Ag Producer Security Work Group Hears Public Input

By Joan Sanstadt, News Editor
Wednesday, November 21, 2007 10:24 AM CST

The Special Work Group on Producer Security, chaired by Gary Rohde, met Nov. 13 at the Department of Agriculture, Trade and Consumer Protection (DATCP) headquarters in Madison.

Before hearing public input on producer security, Jeremy McPherson, director of the bureau of business trade practices, summarized discussion of the work group.

“When we’re talking about risk, we’re really talking about two different things,” McPherson said.

First there is the amount of potential default n or in other words, if a given company were to default how much would producers be out?

The second issue is the probability of default occurring n or what are the odds a given company will default?

The “estimated default exposure” is different for each of the different industries covered by the producer security program (grain, milk and vegetables).

Grain

For grain dealers, that exposure is the sum of 25 percent of the grain dealer’s average monthly payment for the three months, during the preceding 12 months, in which the grain dealer made the largest monthly payments for producer grain procured in this state n or n the grain dealer’s highest total, at any time during the preceding 12 months, of unpaid obligations for producer grain procured in this state under deferred payment contracts.

For grain warehouse keepers, it’s 20 percent of the current local market value of grain that the grain warehouse keeper holds in this state for others.

Milk

For milk contractors, the exposure is 75 percent of the highest one month gross amount that the milk contractor paid for milk during the milk contractor’s last completed fiscal year, or any time since.

Vegetable contractors

The exposure is the sum of 75 percent of the largest amount of unpaid contract obligations that the vegetable contractor had at any time during the last completed fiscal year n (or at any time since) and the full amount of any unpaid deferred payment obligations.

Assessments

To ensure money is available in the event of a contractor default, contractors are assessed at rates tied to their financial statement ratios. New licensees pay higher assessment rates.

Dairy companies with good financial statements are not required to participate.

Grain dealers are required to pay additional assessment and security requirements for their deferred payment obligations.

History

The DATCP has issued a total of 450 licenses for grain, milk and vegetable procurement.

The total of all contractors’ estimated default exposure is $321,216,476.

While the department has not added staff to administer the security program since the mid-‘90s, both staffing and funding have changed during that period. At one time two staff people were paid for with federal funds, now that funding has to come from state tax money.

Besides the details involved with issuing licenses and keeping track of contractors’ purchases, staff annually performs 160 grain warehouse and dealer audits and 100 audits of milk and vegetable contractors.

The cranberry industry used to be a part of this producer security program but opted out for their own program in 1994. One member of the work group reported receiving a call from a cranberry grower suggesting they might again be interested in the DATCP program.

The producer security fund at DATCP is currently at $8 million.

Public input

The work group then listened as a number of presentations were made regarding options for providing producer security. Those included representatives from two insurance companies that provide trade credit insurance, reps from two farm groups and comments from industry trade groups.

Trade credit insurance

Dave Anderson, president of Vincent, Urban, Walker & Associates in Green Bay, told the work group it was possible to obtain trade credit insurance ranging from $5 to $25 million per occurrence. (Anderson was asked to make a presentation by work group member John Vrieze.)

Anderson said his company specializes in agricultural and agribusiness insurance, and tackles such issues as environmental pollution insurance and business income coverage for farmers. The agency works across the country for custom harvesters, dairy and grain farmers and covers a high percentage of manure applicators in the state.

Anderson handed out materials in which he described the problem facing the work group and the possibility the current security fund might, in the future, be tapped to make up for budget deficits.

His preliminary proposal (more information would be required for a formal proposal) involved AIG Insurance Company. Coverage would be $5 million per incident at an annual cost of $58,750, with a 10 percent deductible.

“The commitment is to take everyone currently in the program in the beginning, but others who wished to participate after the plan was in place would be subject to full underwriting,” he said.

Answering questions from work group members, Anderson said a trade association in Iowa (dealing with grain) has had a similar policy for 15 years and that during that time premiums have increased 8.5 percent. He also said the Ford Motor Company has a similar policy.

Rohde’s comments were that “this strikes me as a very viable solution n one that we ought to be looking at.” He noted, “Interest on our $8 million fund was almost $400,000 last year.”

But a work group member warned, “if it sounds too good to be true…” Addressing the DATCP staff, the question was asked, “is there something we ought to know about this?”

Trade Practice Analyst Kevin LeRoy’s response was, “not that we know.”

Anderson did say his quote was based on the DATCP staff continuing to provide the same auditing functions as they do now. Some of the information AIG might want would be in redacted form (without actual names and addresses).

Stephen Gorman, vice president, senior client advisor, from Marsh & McLennan Companies (MMC), told the work group “trade credit insurance had actually started in Europe after WWII, when businesses had suffered terrible losses.

“Today 65 percent of trade receivables in Europe are covered by trade receivables insurance, whereas in the U.S. only about 12 percent are covered,” Gorman said.

The two events that trigger claims under trade receivable insurance, Gorman continued, “are either bankruptcy or protracted non payment in excess of 180 days.”

In answer to a question from work group member Doug Caruso, Gorman acknowledged “Marsh is like a broker that works with a company such as AIG.”

Caruso then wanted to know “if a $150,000 premium for $25 million of insurance (was appropriate)? Gorman’s reply was that “it didn’t add up.”

Gorman asked that Marsh be allowed to prepare a cost benefit analysis for the work group’s next meeting.

Farm Bureau

Weighing in on the whole issue of providing producer security was Jeff Lyon, director, governmental relations for the Wisconsin Farm Bureau Federation (WFBF).

Lyon acknowledged WFBF had opposed rule changes in the past because they had not included any restructuring changes. “Based on past experience with other farmer/industry supported funds, we are concerned that if the fund is allowed to build, the governor, members of the legislature or DATCP will find it tempting to raid the fund for other purposes,” he said.

At the WFBF’s upcoming annual meeting, delegates will be asked a policy question “related to a state’s indemnity fund law that will enhance a producer’s ability to recover losses due to the financial failure of a handler or processor. Several changes to the program will also be suggested,” Lyon added.

One of the questions about the security program has been and continues to be whether or not cooperatives should be part of the program. “Our WFBF committee said they should be part of the program,” Lyon noted.

Family Dairies USA

Dave Cooper, representing Family Dairies USA, said assessments into the security fund needed to be done more often than on an annual basis because “this allows for a better assessment on market trends.”

Cooper said he would like to see increased payments into the fund so that more money would be available for payout in the event of a default. He also favored extending the building of the fund for another ten years.

“We should consider utilizing GPR (tax) dollars as an advance to pay producer defaults until the fund is built up to $20 million,” Cooper recommended. He also recommended establishment of separate commodity pools for grain, dairy and vegetables.

Cooper said co-ops should not be exempt from contributing to the fund because the very idea why people joint co-ops is to spread risk.

Industry representatives

John Umhoefer, representing the Wisconsin Cheese Makers, John Petty, representing Wisconsin Agri-Service Association, Nick George, representing Midwest Food Processors Association, also expressed their concerns to the work group.

Wisconsin Agri-Service represents 85 percent of all grain business in Wisconsin, Petty said. Prior to the presentations by the two insurance company representatives about trade credit insurance, “we’ve been working for years to try to find funding (through an umbrella type policy),” Petty noted.

Petty said one of the basic questions that remains unanswered is whether or not beneficiaries (producers) of programs should directly pay for the program.

“I’d argue,” Petty said, “the vast number of producers in Wisconsin have virtually no idea of anything we’re talking about here n despite mailings by milk companies and statements on the back of grain receipts. Producers do not understand it at all n or are unaware of it. If you were to go directly to producer payments, you’ll get some direct feed back that would ask ‘am I getting what I paid for’.”

Petty also pointed to a difference in the grain industry “that could be problematic. Milk goes 50 miles to a plant; but grain can go into a loading container and that container could end up at a Taiwan feed mill. Is that feed mill in Taiwan going to be licensed in Wisconsin?”

Umhoefer noted, “no other states with a pool like this has co-ops in the pool.”

Petty expressed additional concerns. “The biggest risk is deferred payment in grain, where the producer says, ‘I don’t want to be paid today’. Not a single grain elevator is holding a gun to a producer who says he doesn’t want payment this year n for whatever reason n taxes, markets, etc.

“We have unlimited coverage of payment in the grain industry n some are three to five years of “deferred” status but they have the same standing as the producer who delivered grain yesterday,” he continued.

Petty said other states have specific deferred times n that might be 30 days, 90 days, etc. The risk in the grain industry is deferred payments,” he emphasized.

What’s next?

Mike Dummer, chair of the DATCP board and a member of special work group, said “we’ve heard two insurance presentations. It’s at least clear the insurance world is very different today than it was a year ago. That significantly changes what this committee does n it changes the perspective of catastrophic coverage (which was not available after Sept. 11, 2001.)

“The question is, whether or not our current assessment fund is large enough to take care of the premium for trade credit insurance,” Dummer mused.

Will Hughes, administrator of the agricultural development division at DATCP, is representing the department at the work group meetings.

“We welcome the challenges put to the group n by the insurance company representatives and the industry representatives. With a work group, everyone has their own ideas.

“We will have to look at whether or not the insurance option (as presented by Anderson and Gorman) could work under the current statute n or if changes might be needed. We need a more definitive answer on this.

“There are still a lot of questions that need to be answered and then we have to look at ‘will it work and if so, what is the likely cost’?”

There are enough unanswered questions and discussion needs for the group to have two additional meetings, instead of the one originally scheduled.

The work group will next meet on Dec. 18 and then again on Jan. 29 when it expects to wind up its report and prepare its final recommendations.

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