Schumer: Growing popularity of Greek yogurt requires more upstate dairy

U.S. Senator Charles E. Schumer announced that he is launching a two-pronged plan that will provide New York dairy farmers, who wish to expand their operations to meet the demand being substantially fueled by the Greek yogurt boom, with the financial tools they need. Thanks to new plants including the Quaker Muller plant, Alpina, Fage and Chobani, the New York Farm Bureau predicts that New York’s dairy farmers must be able to expand their output by 15 percent in order to take advantage of the opportunity that Greek yogurt presents for our farmers. To help dairy owners who wish to expand, Schumer plans to introduce bipartisan legislation – the DAIRY (Dairy Augmentation for Increased Retail in Yogurt products) Act – with Sen. Mike Crapo (R-ID) that would establish federal savings accounts targeted to farmers to help them save and grow during booms and to weather market downturns. The accounts would be structured to reward savings during periods when business is strong and defer taxes on those savings until farmers must withdraw funds to cover new expenses or manage cash flow.

Schumer also introduced a second bill that will allow farmers who purchase cows that are already in production to write off the cows as a capital expense, lowering their overall tax burden.

“Upstate New York was recently dubbed the ‘Silicon Valley of Greek Yogurt’ and I want our dairy farmers to have the financial tools to keep pace with that exciting growth in a way that stabilizes risk for them during the up-an-downs of the market,” said Schumer. “That is why I am launching a two-pronged plan that will create a savings bank to help dairy farmers manage profits during boom years, and also lower dairy farmers’ tax burden when they expand. Upstate farmers have got milk, and now we need to help them get more of it on store shelves across the country to keep the dairy engine revving in New York State.”

“With high production costs, volatile milk prices and the recent weather extremes, dairy farms need risk management tools at their disposal now more than ever. Senator Schumer’s proposal for tax deferred Farm Savings Accounts will give farmers greater stability in the tough times by allowing them to invest in their own future. Not only will it serve as a safety net, but it will provide added incentive to save as dairy farmers look to grow their farms to capitalize on the increased consumer demand for dairy products made in New York,” said New York Farm Bureau President Dean Norton.

Over the last several years, Upstate New York has become home to several new dairy-intensive Greek yogurt and yogurt product plants that have resulted in a spike in demand for New York milk. Greek yogurt produced at plants like Chobani in Chenango County and Fage in Fulton County requires roughly three times the amount of milk as standard yogurt. Alpina and Pepsi are both building plants in Western New York to produce various yogurt products. Thanks to the spike in demand from the growing yogurt industry, the state produced just under 370 pounds of milk in 2010, which represents an increase of almost 40 percent from 2009. Yogurt has exploded in popularity due to demand in New York City, Upstate New York and other pockets across the country. According to the New York Times, the Chobani plant in Johnstown employs approximately 900 people in New York and has plans to reach 1,000 employees. Fage said it currently employs 250 and is seeking to hire an additional 140 workers. The two plants in Genesee County, Alpina and Pepsi’s Project Wave will combine to employ about 230 workers.

While the demand for local milk has increased dramatically over the last several years, many dairy farmers know it is not always possible or profitable for them to expand and produce more milk to cover the gap. Schumer today announced his plans to introduce legislation to help give dairy farmers additional financial tools to make it possible for them to tap into periods of increased demand. Recently, the New York Farm Bureau stated that New York’s dairy farmers would have to increase their milk output by 15 percent in order to meet the demands of the rapidly expanding yogurt industry in the state. Between the Fage, Alpina, Chobani and new Pepsi Project Wave yogurt product plants, New York farmers will have to produce 1,879,860,000 additional pounds of milk each year to keep up. Here is how the numbers break down across the state.

In the Capital Region, there are 63,500 dairy cows and production must grow by 199,410,000 pounds of milk per year

In Central New York, there are 129,600 dairy cows and production must grow by 428,625,000 pounds of milk per year

In the Rochester Finger Lakes Region, there are 140,600 dairy cows and production must grow by 471,300,000 pounds of milk per year

In the Southern Tier, there are 96,400 dairy cows and production must grow by 259,275,000 pounds of milk per year

In the North Country, there are 107,700 dairy cows and production must grow by 336,225,000 pounds of milk per year

In the Hudson Valley, there are 10,100 dairy cows and production must grow by 24,150,000 pounds of milk per year

In Western New York, there are 55,600 dairy cows and production must grow by 160,875,000 pounds of milk per year

To help arm New York’s dairy farmers with financial tools should they decide to grow to meet the increasing demand, Schumer will introduce the DAIRY (Dairy Augmentation for Increased Retail in Yogurt products) Act, a bipartisan bill with Sen. Crapo that would provide dairy farm operators with tax-preferenced savings accounts as a means to manage farm revenue risk and fluctuations in the market. The proposal would allow operators to make deposits in the accounts during high-income periods and hold it until leaner times, when additional revenues are needed. Tax liability on deposits would be deferred until contributions were taxed at the marginal rate upon withdrawal, similar to the way that education and retirement savings accounts operate. Additionally, the deferral of taxes upon deposit into the account will allow farmers to invest funds in the near term that would otherwise be obligated for current-year tax payments. Schumer’s bill includes no limit on the amount of dollars that could be deposited each year; however, funds must remain in the account for at least six months before becoming eligible for withdrawal. The USDA’s Dairy Industry Advisory Committee has advocated for this type of approach in the past, and Schumer’s bill would require that the U.S. Departments of Agriculture and Treasury work together to develop guidelines for implementing and administering the accounts.

The second proposal in Schumer’s two-part plan would expand the eligibility for a key tax incentive that allows business owners of all types to write off capital expenses on their taxes. To determine taxable income, businesses subtract expenses from their receipts. For items that are not entirely used up during the year (such as capital equipment), they subtract the value over a number of years as the investment is used up. Bonus depreciation allows a large portion of the deduction to be taken when the asset is first purchased. For 2013, bonus depreciation is currently set at 50 percent. This allows businesses to immediately deduct 50 cents of every dollar spent on qualifying investment purchases in the year purchased. The remaining 50 cents would be deducted over a number of years according to regular depreciation schedules.

For 2013, dairy farm operators can immediately deduct 50 cents of every dollar spent on qualifying livestock purchases, which include the purchase of any ‘new’ dairy cow not previously used for a business purpose. However, dairy cows purchased from another herd do not qualify for this generous tax benefit. Schumer’s legislation would expand the definition of qualifying livestock eligible for 50 percent bonus depreciation this year to include all dairy cows purchased by a dairy farm operator for business use, regardless of whether the dairy cow’s original use had commenced with another taxpayer.

Schumer’s legislation would also modify rules relating to when a dairy cow qualifies for bonus depreciation. Under this proposal, bonus depreciation may be claimed in the year the dairy cow is acquired. For 2013, the bonus depreciation amount would be 50 percent of the acquisition price. The remainder of the basis of the dairy cow would be recovered beginning in the year the dairy cow is placed in service (under existing placed-in-service rules). For purposes of the above, a dairy cow includes a calf acquired to provide dairy products as well as a dairy cow or bull acquired to breed dairy cows. This proposal would be a huge boost to the bottom line of dairy farmers who grow their operation by purchasing young cows that may not have begun to produce milk but have already been deemed a business asset.

For example, if a dairy farmer purchases fifteen mature cows from another herd at a total cost of $30,000 in 2013, under Schumer’s plan that farmer can deduct $15,000 as bonus depreciation in 2013 as well as $3,000 under standard depreciation rules (as the first year of standard depreciation on the remaining $15,000 in basis). The remainder would then be written off according to the standard depreciation schedule (year 2 – $4,800, year 3 – $2,880, years 4 and 5 – $1,728, and year 6 – $864), saving the individual thousands of dollars on his or her taxes. The proposal would also help a farmer’s bottom line when farmer purchases younger cows. For example a dairy farmer purchases twenty dairy calves from another herd at a total cost of $30,000 in 2013, and eight of the calves reach maturity in 2014. The remaining twelve calves reach maturity in 2015. In that scenario, Schumer’s plan would allow farmer to deduct $15,000 as bonus depreciation in 2013. In 2014, $6,000 ($15,000 x 8/20) is placed-in-service and depreciated over the next 5 years. In 2015, $9,000 ($15,000 x 12/20) is placed-in-service and depreciated over the next 5 years. Providing this tax relief would allow the farmer to put more of his or her earnings into expanding the business by purchasing additional cows or equipment.