Washington Insider--Tuesday

By DTN's Washington Insider

Here's a quick monitor of Washington farm and trade policy issues from DTN's well-placed observer.

Hatch, Wyden Continue Work for Reforming U.S. Tax Code

The chairman and ranking Democrat on the Senate Finance Committee reportedly have established working groups tasked with developing legislation to reform the U.S. tax code, even though this issue is not near the top of the agenda for either the White House or other members of Congress.

Committee Chairman Orrin Hatch, R-Utah, and ranking member Ron Wyden, D-Ore., have set up working groups, each of which is charged with reviewing different sections of the current tax code, flagging those sections that are candidates for reform and developing suggestions about how those reforms could be brought about.

According to Mark Prater, chief tax counsel and deputy staff director on the majority side, the process will continue to focus on comprehensive changes to tax law that Hatch and Wyden prefer, including individual, business and corporate taxes. Currently, most attention from the White House and other members of Congress has focused almost exclusively on business taxes.

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Plans to Tax 'Repatriated' Profits Face Significant Challenges

Both Congress and the administration are looking at the possibility of imposing a tax on the offshore profits of U.S. companies as a way to fund a variety of project, the most prominent of which is the nation's need to repair, maintain and increase its transportation infrastructure. An earlier attempt at this –– a voluntary profits repatriation holiday with a 5.25 percent tax rate –– failed to convince many companies to take advantage of the offer. As a consequence, President Obama has proposed applying a 14% mandatory tax on the stockpiled profits and a 19% minimum tax on foreign earnings going forward. The administration estimates the one-time 14% tax would generate $268 billion over six years.

Last week, Bloomberg News reported that eight of the biggest U.S. technology companies added a combined $69 billion to their stockpiled offshore profits over the past year and now account for more than a fifth of the $2.1 trillion in profits that U.S. companies are holding overseas.

Analysts point out that keeping money overseas is particularly easy for technology and pharmaceutical companies whose profits stem from intellectual property that can swiftly be moved. Corporations that rely on intellectual property — trademarks, logos or patents — have an advantage over heavy industrial companies and the financial industry, which rely on providing services to customers.

Knowing that under current law, companies will face the U.S. corporate tax rate of 35$ on profits they earn around the world is a significant disincentive for them to repatriate those profits. The president's proposal would get around that problem, but whether he will be able to sell it to Congress remains to be seen.

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Washington Insider: Retailers and Drug Resistant Bacteria

Cynics often say that no good deed goes unpunished, and it looks a little like the Wall Street Journal did its bit along those lines with a recent article about antibiotic-free fast foods.

Rather than celebrate McDonald's announcement about pulling back from antibiotic use in its U.S. chicken products, the Journal raised what it called the "obvious question" regarding the company's plans for antibiotic-free beef in the future. The answer quickly put McDonald's on the defensive.

McDonalds has unveiled no plans to stop purchasing beef from cattle raised with antibiotics used to treat humans, the Journal noted, or for the pork it uses for its sausage patties and Egg McMuffins.

Still, the company said its shift to antibiotic-free chicken is a start and that decisions with regard to next steps highlight the complexities of making sweeping changes to a supply chain serving more than 14,300 U.S. restaurants.

"It is a massive change, and we wanted to start somewhere," said Marion Gross, senior vice president of McDonald's North America supply chain said in defense of the company's decision. Chicken "is much easier for us, but it doesn't mean we aren't looking to make advancements with other categories like beef," she said.

Beef is not only more expensive than chicken, but also is especially costly when produced to detailed specifications. For example, the Journal notes that antibiotic-free product is often labeled "natural" by U.S. retailers and costs an average of $7.24 a pound in 2013, compared with $3.89 a pound for chicken with that label. Antibiotic-free meat accounts for only about 5% of that sold in the United States today, according to industry estimates.

In general, meat prices are cyclical. For example, beef supplies were tightened by the recent drought and high feed prices. "If you look at it from the perspective of procurement, the cost of producing poultry this way [antibiotic-free] may increase, but for most of these quick-service restaurants, chicken costs aren't anywhere near as much as beef." John Nalivka, president of Sterling Marketing Inc., told the press. And, making major changes in the beef supply chain also is more complicated and risky than for chicken because beef ranching is highly fragmented, and cattle and beef purchasers usually are forced to rely on a broad range of sources.

The chicken industry, by contrast, has been vertically integrated for years, with companies like Tyson contracting with farmers to produce chicken for them alone. In such arrangements, feeding and other production practices can be much more readily regulated to meet purchasers' needs, observers note.

In December, CKE Restaurants Inc., the parent of burger chains Hardee's and Carl's Jr., said it would become the first major fast-food company to offer a burger free of hormones, antibiotics and steroids from grass-fed cattle this year. So far, though, the company has been able to obtain only a limited amount of beef that meets those specifications — only enough beef to offer the "All-Natural Burger" only on Carl's Jr. menus, said Brad Haley, the chief of marketing. Haley said he hopes CKE will be able to offer the burger at Hardee's restaurants later this year.

"The red-meat supply chain is much more difficult than poultry in terms of sourcing hormone and antibiotic-free meat," according to Boyd Hoback, chief executive and president of Good Times Restaurants Inc., a Colorado-based restaurant chain that has sold antibiotic-free hamburgers at its roughly 40 restaurants for 11 years.

He asserts that "there would have to be a major sea change in the supply chain" in order for larger companies to secure the same quality of pork and beef. "People would also have to be willing to pay the premium, and the normal fast food consumer might find it tough to absorb that price difference," he added.

So, what does this mean for the future demand for antibiotic-free beef? It probably means that antibiotic-free products will turn out to be significantly more expensive than run-of-the mill items, and that consumption may be reduced as costs climb. And, it suggests that the transition to antibiotic-free beef may take a while, since it is difficult to see the food industry eagerly shifting into such a very narrow, 5% share of the industry's available supplies.

Still, national concerns about antibiotic drug resistance are both intense and growing and could well shift demand much faster than may have been thought likely. And, while the Journal may have McDonalds to kick around for some time in the future, the focus on antibiotic-free foods seems to have real momentum that producers should watch as it develops, Washington Insider believes.

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