Agriculture Firms Warn of Unintended Impact of Tax Law
Lawyers and accountants say the overhaul gives cooperatives a significant edge over competitors
The new U.S. tax law has placed Rick Tronson, a North Dakota grain-company operator, in a precarious position by unexpectedly bestowing big benefits on his main competitors.
A provision inserted into the tax code during Senate and House negotiations in December gave farmers more lucrative deductions when they sell agricultural products directly to the farm cooperatives he competes against rather than to businesses like his own.
Mr. Tronson, whose four storage facilities handle 17 million bushels of grain a year, said the competition could spell the end of his 76-year-old family-owned business.
“We’ve made a big investment. And this law, if they don’t change it, the scenario is that we’ll go broke,” he said.
Farm groups and agricultural cooperatives battled last year to preserve a deduction on domestic U.S. production, which manufacturers also received. That deduction went away in the tax rewrite, but lawmakers including Sen. John Hoeven (R., N.D.) won the inclusion of a new deduction.
The new provision allows farmers to deduct up to 20% of their total sales to cooperatives, letting some farmers reduce their taxable income to zero. It is a more generous version of a deduction that owners of pass-through businesses, such as partnerships and S-corporations, get in the law.
Farmers would get a smaller deduction—about 20% of income—if they sell grain or other farm products to privately held or investor-owned companies like Mr. Tronson’s.
Tax lawyers and accountants said the new law will give cooperatives a significant edge over competitors. That stands to benefit co-op giants including American Crystal Sugar Co., Land O’Lakes Inc., CHS Inc. and Ocean Spray Cranberries Inc.
It could sting large agribusinesses such as Cargill Inc. and Archer Daniels Midland Co. , in addition to smaller private operations like Mr. Tronson’s.
“It’s kind of hard to imagine they intended to make farming tax-free,” said John Power, a North Dakota accountant whose clients include Mr. Tronson. “Fixing it becomes difficult because I don’t think it’s something that can be fixed with regulation.”
CHS hailed the new deduction system. A spokeswoman said it “should help ensure farmers receive appropriate benefits in the new tax law and that cooperatives continue to be a driver of economic growth in rural America.”
Lawmakers are now re-examining the issue. An aide to Sen. John Thune (R., S.D.), who assisted Mr. Hoeven with the provision, said lawmakers are in search of a “reasonable solution” to “potential unintended effects.”
Kami Capener, Mr. Hoeven’s spokeswoman, said the goal was to prevent cooperatives from being “unfairly treated” by the loss of the domestic-production deduction. “We are looking into any unintentional impacts to noncooperative [grain] elevators and will work with them to address it,” she said.
Republican lawmakers said they intend to pass a technical corrections measure to fix any flaws that show up in the tax law, but any new law is likely to need 60 votes in the Senate. The need for bipartisan cooperation makes the measure’s fate uncertain; the GOP holds 51 seats in the Senate.
The new provision could reshape parts of the agricultural economy and sharply reduce many farmers’ taxes. U.S. crop production was estimated at $183.1 billion in 2017.
Consider a simplified example of a wheat farmer with $500,000 in annual grain sales and $80,000 in profit. A farmer selling grain to a cooperative could deduct 20% of sales, wiping out the entire income-tax liability. By contrast, if the farmer sells grain to an independent grain operator, the farmer’s deduction would be limited to 20% of the profit, or $16,000, leaving that farmer with up to $64,000 in taxable income.
Independent grain company officials said they didn’t begrudge farmers their tax breaks, but feared the provision creates an uneven playing field.
“It’s horrible,” said Todd Lafferty, co-chief executive of Wheeler Brothers Grain Co., a 100-year-old privately owned company that operates 17 locations from Watonga, Okla. “It gives a very real incentive, under the right circumstances, for farmers to sell to co-ops over independents.”
Farm cooperatives are organizations owned by groups of farmers and ranchers who market their crops and goods through them. The co-ops also sell products and services like fertilizer and pesticides to members and disperse profits back to members according to how much business they do with the co-op.
Some of them are huge. CHS had sales of $31.9 billion in its 2017 fiscal year which ended August 31. Land O’Lakes had sales of $13.2 billion in 2016. A Land O’Lakes spokeswoman declined to comment.
“I am getting calls from a lot of private agribusinesses particularly in the grain sector hoping they have somehow misread the producer provisions,” wrote Chuck Conner, chief executive of the National Council of Farmer Cooperatives, in a letter to members last week. “We have even received a few calls from individuals who want to inquire about starting a co-op in order to take advantage of this deduction.”
Mr. Conner noted in a statement that the provision is set to expire at the end of 2025, versus other, permanent changes to the tax law, such as a lower corporate tax rate.
Tax professionals cautioned that they are still deciphering the details and that each farmer’s situation may be different.
Some agribusiness executives said the provision could alter the grain business, where international and regional grain companies often bid against cooperatives to buy farmers’ crops, jockeying to fill massive steel bins with crops that are later processed or sold on export markets.
One possible result: Big agribusinesses, rather than bidding against co-ops, might instead be forced to purchase more directly from them, raising costs.
Some executives of independent grain companies, including Messrs. Lafferty and Tronson, said they had contacted their elected officials to protest the shift.
Cargill, among the largest purchasers and exporters of U.S. grain, “was surprised to see this last-minute addition to the bill and is in the process of assessing it and evaluating the potential impact to our business and to our customers,” a spokeswoman said.
Archer Daniels Midland is “evaluating the potential impacts of this new tax provision, as well as various potential solutions,” said a spokesman. ADM’s share price is down 5.3% in the past three months.
Paul Neiffer, an accountant, said the Internal Revenue Service is likely to issue new regulations later this year that will provide more detail on the provision—and how it may affect farm country.
“It’s not necessarily fair, but fair and the tax code don’t necessarily go together,” Mr. Neiffer said.