New fund protects farmers when grain buyers fail
Minnesota has averaged one grain elevator failure a year since 2015. Whether the cause is fraud or mismanagement, when a grain buying business files for bankruptcy, farmers often don't get paid for grain they've already sold.
So lawmakers created a grain indemnity fund to cover those losses.
“What this bill does in essence is it sets up a pool of funding at the state that will reimburse farmers when due to no fault of their own elevators go under and leave them holding the bag,” said Minnesota Farmers Union government relations director Stu Lourey.
A broken system
State law requires grain buyers to purchase surety bonds to cover financial obligations, but those bonds are insufficient.
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In past financial failures farmers on average recouped only 11 percent of what they were owed.
“That’s 11 cents on the dollar, and they're not seeing that money until years later after the bankruptcy process is over,” said Lourey.
The new indemnity fund would reimburse 100 percent of a what a farmer is owed for cash sales. The reimbursement rate would diminish for longer term contract sales where a farmer delivers grain but defers payment until later.
An advisory group formed in 2017 recommended a dedicated fund to reimburse farmers. During discussions about the legislation, lawmakers pointed out that 14 states use such a fund to reimburse farmers for financial loss from grain business failures.
Farmer-funded insurance
Minnesota’s new grain indemnity program was created with a one-time, $10 million infusion of state funds.
Future funding, if needed, will come from a premium paid by farmers on grain they sell. That fee would be set by the agriculture commissioner and would not exceed 0.2 percent. That’s a one cent charge on a $5 bushel of of grain.
But the fee won't kick in unless the fund falls below $8 million.
“And so we won't have to click on a fee at this time and hopefully never,” said Minnesota Agriculture Commissioner Thom Petersen. “As we discussed it and I went out into the countryside and talked about it with farmers, a lot of farmers told me this is cheap insurance.”
But there is disagreement about how to fund the indemnity program.
“It should not be farmer-funded,” said Minnesota Farm Bureau President Dan Glessing. While he is pleased the state put up $10 million to start the indemnity fund, Glessing said the Farm Bureau position is that farmers should not be forced to pay for revenue insurance to protect a business.
To address those concerns, a provision in the law allows farmers to apply for a refund of any fees they pay to the fund and Glessing plans to use that option.
“Most of my grain goes to a trusted elevator,” he said. “And I'm not going to participate, or if it does kick in, I will apply for that refund.”
Farmers who opt out of the program would not be eligible for payments from the fund.
More oversight an option
There was also opposition from the Minnesota Grain and Feed Association, a grain elevator and feed mill trade group. The group called the proposal a tax on farmers and said the fund would encourage farmers to take more risks in selling grain.
The group also lobbied for more regulation to prevent financial failure of grain buyers.
“I don't feel that our concerns were heard during this session,” said Executive Director Laura Lemke. “They really did not taken any of our concerns into consideration until the very last minute.”
A provision to study regulation and financial oversight was included in the final legislation.
MDA Commissioner Petersen agrees more could be done, and said the agency will continue to talk about the issue of financial regulation of grain elevators and whether a stronger financial oversight program is needed.
“So we're going to kind of evaluate that whole system over the next year and then hopefully come back with some more recommendations next year,” he said.
But supporters of the indemnity fund say the existing system of surety bonds to back grain elevator financial obligations was broken and farmers paid the price for financial mismanagement or fraud.
Stu Lourey with the Farmers Union said a dedicated fund to limit farmer losses is the best option.
“And there's many years, the majority of years, we can anticipate the farmers won't pay anything for it at all,” he said. “But they will have that assurance that if they sell a grain to an elevator in Minnesota they won't have to risk losing their farm.”