If it stands, Section 199A gives cooperatives an advantage

From his small grain company on the western Kansas plains, Gary Gantz admits keeping his 130-year-old family business going hasn’t been easy.

Here, along the 100th meridian in Ness County where rain comes sparingly, Gantz runs D. E. Bondurant Grain, Ness City, one of the nation’s oldest continually operated private grain elevators. Sitting 60 miles from the nearest big city with a Walmart, Gantz has worked tirelessly to keep the family independent afloat in an era of big business and consolidation amid the ever-changing farm economy. 

“We’ve been able to work through droughts and good times and bad times, and we can compete with the Cargills and ADMs of the world,” he said.

Yet, Gantz has deep concerns about how a new U.S. tax law could affect the business his great-grandfather started in the 1880s.

“Just about the time you have the boat turned and you have charted a course for the company and should be viable for a couple of decades, then the government comes out once again with a plan or program that has the potential to really hurt us.”

At issue is the new 199A deduction in the tax law that—if it stands—allows farmers and ranchers to claim a 20 percent deduction on all payments received on sales to cooperatives. For example, if a farmer sells $100,000 in grain to a cooperative, he or she could claim a $20,000 deduction on business income.

Gantz said his accountant told him Jan. 11 the new provision could give cooperatives a significant advantage. Farmers would have more of an incentive to sell to co-ops instead of publicly traded or private grain businesses like his own company.

“It’s pretty huge,” he said. “I think (the cooperatives) hit a homerun on this deal.”

The provision, championed by Republican Sens. John Hoeven, R-ND, and John Thune, R-SD, was included right before the December passage of the bill.

Those affected would be anyone who buys commodities—from feedlots and milk companies to ethanol plants, said Tom Willis, chief executive officer of Conestoga Energy Partners, which has ethanol plants in Liberal and Garden City, Kansas. Willis said his plants use roughly 75 million bushels of grain each year.

But whether the provision will remain is doubtful in Willis’ mind. There has been enough commotion from those affected that work has been occurring behind the scenes in recent days to fix the issue. Among those at the table is the National Council of Farm Cooperatives and the National Grain and Feed Association.

“Everyone realizes there were unintended consequences,” said Willis. “At the end of the day, the goal was to give the co-ops the same tax bill as they had under the old. It wasn’t meant to give them any type of advantage.”

USDA officials have said they are ready to work with Congress to make the needed fixes. The agency’s Under Secretary for Marketing and Regulatory Programs Greg Ibach issued at statement Jan. 12, saying the disadvantages for independent operators was not the original intent.

“The federal tax code should not pick winners and losers in the marketplace,” Ibach said. “We applaud Congress for acknowledging and moving to correct the disparity, and our expectation is that a solution is forthcoming. USDA stands ready to assist in any way necessary.”

Scoular—a privately held company with more than 90 facilities—largely in North America, and $4.3 billion in annual sales—issued the following statement.

“The changes to the tax code, and particularly 199A, are of interest and concern to Scoular. We hope to see cooperatives and independent grain companies working with legislators to swiftly address the business consequences brought on by the changes to this section of tax code. We are continuing to follow the issue closely and are partnering with our trade organizations.”

Ryan Wrasse, a spokesman for Sen. Thune, said when Congress was streamlining the tax code, Thune and Hoeven’s intent was to create an equivalent provision that would still benefit cooperatives and their owners.

“Sen. Thune is now aware of the unintended situation this new provision could create in the agriculture industry and is working with Sen. Hoeven, other Senate colleagues and industry stakeholders to find a reasonable solution," Wrasse said. "Ultimately, Sen. Thune believes that producers should make decision about where and how to sell their products without the tax code unfairly tipping the scales in favor of marketing to one type of business entity or another.”

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The Senate is set to vote on a passel of legislation on Jan. 19, but it’s not expected to take up the 199A provision at that time. Instead, voting may occur when the Senate votes on the Tax Extenders Bill, but it is unknown when that vote takes place. 

The chairman of the Senate Agriculture Committee voiced his concern about the measure.

Pat Roberts, R-KS, said, “It’s disappointing to learn a provision in the tax reform bill is distorting the grain markets. I know the authors of the measure did not intend that outcome, and I will assist them with whatever legislative correction is necessary. It is important that the tax code not benefit one sector of the agricultural market over another, and that the reduction in tax burdens created by the Tax Cuts and Jobs Act benefits the entire agricultural economy.”

What it means

“If you’re a farmer patron of a co-op, you’re probably saying it’s a great thing,” said Brian Briggeman, director of the Arthur Capper Cooperative Center in the Department of Agricultural Economics at Kansas State University.

The old provision had been part of a 2001 program used to help stimulate the economy by giving manufacturers an incentive to hire new workers, he said.

“Over time, co-ops realized they could use the deduction as well and did so quite well. Other grain companies, like ADM, could use it, too,” Briggeman said.

The Section 199A provision is a “pretty lucrative situation for cooperatives and their farmer-patrons.”

Briggeman added that the uproar over Section 199A is fueled by speculation by auditors, academia and industry leaders.

“This is all very political as all the private, independent firms that do not have access to this particular benefit are now raising their voices to Washington,” he said.

Some, including Dorothy and Ed Marlow, who own Turon Mill in the Reno County town of Turon—another one of the Kansas’ older private grain companies—are still trying to understand what it could mean for their small operation.

“We have very few customers who waffle between bringing their grain here and bringing it to the co-op,” she said, adding if nothing with the provision changes they would continue to do what they do best—offer great customer service.

Gantz said he can’t see the provision not being fixed.

Gantz and his family continue to invest in their Ness County communities. They expanded their own business in the past 10 years by building storage south of town, as well as buying an elevator at the nearby ghost town of Laird. Altogether, D E Bondurant Grain has 4.3 million bushels in storage Also, Gantz added a fertilizer component to the operation last year to help continue to keep the company vital.

Meanwhile, his son, Colby returned about five years ago after graduating from college—the fifth generation in the grain business. And Gantz still picks up his 92-year-old father, Bob, every day—bringing him to work.

“I’m hoping it is a non-issue in two weeks,” Gantz said.

“At the end of the day, it gets back to the same old thing,” he said. “You try to do the best you can with competitive pricing and good service.”

Willis said there are too many ramifications for the law to stay the way it is.

“My gut tells me they will come up with something, said Willis, adding that everything is still fluid. “There is a lot of discussion going on behind closed doors. The Senate is fully engaged. The major grain companies are engaged in it.  … I think one way or another it will be fixed."

But if for some reason nothing changes, Willis said he would consider looking into becoming a cooperative.

“I think everyone is looking at that. How do we use the rules to form our own cooperative?

“It’s a big deal,” he said. “I have no idea how they missed it, but man, when they missed it, they missed it big time.”

Senior Field Editor Larry Dreiling contributed to this report.

Amy Bickel can be reached at [email protected].