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Co-op chaos: Provision from tax bill has farmers, companies scrambling

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A provision in the federal Tax Cuts and Jobs Act is causing a scramble in farm country, as farmers looking to maximize their bottom lines take advantage of the law's incentives by moving their crops through farmer-owned co-ops rather than private companies.

Experts say the provision, known as section 199a, is causing dramatic shifts in grain markets that could last even if lawmakers repeal the law, as some are urging them to do.

The last minute addition to the tax bill passed late last year was supposed to continue an existing tax break that benefited cooperatives. But the result, which lawmakers say was unintended, is a big tax advantage for farmers who sell grain to a cooperative instead of a private company. 

"From a logistical standpoint, it is going to have horrible disruption effects on our grain marketing system unless this gets addressed," said Rob Holcomb, a University of Minnesota Extension educator and tax expert.

He says farmers can gain thousands of dollars in tax breaks by selling their grain to a co-op. Here's how it works: If a farmer sells grain to a privately owned grain elevator, they can claim a 20 percent deduction on the net proceeds, or profit, from the sale. But if they sell to a cooperative they can claim the 20 percent deduction on the gross, or total amount, of the sale. 

Holcomb used a simplistic example. A farmer sells $500,000 worth of grain and makes $100,000 in profit. Selling to a co-op would result in a $100,000 tax benefit. Selling to a private company limits the tax benefit to $20,000.

"I don't remember anything that had the dollar amount impact that this is having. I mean this is getting into real money. Even for small producers it's getting into real money," said Holcomb.

The potential tax and marketing implications have farmers scrambling to rethink their grain marketing plans and many companies rushing to form a cooperative.

"We have one member that had a large farmer that took his business down the road to the co-op because he just figured he couldn't wait any longer, he couldn't afford to pass up that opportunity," said Bob Zelenka, executive director of the Minnesota Grain and Feed Association, which represents grain elevators across the state, both cooperatives and private operators. "For that non cooperative grain elevator that accounted to a third of his business, so the longer this goes on the worse it's going to get in farm country."

It's unclear how often that's happening, because farmers generally sell at least part of their crop on contracts inked months in advance of the sale.

But at Al-Corn Clean Fuel, an ethanol plant in the southeastern Minnesota town of Claremont, the tax change is affecting the company's ability to buy corn.

"We've heard from folks who said 'you know you're not a co-op now, I really need to sell to a co-op', and we told them 'well hang on give us a minute, let us get this formed and we'll be able to provide you the same benefits'," said CEO Randall Doyle, who adds his company is not the only one rushing to create a cooperative to buy corn so the farmer gets the tax benefit.

"From my perspective it's a headache. It does take a lot of staff time and we're working on getting the organizational documents done," said Doyle. " (It's) Certainly going to be a boon for the legal profession, since there's a lot of demand to set up these new entities very quickly." 

Many members of Congress have promised the tax provision will be rolled back retroactive to passage of the tax bill, but so far nothing has happened and Zelenka suspects that's why there's a rush across the grain marketing business to form cooperatives.

"Faith in congress is pretty low so you know, when you're dependent on Congress to fix this, well they created the problem in the first place so let's hope they can fix it, and that's what creates the concern," he said. "And that uncertainty is really creating a problem for everyone involved."

But where some see a problem, others see a fair deal for farmers and cooperatives.

"At this point I guess our main message is we don't want to go backwards on this you know for the farmers. It's going to be hard to get a fix done that treats everybody fairly. It's kind of  a big mess. Congress created a big mess is what they did," said Minnesota Farmers Union President Gary Wertish, who contends corporations got a large, permanent tax break in the new tax law, and if the section 199a provision is rolled back, cooperatives will be at a disadvantage. 

And even if the provision steering farmer business to cooperatives is rolled back, the impact might linger.

"You're going to have some ill will that may come of this as well with some loyal customers over the years that have decided that loyalty or not they decide they cannot pass up this opportunity and took their business down the road to the co-op, will that private elevator get that business back? Well it's really hard to say," wondered Zelenka.

The next likely chance for a fix is to attach the change to a budget bill Congress needs to pass by March 23.