Tax Law Change Means All Cash Grain Traders Are Not Equal, Better Bids or No

John Lothian

John Lothian

Executive Chairman

Grain market players who are not part of farmer-owned cooperatives are alarmed over the potential impact on grain market origination of the recent changes to the U.S. tax code. In what appears to be an unintended consequence of bad tax bill writing, cooperatives have been favored over other market players in the form of a tax benefit to farmers for selling their grain to cooperatives rather than to private grain companies.

This change in the way physical grain moves through the system could make it more expensive for consumers, as cooperatives exercise what appears to be newly granted monopoly powers over the cash grain market.

The benefit to the farmer is “a 20 percent deduction on payments for sales of crops to farmer-owned cooperatives,” according to a recent Reuters story.

That means ADM or Cargill or even small family-owned grain companies will have to pay more to compete for grain supplies from farmers. Even a lower bid from a cooperative could turn out better for the farmer after all tax implications have been considered. Private grain companies could be “starved” for cash grains, Reuters reported in a recent story.

This change came during the Republican led overhaul of the tax code President Trump signed into law. According to a DTN story, the political gridlock of Washington could make what is a technical mistake into a long-term problem. DTN reported it would take “60 votes in the Senate to make a change in the law. Much like Republicans refused to help Democrats make changes to the Affordable Care Act, Democrats may be unwilling to help Republicans make similar changes in the new tax law.”

This will skew cash grain prices across the U.S. and change farmer marketing patterns if not corrected.

Reuters quoted Paul Neiffler, an accountant at CliftonLarsonAllen in Yakima, Washington as saying, “The advantage for the farmer is probably at least five times larger selling to a co-op versus not selling to a co-op.”

The same Reuters story quoted an email from Chuck Conner, president and chief executive of the National Council of Farmer Cooperatives, that said, “the producer/member deduction is more generous than most of us thought possible a few months ago.”

If this change to the tax code is not changed by the harvest next fall, I believe we could see increased use of the delivery function of the markets at the Chicago Board of Trade, a CME owned exchange. Keep your eye on open interest across the board for grain contracts.

Of course, while futures hedging will allow grain companies to lock in their prices and secure the eventual delivery of physical grain, it may increase transportation costs as grain needs to move to where it is needed, not where it is deliverable.

All in all it looks to me like the consumer will end up paying more.

Governments should not pick winners and losers in the market. However, with the current political situation in Washington, DC, we see too many examples of that. Wishes were granted in this tax overhaul for many lobbying groups.

Problems like this should be easy to fix, as it appears to be a case of unintended consequences in a poorly written bill that became law. Hopefully the interests of fair markets will come before politics and this will turn out to be just a footnote in history, rather than an epic mistake.

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