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Grain Experts Discuss Differences in S.D., Iowa Law for Grain Transactions

S.D. Public Utilities Commission Vice Chairman Chris Nelson discusses grain transaction laws at a meeting in Chamberlain July 17 (SDFU Photo)
S.D. Public Utilities Commission Vice Chairman Chris Nelson discusses grain transaction laws at a meeting in Chamberlain July 17 (SDFU Photo)

Chamberlain, S.D. (KELO AM) - During the 2013 legislative session, South Dakota lawmakers passed a bill to update and strengthen the state’s laws on grain transactions in response to the financial collapse of Anderson Seed Company in February 2012 that cost producers an estimated $2.6 million. But did the law go far enough to protect agricultural producers? What are other states doing to protect farmers? Those were just two of the questions raised during a meeting at Chamberlain Wednesday, July 17, which featured the vice chairman of South Dakota’s Public Utilities Commission Chris Nelson and grain licensing regulators from South Dakota and Iowa. The meeting was sponsored by South Dakota Farmers Union (SDFU), a family farm organization headquartered in Huron.

“The goal here is to connect farmers and those in the grain buying industry with our Public Utilities Commission and its regulators while giving them all a perspective from other states as to how they handle grain transactions,” said Mike Traxinger, SDFU’s legislative director. “We want to create a dialogue that helps producers understand all of the issues while we put together ideas on how to make sure grain farmers in South Dakota have the protection they need.”

There are several differences in grain transaction laws among states in the region. Both Iowa and North Dakota have an indemnity fund that was set up to pay farmers back if they deliver grain to a buyer or warehouse that goes out of business and leaves the farmers unpaid. South Dakota and Minnesota do not have an indemnity fund.

Richard Wahl, grain bureau chief for the Iowa Department of Agriculture and Land Stewardship, discussed what his state does to protect producers if a grain buyer goes out of business. 

“We try to make sure the companies are fairly sound and credit worthy,” Wahl said as he explained the application process and financial disclosure grain buyers have to submit when they seek a grain buyer’s license. “If the company fails, we have an indemnity fund to pick up the pieces.”

Iowa’s Legislature set up the indemnity fund in 1986, in the midst of the farm crisis, to make sure farmers weren’t losing all their money if a grain buyer went out of business. When the fund was first created, it assessed .014 of a cent per bushel on grain transactions, .014 of a cent per bushel of storage capacity for grain warehouses, and producers were assessed .25 of a cent on grain that they sold. Once the fund grew to a cap of $6 million, assessments on grain transactions stopped. That happened in 1989. Grain buyers who apply for a license still have to pay a fee to the indemnity fund as part of the application process. The fund also grows from interest earned on its investments. The money is there as a sort of insurance policy to cover farmers who weren’t paid on cash grain sales. Unlike North Dakota, Iowa’s indemnity fund doesn’t cover losses on credit sale contracts, only cash sales. Wahl said it’s important to have a safety net for farmers because grain buyer failures have a ripple effect across a community.

“We’re trying to avoid negative impacts on the entire community. Not only the farmers themselves, but input suppliers, landlords and local banks,” he said.

Over the life of the indemnity fund in Iowa, over $14 million in recovery payments have been made to farmers. They’re covered up to 90 percent of losses with a cap of $300,000 if a grain buyer goes under.

South Dakota Farmers Union hosted a similar meeting last month in Redfield, the community where Anderson Seed Company’s facility stood when it went insolvent. North Dakota’s Public Service Commission’s licensing division director Sue Richter during that meeting discussed her state’s laws dealing with grain transactions. North Dakota is similar in that it has an indemnity fund, but it covers credit sale losses, not cash losses. Iowa’s is the exact opposite, only covering cash sales and not credit sales.

Wahl said Iowa has had five grain company insolvencies in the past ten years. In that same time period, North Dakota has had about 12 insolvencies, and South Dakota has had two. 

Chris Nelson, the South Dakota Public Utilities Commission vice chairman, said that fact shows the state’s grain transaction laws aren’t broken. They needed an upgrade, he said, and that came in the form of House Bill 1017 in last year’s legislative session. It was a direct response to the Anderson Seed insolvency.

“Obviously the Anderson Seed situation pointed out to us that we at the PUC were lacking in some of the tools we needed to find problems with grain buyers,” Nelson said. “There are times when grain buyers are going to go broke. That’s part of the free enterprise system, it happens. Our job is not to necessarily stop that from happening, but what I believe is that we need the tools available to make sure that if a grain buyer is having that kind of problem that we find out soon enough so that farmers don’t lose when that business goes out of business.”

The bill was passed by a large majority of legislators, and includes provisions that Nelson said should prevent another situation like Anderson Seed. But some farmers in the room said South Dakota’s current laws don’t go far enough to make sure they’re protected if a company they sell grain to goes under. They want to become the first secure creditor that would get a bond payment first if a company goes broke because they produced the grain.

Sen. Larry Lucas, a Democrat from Mission, attended the meeting and called on everyone in the room to find some common ground on grain transaction policy and called on farmers and those in the industry to come up with possible solutions that could turn into a bill brought to the Legislature next year.

“Don’t surprise us in January” when the Legislature begins the session next year, Lucas said. “If there’s some common interest here I’m willing to work on those, and we can take legislation to the Legislative Research Council and have it drafted.”

South Dakota Farmers Union plans to continue to gather ideas from farmers in the state while looking to other states to find possible solutions.

“We’re focused on making sure farmers are protected,” Traxinger said. “And we realize that any laws South Dakota passes need to be well thought out and involve all the parties affected.”

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