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Biggest co-op run since '20s? Accountants, lawyers get busy

Mark Giddings, president of Giddings and Associates, a Fargo accounting firm, thinks “hundreds” of new farm-based grain marketing cooperatives will form in response to a tax reform change that benefits cooperatives over corporate grain companies. Derek Fletcher / Forum News Service

FARGO — Farmers and even corporate elevators are considering creating their own co-op entities due to the market-destabilizing effect of the so-called 199A tax reform provision, which favors cooperatives over other corporate grain marketers.

Frayne Olson, North Dakota State University agricultural economist and director of the Quentin Burdick Center for Cooperatives, says "If the current tax law is not changed — if it goes on as-is and we don't make any adjustments — there's going to be tremendous incentive to form new co-ops to take advantage of this."

Mark Giddings, president of Giddings & Associates, is one accountant helping farmers with the task. He says it will take about $5,000 in up-front investment and about $1,000 each year afterwards for maintenance.

"I've got a strategy for just about any farm family so they could have enough patrons to form their own cooperative," Giddings says. "We're working with lawyers now, drafting documents for people to form family-controlled cooperatives. I think it could be in the hundreds."

He notes it could be similar to the effect of joint venture agreements between beet co-op shareholders and farm operators.

Contrary to other voices, Giddings wonders aloud if the tax reform 199A "fix" should go unfixed.

"They should give it some time to see how it can work for the farmer, as it is, in place," Giddings says. "It gives them an opportunity to market some grain that they wouldn't market" otherwise.

By selling the grain, farmers can create some income and use tax breaks could allow them to avoid some of that income tax cost.

Positive effect?

"Right now we have a lot of grain being held by farmers because they're looking for a better market," Giddings says. "This is one of the ways the market can reward them for moving the grain."

In a related matter, Giddings thinks private elevators like Minn-Kota Ag Products setting up their own "shell cooperatives" may be too unwieldy to be impractical.

"We're talking about private industry giving up control of their business — literally, depending on how they structure it — to a (co-op) board of directors of farmers now that are going to be directing what's going on," Giddings says. "And the profits will go to the patrons — not to the owners of the (corporate) company."

Olson says the snafu could mean a surge in the creation of grain marketing cooperatives that hasn't happened since passage of the Capper Volstead Act. The landmark act, passed Feb. 18, 1922, allowed cooperatives to form and collectively sell their products and not run afoul of antitrust laws.

"Since then we haven't seen anything like this," Olson says.

What qualifies?

Olson thinks grain elevators looking at setting up a separate purchasing co-op entities is a "Plan B," Olson says. He says if the legislative fix doesn't work, it's also possible that the Internal Revenue Service might also make some changes administratively.

One curiosity is that the law specifies the advantages for a "qualified" cooperative, but doesn't say what that is. If the IRS must get involved in defining a co-op, regulatory definitions could become "less advantageous for both the co-ops as well as the farmers," Olson says.

One question is how a limited liability company whose members are grain marketing cooperatives (such as Alton Grain LLC, of Hillsboro, N.D.) will be treated. Alton is owned by several cooperatives. Olson says it isn't clear whether that would be a co-op. He thinks that corporate elevators trying to set up co-ops are likeliest to succeed by getting together with like-minded private companies. Corporations likely can't make a co-op of its various grain handling sites.

Giddings says Minnesota has statutes that allow "some partnerships to be a cooperative," if set up for the purpose.

North Dakota law requires that a cooperative start out with at least five "organizing members," but they can immediately slim down to as few as two. Giddings has formed farmer marketing cooperatives since the 1980s. Some shifted to corporate forms, but some of those could shift back to cooperatives because of the tax reform rules, Giddings says.

On a patronage basis, members must also be agricultural "producers" but crop-share landlords may qualify as a producer for purposes of being a co-op member.

Giddings says family members who farm in various "entities" for farm program benefits can, in turn, put those entities together to form a marketing co-op. The operating entity can sell grain to the new marketing co-op, which can sell to a private grain company and still get a pass-through benefit for taxes.