Becoming a co-op: Green Plains lifts the lid on its 199A response

19 Feb 2018 | Tim Worledge

In the collective hand-wringing that met the realisation that President Trump’s flagship tax reform had unwittingly tilted the US tax system heavily in favour of US farmers trading with their cooperatives, US ethanol producer Green Plains was quick to spot a solution.

On February 8, during its quarterly earnings call, CEO Todd Becker was already in a position to confirm it had been through the paperwork and created a cooperative in Kansas.

For a small registration fee, farmers would be able to continue to sell grain to the company that, as one of the biggest ethanol producers in the US, consumes 500 million bushels a year – around 3% of total US corn production.

From that, Green Plains produces 1.5 billion gallons of ethanol, 4.1 million mt of dried distillers grains and 343 million pounds of corn oil – which increasingly feeds into US biodiesel production.

Securing that supply chain is critical and, as company spokesman Jim Stark told Agricensus, in recent years the cooperative has been losing ground.

"We’ve had a big focus over the last three or four years to buy more corn directly from farmers," Stark said, with bypassing the cooperative and streamlining the supply chain saving up to 7 cents a bushel.

The repeal of Section 199 has changed all that, effectively casting the cooperative as the kingmaker as the rest of private business and independents scrabble to find solutions.
In life, only two things are certain
Stark says the company spotted something was wrong with the tax changes in late December, and immediately reached out to the clause’s architects, North and South Dakota senators John Thume and John Hoeven.

They were quick to put their hands up and admit the oversight, with the industry equally quick to adopt the mantra of ‘unintended consequence’.

"They didn’t intend to get the US farmer a 20% benefit – they were focused on protecting the original conditions of Section 199,” Stark says, and Green Plains remains confident that Section 199A wording will be addressed.

But despite broad agreement amongst all stakeholders that mistakes were made and they must be redressed, finding a solution has taken longer than many had anticipated.

What’s at stake?
As the debate runs the risk of falling into any number of fissures that currently fragment the political landscape, US farmers are closing in on the key decision-making dates around what crops they intend to plant.

Losing out now stores up longer term problems.

"We have not seen any real effect of any farmers – there’s no two tier impact. That indicates the farmer anticipates that the [tax] change will come," Stark says, but the danger of not being at the table when the farmer starts selling his new crop forward is a real one.

"They will sell 15-25% of their corn forward... We don’t want to be at a disadvantage," Stark told Agricensus, and the company could already call on cooperative expertise after acquiring Great Lakes Cooperative in 2008.

"We’re not looking to re-cast the company. What we’re trying to do is put a mechanism in place that means farmers can realise the same benefit for selling their corn to Green Plains Grains Cooperative," explained Stark.

Kansas was selected because of its ‘more favourable corporation laws’ and with Green Plains Grains Cooperative now set up, the company is able to start applying for licenses in other states that its ethanol operations are active in.

A hill of beans
Green Plains isn’t alone.

While some of the bigger players are more cagey about their plans, evidence is growing that every major presence in the US grains space is exploring how to incorporate cooperatives into their business structure.

For the US industry, which has prided itself on the almost seamless flow of its logistics chains, the impact of the change may bring friction to the key dependencies within the supply chain.

"With production of corn and soybeans busting bins across the Midwest, neither co-op nor privates can handle all of it on their own," one cooperative source said.

But incorporating elements of cooperative into an established business is not a straightforward process.

"Creating a new co-op and signing up patrons, which do participate in net revenue through annual patronage cheques, would not be a problem but it’s the time and effort in getting farmers signed up," one grain market analyst told Agricensus.

"How do shareholders of the parent participate? Especially because patrons of the newly formed entity will be their partners without any financial risk. It’s a very tricky situation," he continued, but it does seem to be the primary solution.

"We’ve seen a few other companies that are picking up speed," Stark said, and doubtless many will be watching Green Plains Grains Cooperative to see how it fares.