While we all know the phrase "buyer beware," in many instances sellers must also beware of whom they do business with in order to avoid bad payments. There are several recent examples of individuals and businesses in agriculture that have not paid for products delivered. Some were because of funds tied up in bankruptcy, while others were due to flat-out deceit.
In 2009, a Missouri grain dealer bilked 180 farmers out of $27 million to $50 million by quoting them above-market prices for their grain but actually selling the grain for spot prices at the local elevator. The proceeds from the sales were used to cover the above-market prices offered to other farmers. By the end of the scheme, the money ran out and farmers at the tail end didn’t get paid at all.
This past November, Eastern Livestock Commission Company, registered with USDA’s Grain Inspection, Packers and Stockyards Administration (GIPSA) as a market agency that buys and sells livestock on a dealer basis, left more than 700 livestock producers, auction barns, feedyards and others holding more than $130 million in bad checks. Eastern’s bond only went to $875,000, not nearly enough to cover the losses to producers. In some cases, individual producers received payment if they went through a livestock auction barn and the auction barn took the financial hit of non-payment from Eastern, says Mark Mackey, CEO of the Livestock Marketing Association.
Iowa Agriculture Secretary Bill Northey says a similar problem could have occurred two years ago with people selling fertilizer in the state. Dealers were selling fertilizer for future delivery, but if they went out of business, there would be no protections for farmers who paid but never had fertilizer delivered. In this instance, the farmer would be an unsecured creditor and would take the loss.
Current protections. Each state has its own licensing and bonding requirements for grain dealers. Livestock dealers, however, are under GIPSA’s federal jurisdiction. GIPSA requires market agencies and dealers to maintain a bond based on the volume of business, generally an average of two days of business with a minimum $10,000 bond. Packers whose annual livestock purchases exceed $500,000 are also required to be bonded.
In Iowa, Northey says, the state set up a grain indemnity program fund more than 20 years ago to cover sales to a grain dealer. Grain elevators and producers paid into a checkoff, which is currently valued at $7 million.
"It’s there to cover the cost of a problem. If the problem is bigger than $7 million, we can re-establish a checkoff payment of 1⁄4 of a cent per bushel on corn or soybeans," Northey says. "But we have not had to collect money for that fund since 1988.
"By law, most grain dealers need to have a grain dealer’s license, and there are very few exceptions," he says. "That licensing causes us to inspect their facilities, and it requires them to have financial records that we can look at to determine if they have the appropriate financial backing to have a grain dealer’s license." Records and facilities are checked annually.
Farmers are covered through the indemnity fund up to 90% of the loss (with a $300,000 limit) if they sold grain to a dealer and didn’t receive payment. One exception, Northey says, is that this program is for actual sales, not for credit sale contracts or forward contracts for a future sale.
In the case of VeraSun Energy, the Iowa Grain Indemnity Fund paid five farmers for losses, but many others were not covered because they had contracted the grain to be sold at a future time, which was not a physical grain movement. So when VeraSun went out of business, the bankruptcy courts cancelled the contracts.
Indiana has an indemnity fund, as well, where farmers pay a voluntary checkoff for all grain. Once the fund reaches more than $10 million, the collections cease until the fund falls below the $10 million mark. Illinois and other states have similar programs.
While it’s impossible to foresee all potential problems, there are some steps you can take to protect yourself.
Ideally, you want to make sure payment clears before delivery of the product. This can be cumbersome, however, especially when dealing with a live commodity, such as cattle.
Ask neighboring producers about the reputation of cattle buyers, Mackey advises, and make sure they are licensed. A fixed facility, such as an auction barn, has regular audits by GIPSA and state agencies, offering some level of protection.
Anytime farmers are left in the lurch, it leads to renewed conversations about what can be done to offer better protection during these situations. "It’s a challenge to operate a system where everybody can understand what’s going to happen when something goes wrong, but not cause so much limitation that it makes it too expensive to operate, " Northey says.
- Always obtain signed paperwork that accurately describes the type of transaction and the payment terms.
- Know your state’s licensing regulations and protections.
- Deal only with licensed businesses, and check into every step in any transaction. Make sure dealers hold a current state license and meet state and federal surety bond requirements.
- Make sure your grain is properly weighed and you receive a scale ticket with the name and address of the buyer or storing elevator and applicable discount factors concerning grade, gross, tare and net weight. Verify the method of payment for the transaction.
- Always get written documentation from the driver when grain or livestock is picked up on the farm.
- All grain delivered that has not had the purchase price established is considered storage grain unless a valid delayed pricing or minimum pricing contract is completed.
- Delayed pricing agreements, where the purchase price is not established at or before delivery, typically are not covered by either the warehouse or dealer bonds or other indemnity programs.
- February 2011