grain barge river elevator DarcyMaulsby /iStock/Thinkstock.
This barge on the Mississippi River in eastern Iowa is taking on a load of grain, either corn or soybeans, from area farms.

Section 199A driving local elevators to make tough decisions

Without a legislative fix, co-ops are getting all the grain sales, farmers must make tough decisions and small elevators are left with few options.

In recent weeks, soybean prices have rallied more than $1/bu. and corn more than 40 cents/bu. Most local elevators and cooperatives are offering free storage to capture grain being held by farmers.

For Paul Kroeker, who owns and operates Kroeker Grain & Lumber in Henderson, Neb., most of that grain did not come to his small, family-owned and -operated elevator, which handles 3-4 million bu. of corn and soybeans each year. Since the new year started, Kroeker has lost 30% of the business he typically would see at his nearly 90-year-old elevator; his grain bins sit empty.

It’s not his doing. It's because of the Section 199A tax code change made in the December 2017 tax reform bill that has dramatically changed the competitive nature of grain buying and selling in the countryside.

Section 199A allows producers selling grain to receive a 20% deduction of gross grain sales (before farm expenses) from taxable income less capital gains if they are a member selling to a cooperative. If the sale is, instead, made to a non-cooperative marketing firm or processor (e.g., Archer Daniels Midland, Cargill or any number of independent grain marketing firms), the deduction is 20% of net income. The tax savings offer thousands of dollars in benefits to farmers who sell to cooperatives.

According to Iowa State University, the average farmer in Iowa has $399,235 in grain sales and an average net income of $97,719. If the farmer takes his grain to a co-op, he will be able to deduct 20% of gross sales, which is $79,847 in deductions. If the farmer takes his grain to a private elevator, then he will be able to deduct 20% of net income, which is just $19,543.80. There is a $60,303.20 difference between these two deductions.

Minn-Kota Ag Products handles 20-25 million bu. of corn, soybeans and wheat per year. Dale Beyer serves as chief financial officer of the fourth-generation family-owned business. In order to stay competitive, Beyer said the decision was made to establish the 80-year-old, privately owned operation as a cooperative. It will cost $50,000 in fees to set up the cooperative, pay the lawyer and change the software. “Operationally, we’ll have to add another database to our operations. We will have to make double entries of several things, which is terribly inefficient,” Beyer said.

Then, they’ll need to hire a new person to help manage the cooperative, which Beyer said will “probably be another $75,000 of wasted money every year.”

Beyer said the decision came down to either closing the doors or becoming a cooperative. He expects 3,000-4,000 new cooperatives to be formed this year for the same reason.

Kroeker said if the tax code isn’t fixed, his company will cease to exist, because farmers will be forced to go where they can obtain the greatest incentive. Under the previous Section 199, cooperatives may have been able to offer a 3-4 cents/bu. incentive, but farmers typically still sold to their local elevator to keep that business closer to home.

Just last week, Kroeker said he lost his second-largest customer. He said if the tax law gets switched, the customer will come back, but he couldn’t take that chance with taxes right now. “I don’t blame him,” Kroeker said of the customer's decision.

Kroeker said he knows the struggles his fellow community members face due to the downturn in prices, and knowing that, “How can I ask them to sell to me and give up a 20% tax break when they’re already losing money?”

Last week, the National Grain & Feed Assn. (NGFA) and the National Council of Farmer Cooperatives (NCFC) released a statement saying they support a fix that aims to restore some of the treatment agricultural cooperatives enjoyed under the previous law. Farmers selling their products to agricultural cooperatives will be able to claim deductions on those products sold and receive a pass-through deduction from their cooperatives, although the deductions will be limited to ensure a competitive balance in the agricultural marketplace.

Mike McCloskey, chief executive officer for the dairy cooperative Select Milk Producers and operator of Fair Oak Farms, had advocated for a fix that could be expanded to include all farmers, whether co-op farmers or non-co-op farmers. To include all farmers and maintain budget neutrality, the percentage of the deduction to gross revenue in 199A would need to be reduced from 20% to 5%. The idea was to offer a tax benefit that would stimulate the economy and offer direct, equitable assistance to all farmers.

However, it fell on deaf ears. Legislators instead focused on the NGFA and NCFC compromise plan that goes back to the old 199A with a limit on how much of a deduction a producer can take and actually creates a disincentive for cooperatives to pass earnings on to producer members. “The only goal was to try to fix the unintended consequence and go back to the old 199A, and we ended up with a worse program than we had before,” McCloskey said.

“This is an incredible missed opportunity,” McCloskey said. The suggested fix was a way to offer farmers a tax break and keep more money in their pockets at this time of very low commodity prices, he added.

Roger McEowen, agricultural law and taxation professor at Washburn University School of Law, was involved in reviewing the proposed fix. Although it isn't perfect, he sees it as better than the no-fix scenario. “The 'fix' helps level the playing field between sales to co-ops and sales to non-co-ops by means of a formula applied to the 20% deduction. In some instances, a farmer-seller will be better off selling to a cooperative, and in other instances, a farmer-seller will be better off selling to a private elevator. It just depends on the facts and circumstances of each particular situation,” he explained.

The current authorization for government funding runs out on March 23, and Congress is working to pass an omnibus appropriations bill before that deadline to fund the government for the remainder of fiscal 2018.

Republicans and Democrats all seem to agree on the need to fix the Section 199A mistake, but because of that, it is being used as a political football. Democrats want something big in return for supporting an omnibus bill that includes the fix, so they are seeking an expansion of the low-income tax credit.

“I’m just a bargaining chip for their pet project,” Kroeker said of the political posturing. “It’s disheartening that a lot of Democrats in agricultural states understand what we’re going through, but this is politics as usual.”

Kroeker acknowledged that if his business goes broke, it’s on him for not running the business with sound principles -- but that isn’t what he sees at play here. “The government is putting me out of business,” he said.

“If they don’t get it fixed, we will cease to exist, or at least in our current form,” he explained. “My only option, if it doesn’t get passed, will be to close the doors. I could sell my business to a co-op, which now is worthless, and I’d be lucky to get 10 cents on a dollar. Or, I could merge with them, and we just get absorbed into another business, and my family business that has been here forever is gone.”

The unintended consequences or losing his grain business is frightening to Kroeker. “I don’t sleep much anymore -- haven’t much since January,” he said.

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