By Glenn Adams,Associated Press Writer

KNOX – Sprawling over 1,300 acres at the crest of a ridge overlooking woods and fields milk-white with late-winter snow, Aghaloma Farm is a survivor.

At one time, this town of 750 people had 17 dairy farms, but that number now stands at seven, including the Larrabee family’s Holstein farm. The numbers reflect a statewide decline from 775 dairy farms in 1986 to fewer than 400 now.

Now, after a couple of years of relatively stable prices, dairy farmers are facing their latest challenge: a tax on livestock semen, a product that is nothing less than critical to dairy operations.

“Will it put another nail in the coffin? No,” said Galen Larrabee, whose 700-head, third-generation dairy farm is one of the seven largest in the state. “Will it put some other farms out? Yes.”

Maine is the only state in New England, and one of only a half dozen states across the country, to levy a tax on bull semen.

The topic may make non-farmers squeamish, but bull semen is as basic as feed to dairy operations, which breed cows about once every 14 months to keep them producing milk. Farmers tend not to use bulls much because they are hard to manage and can be dangerous.

Farmers long avoided a tax many didn’t even know existed as Genex Cooperative Inc., the largest livestock semen distributor in Maine, simply paid the 5 percent levy without passing it through to farmers, according to state Rep. John Nutting, D-Leeds.

Then the company decided that as of Feb. 1 it would stop paying the tax, which it sees as an increasing burden. The tax has started showing up on farmers’ bills.

“That’s why the issue has just hit the fan,” said Nutting.

Because the government regulates milk prices, farmers can’t simply pass the latest added cost of doing business onto consumers, Larrabee said while standing in a small office at the edge of his cow barn. For larger farmers like Larrabee, “We’ll end up absorbing it,” he said. “Some small farmers, they’ll say, Maybe I ought to say the heck with her.”‘

Peter Waterman, whose Sabattus dairy farm has 125 cows, worries that the tax “opens the door to start taxing all the expenses” smaller farmers like him contend with, “and that would be a hardship.”

Waterman also said the tax frustrates farmers’ efforts to diversify and run their operations more efficiently, as a state dairy task force advocates. “I think this sets a bad precedent,” said Waterman, who faces $250 a year in new taxes.

“This is one of our core expenses … it’s a necessity, really.”

Nutting and others say Maine law is on their side. They cite language that clearly exempts products used in agricultural production, including seed, feed, hormones, fertilizer, pesticides, litter, medicines and other items.

Nutting, a lanky man with a boyish face whose large hands attest to his hours on his own dairy farm, said he sought to have the state send a letter clarifying that livestock semen should not be taxed. The state, facing a budget shortfall in the hundreds of millions of dollars, refused.

Now Nutting wants language freeing farmers of the tax inserted in the state budget. It’s a battle he’s waged before.

“It’s just like hay five years ago. It’s an agricultural product and we had to make sure they didn’t collect taxes on it,” said Nutting. “Now it’s semen.”

It’s not a small expense for dairy farmers. Each unit of bull semen, packaged in a thin tube resembling a straw, costs about $20, but it takes an average of two applications to achieve a conception. That means a farmer who has 300 cows would need about 600 units per year, at a cost of $12,000. Maine’s 5 percent tax adds $600 to the bill.

But, depending on the genetic components and source, semen can cost $50 per unit, which pushes the tax up markedly. Using artificial insemination, farmers can also modify and improve the genetic ability of their cows to produce milk.

Statewide, there are about 38,000 dairy cows, said Julie-Marie Bickford, executive director of the Maine Dairy Industry Association. With roughly 76,000 applications a year at $20 per unit, farmers across the state face a sudden new tax of $76,000.

“The numbers don’t sound astronomical, but when you’re running your operation on a small margin … ” said Bickford.

Farmers who didn’t buy from Genex face an added burden. Because other suppliers were not paying the tax before, farmers face prospects of paying the tax retroactively for purchases they made over several years. Bickford had no estimate of how much the retroactive taxes add up to.

Cheryl Carson, operations manager at the Larrabee farm, knows how volatile finances can be in the dairy industry, noting that even her relatively large operation lost $8,000 a month for two years and three months before the prices stabilized.

She said it’s the wrong time to be adding to the burden of dairy farms.

“Their timing is inappropriate because dairy farms are in a rebound,” Carson said.

Maine gives scores of other businesses and services tax exemptions, and farmers say they are entitled to one too. Waterman, whose family farm has been in business since 1919, said that besides providing a basic food and hundreds jobs, dairy farmers preserve open space and the rural character of Maine.

“We give a lot, and don’t ask for a lot in return,” Waterman said.

AP-ES-02-11-05 1813EST