Understanding Recent Changes to Minnesota’s Green Acres Program

July 2010

Minnesota’s Agricultural Property Tax Law, codified at Minnesota Statute 273.111 and commonly known as the Green Acres Program, has existed since the 1960s. A key purpose of the Green Acres Program is to reduce urban sprawl by assessing certain land based upon its agricultural value and deferring higher property taxes attributable to the land’s value if it were assessed as commercial or residential.

Green Acres property is assessed at both an actual market value and an agricultural value. Property taxes are calculated on both values, but are paid on the lower agricultural value until the property is sold or no longer qualifies for the Green Acres Program. Once the property is sold or no longer qualifies for the Green Acres Program, the deferred tax will be due for the immediate prior three years on the portion sold or no longer qualifying. Special assessments are also deferred while a property qualifies for the Green Acres Program. Once the property is sold or no longer qualifies for the program, all deferred special assessments become due and payable.

In 2008, the Minnesota Legislature made sweeping changes to the Green Acres Program. One of the most controversial changes made certain non-productive agricultural land ineligible for the program. This change outraged some landowners, and fears mounted that landowners would convert wooded areas and wetlands into tillable crop acreage. In response to this and other problems created by the 2008 legislation, the Minnesota Legislature again amended the Green Acres Program in 2009. This article answers several questions about the cumulative effect of these changes to the Green Acres Program.
What land now qualifies for the Green Acres Program?

Commencing with the 2009 assessment for taxes payable in 2010, only land that the assessor classifies as “class 2a” agricultural land will be eligible for the Green Acres Program. Class 2a agricultural land must be primarily devoted to agricultural production and be at least 10 acres in size. The 2008 legislative changes required the assessor to subjectively determine what land qualified as class 2a agricultural land. The 2009 legislation amends the definition of class 2a agricultural land in such a manner that an assessor must (as opposed to may, in the 2008 legislation) classify certain class 2b non-productive rural vacant land as class 2a agricultural land if: (i) the land is interspersed with class 2a agricultural land; (ii) the land is impractical for the assessor to value separately from the rest of the property; or (iii) the land is unlikely to be able to be sold separately from the rest of the property. Examples include sloughs, wooded wind shelters, acreage abutting ditches, and ravines.

The 2009 legislation allows certain land enrolled in the Reinvest in Minnesota (RIM) Reserve Program, the federal Conservation Reserve Program, or a similar state or federal conservation program to qualify for the Green Acres Program if the land was in agricultural use before enrollment. Land enrolled in the RIM Reserve Program will not qualify for the Green Acres Program if it is subject to a perpetual easement.
Are there any changes as to who may participate in the Green Acres Program?

The 2009 legislative changes provide that any entity in which (i) a majority of the members, partners, or shareholders are related, and (ii) at least one of the members, partners, or shareholders either resides on the land or actively operates the land, may own land enrolled in the Green Acres Program. Previously, many limited liability entities were not eligible to own land in the Green Acres Program.
Will land that no longer meets the Green Acres Program requirements be grandfathered?

Class 2b non-productive rural vacant land currently enrolled in the Green Acres Program that qualified for the Green Acres Program prior to 2008 will be grandfathered until the 2013 assessment. Commencing with the 2013 assessment, the grandfathered land will be removed from the Green Acres Program and deferred taxes for the then-current assessment year and the two previous years will be collected.

If grandfathered class 2b land is sold, transferred, or subdivided during this grace period, the land must satisfy the current Green Acres Program requirements created by the 2008 and 2009 legislation to remain eligible for the Green Acres Program. If it does not qualify, deferred taxes will be collected. Certain conveyances, however, such as transfers to a child or transfers to a trust created by the landowner that do not alter the landowner’s beneficial interest in the land, will not affect the status of grandfathered land.
Is there an option to withdraw the land from the Green Acres Program without penalty?

Land currently in the Green Acres Program that no longer qualifies as such due to the 2008 or 2009 legislative changes can be withdrawn from the Green Acres Program prior to August 16, 2010, with no requirement to pay the deferred taxes.
What is the new Rural Preserve Property Tax Program?

Despite the 2009 legislative amendments, some land that historically qualified for the Green Acres Program will no longer be eligible. Examples include larger tracts of non-tillable acreage, such as wooded areas, that can be separated from an agricultural operation and sold separately. To account for some of these lands, the 2009 legislation created the Rural Preserve Property Tax Program to provide favorable assessment to certain lands that no longer qualify for the Green Acres Program. There is no requirement to pay deferred taxes on land that is converted from the Green Acres Program to the new Rural Preserve Property Tax Program.

To qualify for the Rural Preserve Property Tax Program, a parcel must be at least 10 acres in size and the owner must commit to enroll the parcel in a conservation management plan for a period of not less than 10 years. The conservation management plan must be approved by the soil and water conservation district and provide a framework for site-specific healthy, productive, and sustainable conservation resources. The landowner must sign a covenant agreement that is recorded in the land records in the county where the land is located. This program will be available for the 2011 assessment year, with taxes payable in 2012. If an owner removes land from the Rural Preserve Property Tax Program, it is subject to the same three-year deferred taxes requirement as land enrolled in the Green Acres Program.

Rural landowners should familiarize themselves with the 2008 and 2009 changes to the Green Acres Program to determine whether their current Green Acres status will be affected.

Buffer Zone

For generations, the Taylor family has farmed hundreds of acres in Sciota Township along the Cannon River and its tributaries.

About five years ago, they made a change: The rows of corn and soybeans don’t reach the riverbanks any more.

Instead, there’s about 100 feet of natural prairie grass between the crops and the water. They planted it, with the help of Dakota County, to prevent erosion, restore habitat and preserve their family land.

“It’s a very good idea,” Ray Taylor, 80, said. “It saves agricultural land for future generations.”

The Taylors were early participants in Dakota County’s Farmland and Natural Areas Program (FNAP), which aims to protect open space, water quality and habitat. They sold the county permanent conservation easements covering 343 acres, retaining ownership and pledging to follow a conservation plan.

Voters approved $20 million in bonds in 2002 to fund the preservation program, the first of its kind in the state, for 10 years. At the time, rich farmland was being snapped up for subdivisions and strip malls.

As FNAP gets close to completing what it set out to do — the original balance has dwindled to few million dollars — the results have been widely praised by county officials, landowners and conservationists. Thousands of acres have been preserved in perpetuity. A look at a map shows a handful of green spaces that will stay green in the northern, more populous part of the county, and large swaths of undisturbed land that will help maintain the health of important watersheds in the rural, southern part of the county.

“There’s this inherent peace about preserving the rural landscape and allowing farming to continue to thrive,” said Al Singer, the county land conservation manager.

The county has been financially shrewd, too: It has parlayed the original $20 million into an additional $45.6 million in grants and donations, including property worth $23.8 million from participating landowners.

For example, the Taylors, whose land was appraised at $1.4 million, got $505,000 from the county and $504,000 from a federal farmland preservation program, then donated land worth about $400,000.

From doubts to success

County leaders are now thinking about what to do when the money runs out: Seek outside funding to do more? Go back to the voters? Call it quits? But when the original plan was pitched in 2002, not everybody was convinced it was a good idea. Realtors were among those who voiced concerns, claiming the program would push land prices higher.

Greg Stattman, a Realtor who now serves on the program’s citizen advisory committee, said the economy and the county’s careful stewardship of the bond money have staunched the criticism.

“I don’t think there’s the animosity there was before, because there just isn’t the development we were seeing in 2002,” Stattman said, adding that he likes the county’s focus and desire to protect water quality.

“What’s really impressed me is how many other counties in the state haven’t even bothered,” he said.

Washington County now has a similar program, with a $20 million bond referendum approved by voters in 2006, but officials there didn’t start buying property until this year.

The National Association of Counties and the nonprofit Trust for Public Land, which helped launch the Farmland and Natural Areas Program, bestowed a national conservation award on the Dakota County program in 2005.

“The track record and the accomplishments are stellar,” said Susan Schmidt of the Trust for Public Land. “We are well aware of many acres that have been protected and, but for this program, I’m sure would not have been protected.”

Tom Lewanski, of the nonprofit Friends of the Mississippi, said the buffers are an important step toward improving water quality.

“It certainly will help a lot,” he said. “Not only are you helping water quality, but you’re also gaining the habitat values on these buffers planted in native vegetation.”

For the Taylors, restored wild habitat along the Cannon River means glimpses of foxes, turkeys and pheasants.

It’s nice to see some natural areas,” Ken Taylor, 54, said. “You don’t have to take everything. You can give something back.”Katie Humphrey • 952-882-9056

MN Green Acres


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For immediate release:

June 25, 2010

Legislative changes simplify enrollment for Rural Preserve program

Aug. 16 deadline approaches for initial decision on non-ag land enrolled in Green Acres

Saint Paul – Recent legislative changes will make the new Rural Preserve program a simpler option for Minnesota farmers deciding on property tax treatment of non-agricultural, class 2b rural vacant land that is currently enrolled in Green Acres.

Class 2b land will no longer qualify for Green Acres starting Jan. 2, 2013 (for taxes payable in 2014). Rural Preserve is just one of several options landowners may choose for class 2b land once it is removed or withdrawn from Green Acres.

Revenue Commissioner Ward Einess “urges landowners to weigh all of your options before making this important decision about your class 2b land. Think carefully about what is best for your overall situation.”

Other options for class 2b land are explained below.

Rural Preserve will offer tax deferral benefits similar to Green Acres for qualifying rural woodlands. Though tax benefits are similar, Rural Preserve requires a preservation plan and covenant that prevents changing the use of land while enrolled in the program.

Legislation enacted this year simplified the preservation plan requirement and reduced the minimum covenant and enrollment period to eight years (down from 10 years). The revised law requires a simplified “conservation assessment plan” to enroll eligible land in Rural Preserve, which can be based on a USDA field map rather than a more-detailed land inventory as under the previous requirement.

Landowners can apply for Rural Preserve starting with the 2011 assessment (for taxes payable in 2012).


The main choices for landowners with class 2b land currently enrolled in Green Acres include:

Withdraw class 2b land from Green Acres by Aug. 16, 2010. The usual three-year payback of deferred property tax will be waived for class 2b land withdrawn by Aug. 16. This avoids the payback, but withdrawn acres will be valued at market value for taxes payable in 2011 and beyond.

Leave class 2b land in Green Acres for now, but transition it to another program before Jan. 2, 2013. Class 2b land that is shifted to Rural Preserve by 2013 will not be subject to the three-year payback requirement. Land that is shifted to other programs will be subject to a three-year payback. Examples include the Sustainable Forest Incentive Act (SFIA), which provides an annual payment for enrolled woodland, or the class 2c Managed Forest classification, which provides some landowners with a reduced class rate.

Leave class 2b land in Green Acres until the 2013 assessment. Any class 2b land remaining in Green Acres will be automatically withdrawn on the assessment date of Jan. 2, 2013. The land will be subject to a three-year payback and will be assessed at full market value for taxes payable in 2014 and beyond.

Taxpayers with questions should contact their county assessor’s office. For general program information, visit the Department of Revenue website at www.taxes.state.mn.us and click “Property Tax” in the top-left navigation menu.

Agriculture Secretary Vilsack Launches Showcase on ‘Know Your Farmer, Know Your Food’ Website

WASHINGTON, July 14, 2010 – Agriculture Secretary Tom Vilsack today launched a new feature on the ‘Know Your Farmer, Know Your Food’ website to highlight local and regional food systems and the multitude of connections being made between farmers and consumers. The new online resource advances a national conversation about food and agriculture and highlights the importance of local and regional food systems – one of the fastest growing segments of agriculture – to American agriculture, the economy, and rural communities.

“By developing our local and regional food systems, we can spur job growth in our rural communities and ultimately strengthen American agriculture,” said Secretary Vilsack. “This showcase will serve as a hub of ideas, local success stories, and USDA resources that showcase and strengthen the link between local production and local consumption that benefits producers of all sizes.”

The ‘Know Your Farmer, Know Your Food’ Ideas and Stories webpage – http://kyf.blogs.usda.gov – will provide real-world examples of the outpouring of dedication, entrepreneurship and support for agriculture that are taking place every day across the country. The website also serves as a clearinghouse for USDA resources aimed at linking local producers with consumers and promoting a national conversation about food and agriculture.

USDA’s “Know Your Farmer, Know Your Food” initiative seeks to create new economic opportunities, to promote local and regional food systems that help keep wealth in rural communities, and to encourage a national conversation about what we eat and where it comes from in order to benefit producers of all sizes.


USDA is an equal opportunity provider, employer and lender. To file a complaint of discrimination, write: USDA, Director, Office of Civil Rights, 1400 Independence Avenue, SW, Washington, DC 20250-9410 or call (800) 795-3272(voice), or (202) 720-6382 (TDD).

Groups Press USDA on Proposed Livestock Rules

The National Pork Producers Council and National Cattlemen’s Beef Association have taken first steps toward challenging USDA’s new proposed federal rule on livestock marketing recently when they requested an extension of the 60-day comment period on the proposed federal rule that could change livestock marketing rules. The comment period currently expires Aug. 23.

USDA was told by Congress in the 2008 farm bill to specify the criteria it will use under the Packers and Stockyards Act to define “undue or unreasonable preference or advantage in a contract.” USDA responded last month with a highly detailed proposal that has become increasingly controversial.

Livestock groups are telling the press that since they have had an opportunity to review the proposed rule, they believe that it goes well beyond the parameters set out in the law, specifically with regard to sections on “unfairness,” purchasing practices, contracts, “competitive injury” and recordkeeping. For example, NPPC President Sam Carney told the press that the USDA proposal, “is overly broad and very vague. We need more than 60 days to determine all of the ramifications this regulation could have on America’s 67,000 pork producers,” he said

NPPC also has concluded that the broad scope of USDA’s proposal and what it called “the lack of an adequate economic analysis of its impact on the livestock industry” warrant an extension of the comment period. The organization also pointed out that the Aug. 23 comment deadline is four days before the next USDA-Department of Justice workshop on competition in the livestock industry, and that public comments from that event in Ft. Collins, Colo., as well as from the final Dec. 8 workshop in Washington, D.C., should be considered before making the proposed rule final.

One very important new requirement in the proposed rule is its ban on direct packer-to-packer sales and its restrictions on other buying practices. Another is the proposed change that would allow many small meat plants to sell products nationally, even abroad, after being approved by state inspectors who enforce USDA standards.

Meat industry experts suggest the USDA proposal would exceed its legal authority. In addition, they suggest the rule would prohibit or restrict many practices allowed for decades, and could severely harm producers and the industry.

For example, packers who own feedlots would have far fewer sales options, since they could sell their cattle only to their company’s packing division — and pork companies that raise hogs would face similar restrictions.

Perhaps the most controversial, longer-term effect of the USDA proposal, industry observers suggest, is the change in requirements for producers who allege anti-competitive actions. In such cases, a showing of “competitive harm” has traditionally been required to support allegations — but, USDA now proposes to eliminate that threshold, a very important change.

The process from here is that interested parties — and, there certainly will be many, by all indications — will make formal comments to USDA, and include legal and economic analyses of the likely effects of the new rules. Given the level of interest and controversy, USDA appears certain to allow an extension of the time period for public comment, and, once it has had time to review the comments, it will propose a final rule — and, then interested parties will decide whether to mount legal challenges, which seem likely at this time.

At this early point in the process, it appears the USDA proposal could change the structure of the U.S. livestock marketing channels in very significant ways, both by restricting options now used by packers and others and by making it easier to bring charges of anti-competitive behavior.

Industry observers suggest that at least some of these proposed changes have been rejected by earlier court decisions. If so, it will be important to see whether Congress will now craft new legislation to support USDA’s proposal. Certainly, the proposed changes are important and should be watched carefully as they continue through the regulatory and legislative process, Washington Insider believes.

Want to keep up with events in Washington and elsewhere throughout the day? See DTN Top Stories, our frequently updated summary of news developments of interest to producers. You can find DTN Top Stories in DTN Ag News, which is on the Main Menu on classic DTN products, on the News Menu on Farm Dayta, and on the News and Analysis Menu of DTN’s newest Professional and Producer products. DTN Top Stories is also on the home page and news home page of online.dtn.com.

DTN Washington Insider can be contacted at Washington.insider@dtn.com

Variable Conditions For Early July

As the crop season rolls into midsummer, we’ve got some real back-and-forth going on when it comes to the state of affairs weatherwise.

Light to locally moderate rain will move across the central and southern Plains through the western Midwest Wednesday. Eastern Midwest, northern Plains, and Delta areas will be mainly dry. The rain is not heavy enough to cause new flooding, but soils in the western Midwest will continue to be wet from these additional showers. We’ll also see some delays in wheat harvest; however, the southern Plains harvest season is very close to finishing. Temperatures will be hot in the eastern and southern areas as well, with the possibility of some stress to crops. In contrast, very cool conditions are in store for northern areas.

Highs: 70s Canadian Prairies, northern, western and central Plains; 80s northern, western, and central Midwest, southern Plains, Texas Panhandle, west Texas; 90s eastern and southern Midwest, Delta, Deep South, central, eastern and southern Texas.

Bulletins have quite a bit of flooding for the southern Plains–continued flood issues in the western and central Midwest–and heat concerns from the eastern Midwest through the Northeast. There is some heat stress to crops in the eastern Midwest from this weather pattern this week.

5-day rainfall does offer some potential for showers over the eastern Corn Belt and Delta–which will be welcome. We’ll see rain in most of the central U.S.–possible flooding in the southeastern Plains–and wheat harvest delays due to rain in the central Plains.

5-day highs–on the mild side for sure. No threat to corn pollination from a temperature standpoint through the balance of this week. This, of course, is where some of the real discrepancies come in. Corn pollination is off to a good start with 19 percent silking. However, the crop conditions are declining–and maybe just a bit early for that feature. The overall U.S. crop rating dropped two percentage points last week, and the Iowa corn crop went down by seven points due to the effects of wet ground leaching out nutrients and causing drowned-out spots. On the other hand, of course, areas which aren’t drowned out are looking very good.

The jet stream pattern through Saturday the 17th has fair model agreement. We stay with the U.S. depiction for a broad trough over the northern and eastern Midwest. Still some showers with no major heat wave problems.

There are some issues internationally. In Europe, France has 95-100 degree high temperatures forecast for Thursday. Look for that heat to spread northeast to Germany by the weekend–stressful to crops.

And the North China Plain is HOT–100+ again Tuesday–stressful to crops–certainly including corn. The northeast is not as hot, but this pattern is noteworthy.

Pertinent numbers from the Australia weather bureau regarding the Southern Oscillation Index (SOI) in the Pacific are: average the last 30 days +3.65; average the last 90 days +6.96; daily contributor to the SOI calculation +14.47. So, at this point the Pacific SOI reading is edging toward La Nina values but it’s not there yet.

Finance Overhaul Casts Long Shadow on the Plains

GILTNER, Neb.—Farmer Jim Kreutz uses derivatives to soften the blow should the price of feed corn drop before harvest. His brother-in-law, feedlot owner Jon Reeson, turns to them to hedge the price of his steer. The local farmers’ co-op uses derivatives to finance fixed-price diesel for truckers who carry cattle to slaughter. And the packing plant employs derivatives to stabilize costs from natural gas to foreign currencies.

Far from Wall Street, President Barack Obama’s financial regulatory overhaul, which may pass Congress as early as Thursday, will leave tracks across the wide-open landscape of American industry.

Designed to fix problems that helped cause the financial crisis, the bill will touch storefront check cashiers, city governments, small manufacturers, home buyers and credit bureaus, attesting to the sweeping nature of the legislation, the broadest revamp of finance rules since the 1930s.

Here in Nebraska farm country, those in the business of bringing beef from hoof to mouth are anxious, specifically about the bill’s provisions that tighten rules governing derivatives. Some worry the coming curbs will make it riskier and pricier to do business. Others hope the changes bring competition that will redound to their benefit.

“Out here we like to cuss the large banking institutions because of the mortgage mess, but we also know that without them some of these markets don’t work,” says Mike Hoelscher, energy program manager for AgWest Commodities LLC, a Holdrege, Neb., brokerage that provides derivatives services to the farming industry.

How Farmers Use Derivatives


Derivatives are financial instruments whose value “derives” from something else, such as interest rates or heating-oil prices. The first derivatives were crop futures, which appeared in the U.S. at the end of the Civil War and became a standard facet of business for companies across America.

During the financial crisis, they became notorious as American International Group Inc. and others were gutted by bad bets on derivatives linked to bad mortgages.

President Obama and other proponents say the financial overhaul will prevent the kind of reckless lending and borrowing that sank the financial system and left taxpayers with the check. They say non-financial companies are worrying unduly about the derivatives portion of the legislation. The Senate is expected to approve the financial regulatory overhaul on Thursday, sending it to the president.

The full impact won’t be known for years, but in Nebraska nerves are already on edge.

Executives at Five Points Bank in Hastings think the new rules on mortgage lending will make the home-loan business less profitable. “When they create a new regulator, it really scares us,” says Nate Gengenbach, vice president of commercial and agricultural lending.

Advance America Cash Advance Centers Inc. thinks the new Bureau of Consumer Financial Protection will take aim at the payday-loan business, though it’s not clear what steps the agency will take. Advance America’s storefront at the Skagway Mall in Grand Island charges an effective 460.08% annualized interest rate on a two-week $425 loan.

But it’s the derivatives portion—the part of the bill aimed directly at Wall Street—that might end up touching most lives in rural America.

The new law requires most derivatives transactions be standardized, traded on exchanges, just like corporate stocks, and funneled through clearinghouses to protect against default.

What’s Made It Into the Bill?

For consumers, for investors, for banks and for the government.

Overhaul Timeline

See a timeline of the legislation’s progress.

Akaka to Wyden

Review the senators’ current vote plans.

Faced with intense lobbying, Congress partially exempted businesses that use derivatives for commercial purposes. So, farmers and co-ops probably won’t face new collateral requirements, for instance—although there remains a dispute over that section of the bill. Those that trade derivatives on regulated exchanges, such as the Chicago Board of Trade, are less likely to see immediate impacts than those conducting private over-the-counter deals, which will face federal regulation for the first time. The goal is to make such deals transparent.

The question for these farmers is whether such rules will make hedging more expensive. Some say new requirements on big players will create higher costs for small players, including the cash dealers will have to put aside to enter into private derivatives transactions. Some brokers think restrictions on big-money banks and investors will drain the amount of money available to the everyday deals farmers favor.

Others predict the opposite effect, pushing money from the private market to the exchanges and creating more competition that will benefit farmers.

Uncertainty reigns in Giltner, a town of 400 residents 80 miles west of Lincoln. At first glimpse, Giltner’s landscape seems featureless, a fading horizon of corn and soybeans. But its details are more subtle, including wildflowers and shaded creeks. Everywhere galvanized-steel sprinkler systems crawl across farm fields like giant stick insects.

Mr. Kreutz, an outgoing 36-year-old with a sandy crewcut and sunburned neck, gave up a career in finance and took over the 2,800-acre family farm after his father’s death. As he works his fields, he checks the crop futures prices on his smart phone.

Here’s how Mr. Kreutz does it: Say in early summer he sees that the price for a Chicago Board of Trade futures contract on corn for delivery later in the year is $3.56 a bushel. If he likes the price, and wants to lock it in, he calls AgWest and sells a futures contract for 5,000 bushels. The futures contract is a derivative in which the price for corn is set now for exchange in the future, though no kernels will change hands. Instead, when the contract nears expiration, Mr. Kreutz and the buyer of his contract will settle—in effect—by check.


By fall, when Mr. Kreutz is ready to deliver his crop to the local co-op, the market price might have fallen by 50 cents. He’ll sell his actual corn for that lower amount. But he’ll make up the difference through his financial hedge. (Mr. Kreutz buys a new futures contract at the lower price to make good on his earlier promise, making up the 50 cents.) In all, he’ll have hit the price target he locked in earlier in the year, minus brokerage fees.

If the price rises during the summer, as it did during the food crisis two years ago, Mr. Kreutz has to pony up extra cash for his broker—a margin call—to maintain his positions. He recoups that by selling his actual corn at a higher price, but has to take a loss to meet the futures contract he signed earlier in the year, missing out on a windfall but ultimately meeting his target price.

Mr. Kreutz does this type of operation dozens of times a year, hedging about 70% of his 345,000-bushel corn harvest.

Such deals ripple through the local economy. When Mr. Kreutz gets a margin call from his broker, he turns to his banker, Mr. Gengenbach, for a loan to cover it. Mr. Gengenbach estimates that one quarter of his farm clients use derivatives.

“Somebody like Jim has a lot of money in his crop out here,” says the 37-year-old Mr. Gengenbach. “If he can’t protect that, it’s not good for us.”

Mr. Kreutz’s brokerage, AgWest, thinks the new finance law will hurt both firm and farm. If big investors and dealers have to keep more cash on hand, there will be less liquidity in the market and therefore the cost of derivatives will increase, Mr. Hoelscher, the broker said.

A few minutes from the Kreutz family farm are the corrals of Jon Reeson’s feedlot. Mr. Reeson, 43, is married to Mr. Kreutz’s sister Jane. His feedlot holds as many as 1,500 steer, mostly Black Angus, which grow from 600-lb. calves into 1,300 pounders ready for slaughter.

Mr. Reeson uses derivatives to hedge both the price he pays for feed and the price he gets for selling his steer.


The fattening takes about 7,000 pounds of food for each animal. Mr. Reeson can’t count on a favorable price from his brother-in-law’s farm, in which he has a stake, so when he sees a feed price he likes, he seals it with a futures contract.

In April, he called AgWest and locked in a price with a futures contract for $95 per hundredweight of cattle. Since then the market price has dropped to $90. If the price stays there until October, he’ll have made the right call, earning a higher price than if he’d relied on the market alone. If the price spikes higher, though, he’ll miss out on potential gains.

Mr. Reeson is willing to live with that possibility in exchange for locking in a profit or a narrowed loss. Derivatives hedging helped him survive the recession of 2008-2009, when cash-strapped diners avoided steak and the price of beef plunged.

He’s watching the new legislation warily and can’t yet tell if it will hurt or help.

When his cattle have reached full weight, Mr. Reeson puts them on Roger and Barb Wilson’s trucks for the trip to the slaughterhouse. The Wilsons have seven semi tractors and 16 trailers, and one of their biggest costs is diesel fuel to keep the fleet on the road.

In 2004, Cooperative Producers Inc., his local co-op, offered Mr. Wilson a price-protection plan for 10,000 gallons of diesel at about $2.50 a gallon, with 90 days to use it.

CPI had a choice. It could take its chances and hope the price of fuel would drop before Mr. Wilson took delivery on his full order, a windfall for the co-op. If diesel prices jumped, though, the coop would take a bath. “That falls under speculation,” says Gary Brandt, CPI’s vice president of energy. “But that’s not what cooperatives do. That’s what Goldman Sachs does.”

Instead, CPI hedged on the New York Mercantile Exchange, buying a futures contract on heating oil, a close market substitute for diesel fuel. The co-op goes a step further and hedges also the difference between the prices of fuel traded in New York and delivered in Nebraska.

For the 57-year-old Mr. Wilson, the pricing plan proved a mixed blessing. The first year, the pump price shot up by another 20 to 25 cents, meaning he was getting a good deal. The following year the pump price dropped about a quarter a gallon, but Mr. Wilson was obliged to pay the higher price. “It hurt to have to pay for that fuel,” he recalls sourly. He quit the program after that.

The finance law’s imminence has prompted CPI’s Mr. Brandt to warn his sales team and customers that the co-op may have to end its maximum-price fuel contracts. He’s worried too that CPI might have to cut its fuel supplies if it can’t hedge against price drops.

“We have to start making a game plan if they take away the ability for us to hedge that inventory,” Mr. Brandt says.

The Wilsons deliver Mr. Reeson’s steer to a low, cement-gray complex on the edge of Grand Island, Neb., where trucks arrive loaded with cattle, and others leave loaded with meat. Over the past year, Mr. Reeson has sold 1,125 steer to the packing plant, which is owned by JBS USA, a Greeley, Colo., unit of Brazilian-owned JBS SA.

JBS buys livestock two ways. Sometimes it pays cash for the following week’s kill. Sometimes it buys further forward, agreeing in July, for instance, to a fixed price for steer delivered in December. JBS hedges on the derivatives market to make sure live cattle prices don’t drop before it takes delivery.

Michael M. Phillips/The Wall Street JournalBlack Angus cattle at Jon Reeson's feedlot in Giltner, Neb.

The company also sells beef cuts forward to restaurant chains, promising delivery at set prices months ahead of time. JBS expects to have enough meat to fulfill the agreements. But if it runs short, it doesn’t want to risk having to pay higher prices to buy meat to supply those restaurants.

So, it uses the derivatives market to play it safe. To do so, the company has to find a way to hedge different cuts of beef: Tenderloins might represent 1.5% of the total value of a steer. Strip loins might make up 3%. In a sense, JBS protects itself by reconstructing the steer through a derivatives trade on the Chicago Mercantile Exchange. “We try to put the carcass back together financially,” says company spokesman Chandler Keys.

The company hedges electricity for its refrigerators and natural gas for its boilers. It hedges currencies to stabilize its income from overseas. It hedges fuel for its fleet of thousands of trucks.

Even executives at a big firm such as JBS haven’t been able to nail down the precise impact of the legislation on their business, introducing an unaccustomed level of uncertainty into their operations. They aren’t changing the way they use derivatives, yet, hoping instead that exemptions for commercial users will insulate them.

“To get food, particularly highly perishable food like meat and poultry, through to the consumer, you have to manage your risk,” says Mr. Keys.

Write to Michael M. Phillips at michael.phillips@wsj.com — Sarah N. Lynch contributed to this article.