Crop sale incentive program is wrong policy for trade and security

In the days immediately following passage of the recent historic tax reform, lawmakers found themselves staring at a series of unintended consequences. While unsurprising given the speed with which a massive overhaul was pushed through, significant changes made to existing policy without the benefit of careful oversight had the effect of picking winners and losers — the signature of government intervention in the free market.

Consider Section 199A, which created new, federal tax incentives for farmers to sell their crops to co-ops instead of independent grain merchandising companies. Until now, farmers had every reason to avail themselves of all offtake options in an otherwise efficient market for their crops, selling to both co-ops and independents based largely on price, location, speed and other intangibles.

Unfortunately, as often happens when major legislation is crafted quickly, Section 199A tipped the market’s scales without the benefit of committee hearings, markup and thorough debate that is required for effective lawmaking. As highlighted by Iowa State professor Keri Jacobs in AgPro, the last-minute provision sponsored by Republican Sen. John Hoeven of North Dakota (whose home state boasts many co-ops) delivered an outsize benefit to farmers that chose to use local co-ops instead of independent companies — a 20 percent tax deduction. Under this new regime, a rational farmer had every reason to sell first to his or her local co-op, net the tax savings, and then market the remainder of his or her products to any other market participant.

{mosads}While intended to preserve prior Section 199 treatment for these smaller entities, the actual effect of the law was to upset the careful symbiosis that has long existed in the grain industry — smaller co-ops handled a portion of the harvest, while larger private companies handled larger deliveries (both directly from farmers and co-ops), as well as the mechanics of getting that grain to far-flung markets for use as feed and food.

It didn’t take long for Hoeven and his Senate colleague, John Thune (R-S.D.), to realize that they’d used a sledgehammer to create a policy best crafted with a scalpel. Over the last seven weeks virtually every farm-oriented trade association and many of their members have huddled with a select group of senators and staff to work toward re-establishing the status quo. With farm-stored crop deliveries already underway, wheat season around the corner and the annual farm bill on the horizon, all parties have committed to develop a fix for the issue – which has proven to be a tall task, as there was no solution crafted before passage of the recent budget deal, and both sides seem to now be warily approaching a framework for solving the problem. 

Worse, the law has also brought a whiff of Washington influence peddling to the heartland. Within days of the tax bill’s passage, articles and op-eds began appearing in agricultural trade magazines and newspapers around major farm cities labeling large independent crop merchants as “greedy” and characterizing them as corporations that received a permanent tax break, begrudging the “family farmer” his share of a financial windfall. Another Washington staple, community action groups (less grassroots and more astroturf), appeared like spring daffodils to cry foul for the family farmer — while masking their own identities through shell entities. These tactics may be familiar to the lobbyists and lawyers inside the beltway, but in the agriculture industry where teamwork and relationships are key, it was an unpleasant, unfamiliar and unwelcome sight.

Section 199A stands as a good example of what happens when political expediency and parliamentary sleight of hand take precedence over doing the hard, often difficult work of crafting good legislation. But as Sen. Chuck Grassley (R-Iowa) suggested in committee hearings, there’s little question that a solution will be crafted between farmers, co-ops and private agriculture companies; finding solutions to difficult problems is essentially the backbone of an industry that feeds the world every day.

However, especially as debate begins around the new farm bill, it’s critical to our food security and international trade relationships not to let the same special interests that have created gridlock in Washington ruin working relationships around farm country. 

Charles R. “Bob” Brettell is managing partner for Prosody Consulting, where he oversees the management consulting and economic development practices. Joe Brettell is a partner at Prosody in charge of strategic communications and government relations. The company assists clientele with specialization in the agriculture, energy and financial services industries. Prosody also advises independent and cooperative grain and feed merchandisers as well as associated farm products manufacturers throughout the United States.