Governors' Biofuels Coalition

Ethanol makers, family-owned grain companies are setting up cooperatives to benefit from a provision in the law that gives farmers larger tax savings for selling crops to co-ops

Under the new law, farmers get larger tax savings for selling crops to agricultural cooperatives. To avoid being put at a disadvantage, some ethanol makers and family-owned grain companies are setting up their own cooperatives.

Executives say that if Congress doesn’t change the law or they aren’t able to register their own farmer-backed cooperatives, processing plants could run short of crops and small grain elevators could be driven out of business.

Green Plains Inc., GPRE 0.78% the world’s second-largest ethanol producer by capacity, registered part of its business as a cooperative in January after studying the new tax law. “We jumped on this right away as a backup plan,” said Todd Becker, chief executive of the Omaha-based company, which buys more than 2,000 truckloads of corn every day. Scoular Co., another major grain company based in Omaha, is also forming a cooperative in response to the law, a spokeswoman said.

In Turon, Kan., Colten Katz said he has filled out the paperwork to set up a cooperative for his grain business, Turon Mill & Elevator Inc. If he doesn’t act, Mr. Katz said, local farmers will sell to nearby co-ops instead of to him, potentially bankrupting a company that has been in business since 1892.

“We’ve been through depressions and dust bowls, but we’ll be brought down by government legislation,” said Mr. Katz, a partner at Turon. “They will fix it, or we will start a co-op.”

Commodity giants like Archer Daniels Midland Co. , Bunge Ltd. and Cargill Inc. have also pushed lawmakers to alter the law. “We’re not going to sit idle,” Juan Luciano, ADM’s chief executive, told investors last week.

Soren Schroder, CEO of Bunge, said in an interview his company could set up its own cooperative or form partnerships with existing cooperatives, though he said he was “very confident” Congress would act.

Lawmakers, including the provision’s authors, say they are working to change it, but they haven’t reached a deal yet. Sen. Orrin Hatch, chairman of the Senate Finance Committee, said Wednesday he was committed to “develop a solution to this issue that does not choose winners and losers and is fair to everyone involved.”

A spokeswoman for Cargill said the Minnesota-based agriculture conglomerate “will continue planning for ways to remain competitive in the U.S. market” under the new tax law, though Cargill hopes for Congress to resolve the matter.

A traditional cooperative helps farmers leverage their combined scale to sell crops and purchase supplies at better prices. Some grain companies say there is nothing preventing them from establishing their own cooperatives, staffed by their employees but overseen by a board that includes farmer-members. Farmers could join for a fee that they would likely earn back when the cooperative returned profits to members, these companies say.

An industrywide shift toward the cooperative model could allow more farmers to lower their taxable income to zero and cost the U.S. government significant tax revenue. Farmers with positive income reported $13.5 billion of profits in 2015, though most farm tax returns show net losses, according to the Internal Revenue Service.

The provision in the new tax law was designed to ensure that farm cooperatives benefit from a new deduction for pass-through businesses, and was added days before the tax bill was signed in December. Under the new tax law, farmers can deduct up to 20% of their gross sales to cooperatives, versus 20% of their net income from other sales. Selling to cooperatives would translate to a much larger deduction for many farmers, accountants say.

While some U.S. cooperatives initially hailed the provision, they now are helping craft a new version. The National Council of Farmer Cooperatives is working with the National Grain and Feed Association, which represents both independent grain companies and cooperatives, on a new proposal that will ensure farmers’ taxes don’t go up and won’t “create a new, unintended imbalance in the marketplace,” a spokesman for the cooperative group said.

Lawmakers and farm lobbyists couldn’t agree on a fix before the federal budget bill was signed Feb. 9, and now are targeting another spending bill slated for before March 23. If that bill passes and funds government operations through Sept. 30, it could be the best chance to change the cooperative provision for some time.

Urgency is building for companies that buy and process farmers’ crops. As spring planting season nears, many farmers will begin making advance sales of this year’s harvest, and the tax treatment of those sales could become a big factor as farmers continue to struggle against low grain prices.

“The urgent objective for all involved is ensuring that America’s farmers and ranchers reap the benefits of pro-growth tax reform and that balanced competition in the marketplace is restored,” said Lauren Aronson, a spokeswoman for the House Ways and Means Committee.

Sen. John Thune (R., S.D.) is aware of the significant unintended effects of the law on grain markets and is trying to find a “reasonable” solution, an aide said. Mr. Thune, who represents a major farming state, was involved in crafting the provision and has been discussing a fix.

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