US majors mull switch to co-op status as 199A debate rumbles on

Major US agribusiness players are investigating incorporating agricultural cooperatives into their businesses in order to access advantages accidentally introduced with US tax reform at the end of 2017, market sources have told Agricensus.  

Dismay amongst big players at the change – which has introduced a tax break for US farmers trading directly with cooperatives – has fuelled enquiries around the feasibility of becoming a cooperative. 

At stake is access to the US supply chain, with independent farm businesses – including global players like Cargill or ADM – potentially frozen out as farmers focus on cooperatives wherever possible.

The change, known as Section 199A after the specific clause in the US Tax Cuts and Jobs Act that accidentally introduced the imbalance, has had the industry and politicians scrambling to undo it since.

If you can't beat 'em, join 'em 
CEO of US ethanol producer Green Plains Todd Becker announced during the company's earnings call on February 8 that it had moved quickly to set up a cooperative business in Kansas so "our customers can... continue to sell grain to us."

Other industry players are also said to have explored the possibility of creating cooperative businesses to circumvent the 199A loophole.

ADM's CEO, Juan Luciano, acknowledged during their fourth quarter earnings call in early February the 199A change has had limited impact so far, but it would be felt the longer it remained unresolved, and confirmed that the company had been pursuing parallel solutions should 199A not be redressed quickly.

"Of course we are not going to sit idle and lose our share," Luciano said during the call.

"It's a state licencing requirement to become a co-op, so [the requirements] vary by state. I'm sure ADM is looking hard at which states they can quickly become a co-op just like Green Plains did," Peter Meyer of S&P Global Platts' PIRA Agriculture told Agricensus.  

ADM declined to comment further when contacted by Agricensus, but both ADM and Cargill have previously said they are concerned and are working to find solutions. 

Bring me solutions 
The primary vehicle to redress the issue remains a legislative initiative, spearheaded by US-industry group the National Grain and Feeds Association, working alongside the National Council of Farmer Cooperatives, as well as industry players and representatives of key senators.

That initiative had hoped to pin a solution to the finance bill that was passed on February 9, but the deadline appears to have been missed while the coalition continues to smooth out a viable solution to the issue.

Sources close to the discussions confirmed they are ongoing with negotiations sticking on "a couple" of final points, but opportunities to address the change become less frequent now that the US government funding issue has been put to bed.

"My guess is nobody can figure out a workable solution... how to get the toothpaste back into the tube," a Washington DC-based tax advisor told Agricensus.

"With the passage of the budget... the tax break remained in the final wording," S&P Global Platts' Meyer said.

"From here there are some procedural matters that must be approved by the end of March. After that it could be eliminated by the Farm Bill process," he said.

A new Farm Bill is unlikely to come before 2019.

Necessity the mother of invention 
Ultimately, multinational agribusinesses like ADM, Bunge, Cargill and Louis Dreyfus, have the logistics to move the substantial volumes of US produce and remain fundamental to the US supply chain.

However, inventive solutions to an unintended consequence appear to be being contemplated, which may subtly redraw the US industry.

"We're hearing anecdotal reports from the private grains sector, but... with production of corn and soybeans busting bins across the Midwest, neither co-ops nor privates can handle all of it on their own," said one co-operative source.

"This is a concern, but the NGFA can't speculate on which businesses will start looking into changing their structure to cooperatives or when they will do so," Sarah Gonzalez, director of communications and digital media at the NGFA told Agricensus.