U.S. grain companies fear harm from new tax law

CHICAGO, Jan 9 (Reuters) – The new U.S. tax law is poised to drive more
control over the nation’s grain supply to farmer-owned cooperatives,
provoking concern among ethanol producers and privately run grain
handlers that they could be squeezed out of the competition to buy
crops.

Until now, the cooperatives, private companies and publicly traded firms
had a more even opportunity to handle the grain supply used in
everything from loaves of bread in supermarkets to livestock feed.

The changes mean massive grain traders such as Archer Daniels Midland

Co, Bunge Ltd and Cargill Inc could find it difficult to source corn,
soybeans and wheat.

The perceived threat to these companies stems from a provision included
in the final stages of the law’s passage in December. It gives farmers
such a big tax deduction for selling their produce to agricultural
cooperatives that private firms fear their grains supply will dry up.

The provision was championed by Republican farm state senators including
John Thune of South Dakota and John Hoeven of North Dakota.

Privately held Cargill said on Tuesday it was surprised the provision
was added to the bill at the last minute and is evaluating its potential
impact.

Rival ADM, which also produces ethanol, said it too was evaluating the
provision and “various potential solutions” to it.

The new tax law allows farmers and ranchers to claim a 20 percent
deduction on all payments received on sales to cooperatives.

“It is going to put us out of business as a private if something is not
changed right off the bat,” said Doug Bell, president and general

manager of Bell Enterprises Inc, which operates grain elevators in
central Illinois.

“There is just no reason whatsoever why a farmer would do business with
anyone other than a co-op.”

The deductions could come as a massive boon to cash-strapped U.S. grain
farmers, who have struggled for at least four years amid a global grain
glut and sluggish commodity prices.

Some farmers seeking to take advantage of the new deduction are already
asking about transferring grain they have stored at private elevators
and selling it to cooperatives, Bell said. An association that
represents cooperatives also has received questions from people who want
to open new cooperatives.

The change focuses on a provision in the federal tax code that cuts
taxes on proceeds from agricultural products – whether corn and
soybeans, or milk and fresh fruit – that farmers and ranchers sell to
farm cooperatives such as CHS Inc.

There is no comparable provision for farmers doing the same business
with private or investor-owned companies.

“The advantage for the farmer is probably at least five times larger
selling to a co-op versus not selling to a co-op,” said Paul Neiffer, an
accountant at CliftonLarsonAllen in Yakima, Washington.

Neiffer said he has received hundreds of calls and emails from private
elevators upset about the law.

Chuck Conner, president and chief executive of the National Council of
Farmer Cooperatives, said his organization had begun to receive calls
from people asking questions about starting a co-op to take advantage of
the deduction.

“The producer/member deduction is more generous than most of us thought
possible a few months ago,” he said in an email to members.

The number of U.S. farm cooperatives has been steadily shrinking in
recent years, as they scramble to consolidate and stay competitive amid
the merger frenzy of major seed and chemical companies.

There were 1,953 farmer, rancher and fishery co-ops in 2016 in the
United States, down 4.6 percent from a year earlier, according to the
most recent U.S. Department of Agriculture data. They handled $44.3
billion in net sales of grains in 2016, down 33 percent from a $66.3

billion peak in 2013.

CHS, the largest U.S. agricultural cooperative, said the new law ensures
that “that cooperatives continue to be a driver of economic growth in
rural America.”

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