Washington Insider - Thursday

Tax Law Could Disrupt How Grain is Sold

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

Top NAFTA Trade Officials to Meet In Switzerland

The sixth round of NAFTA 2.0 talks will kick off January 23 in Montreal without the top negotiators from all three countries. But they will meet in Davos, Switzerland, at the World Economic Forum.

U.S. Trade Representative Robert Lighthizer, Mexican Economy Minister Ildefonso Guajardo and Canadian Foreign Minister Chrystia Freeland are scheduled to be at the Davos event which starts January 23, with a statement from Alex Lawrence, a spokesman for Freeland, saying she expected to raise the NAFTA situation informally on the sidelines of the Davos meeting. However, all three officials will be in Montreal for a trilateral meeting January 28, according to Lawrence.

China Official Warns Of Higher Production Costs In 2018

A jump in fertilizer and pesticide prices will likely contribute to a surge in ag production costs for China in 2018, according to Tang Ke, director of the ag ministry’s market and economic information department. Domestic urea prices are up 34 percent from year-ago levels while compound fertilizer prices are up 17 percent, he stated.

Plus, ag machinery prices and environmental protection costs are on the rise, which means after two nearly steady years, "agriculture production costs in China are expected to go back to a relatively fast rising channel in 2018," Tang stated. He detailed corn production costs are expected to rise 2.8%, rice 2.4% and wheat 2%. The government is working to make sure fertilizer supplies are adequate and stable ahead of planting season, as a gas supply crunch has caused supplies of urea and other gas-based fertilizers to dwindle.

Washington Insider: Tax Law Could Disrupt How Grain is Sold

There is a good bit of attention being paid to the implications of the new tax law just now and the Minneapolis Star Tribune this week examined ways the new law could affect grain sales. It reported that both farmer cooperatives and private grain trading companies are working together “in an urgent attempt to change a provision in the massive new law that many fear could put small grain elevators out of business.”

The law gives farmers a 20% tax deduction on gross sales of crops to farmer-owned cooperatives--but a much smaller deduction on farmer sales to private grain handlers, whether they be small independent grain elevators or giant companies such as Cargill.

“It’s a game-changer on a lot of things, not just for grain elevators but also for the entire farm industry,” Brad Stenzel, owner and manager of Matawan Grain & Feed Inc., told the Star Tribune. His firm has been in business for more than 40 years in the south-central Minnesota town of New Richland. “It would change the whole playing field, and it could close a lot of the privates down.”

The report also says that lawmakers are considering ways to undo the provision, possibly by attaching new language to the continuing resolution measure that Congress needs to pass this week.”

The concern is that farmers will sell billions of bushels to cooperatives such as CHS Inc. and Land O’Lakes in 2018 and beyond to take advantage of the more lucrative tax deduction, putting private firms at a disadvantage or even pushing them out of business.

This is because farmers would have a financial incentive to sell to cooperatives, Stenzel said. And, it could lead to private grain businesses like his bring unable to compete successfully for the grain.

Bob Zelenka, executive director of the Minnesota Grain and Feed Association, said about half of his 250 members with grain elevators are cooperatives, and half are private operators. The independents are especially concerned about losing business soon if the tax provision is not changed, he said.

The Star Tribune said that USDA “acknowledged the problem, and said in a statement last Friday that the unintended consequences of the current language disadvantage the independent operators” of the industry.

Large co-ops and private firms have said little about the issue, the Star Tribune said. Cargill and Inver Grove Heights-based CHS Inc., two of the largest players, declined to comment.

Land O’Lakes President and CEO Chris Policinski said that the Senate authors of the provision worked hard to ensure that tax bills of co-op farmer members did not rise as part of the tax reform. “Unfortunately, as the authors and the USDA have publicly stated, there was an unintentional consequence that could potentially alter the competitive landscape in agriculture,” Policinski said and noted that Land O’Lakes is working with other co-ops, agribusinesses and legislators to fix the problem, he said.

“Our stakeholders are committed to reaching a solution in a thoughtful and expeditious manner, and to working with Congress to address this issue promptly,” said the National Council of Farmer Cooperatives and the National Grain and Feed Association in a joint statement last week.

The two groups have been working with others to revise the provision with Sens. John Hoeven, R-N.D., and John Thune, R-S.D., who drafted the section during final House-Senate negotiations last month.

Congress could try to add a rewritten provision as a rider to a continuing resolution or appropriations bill, Zelenka said. It could also take up the measure as part of a corrections bill for other things in the new tax code, he said, but many feel that it would be difficult to garner the necessary 60 votes in the Senate for passage.

Steve Fischer, owner and manager of Wabasso Grain & Feed in southwestern Minnesota, said farmers are very aware of the new law, and are watching closely to see what happens.

Even though he’s been in business for 40 years, Fischer said he couldn’t blame farmers for selling to cooperatives if they could save thousands of dollars on their income taxes. That could begin to happen soon, he said, as farmers sell grain in 2018 that’s subject to the new tax code.

“Fortunately there’s not a lot of grain moving now because prices are low,” he said. But farmers are dealing with their tax accountants at this time of year and everyone is looking at their balance sheets and cash flows, searching for ways to save money. “Every day that goes by without this changing is one day against us,” he said.

Well, it is not unusual for Congress to make mistakes in large bills, especially if it is in a hurry. And, it is routine for it to come back with fixes a little later, so that is likely what will happen this time. However, this seems like a pretty important problem that deserves priority attention before it leads to impacts on the markets as well as on smaller grain handlers. It clearly deserves close attention as soon as possible, Washington Insider believes.

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