moving now because prices are low," he said. But farmers are dealing with their tax accountants at this time of year, Fischer said, and everyone is looking at their balance sheets and cash flows, searching for ways to save money. "Every day that goes by without this changing is one day against us," he said.