<24—Lancaster Farming, Saturday, July 25,1981
USDA helps keep harvests safe from failing elevators
WASHINGTON, D.C. - After
droughts, insects, had, and other
natural disasters, some fanners
face another threat: elevator and
warehouse bankruptcies.
Statistics indicate that the risk is
small. Only about 175 gram
elevators out of an estimated 10,000
nationwide have closed or
reorganized since 1975. However,
the fadure rate may be increasing.
“The number of bankruptcies
per year rose over the last few
years,” says USDA economist
Bruce Wright. “Because this has
been a tune of high interest rates
and inflation, it looks like the in
crease is tied to the general state of
the economy. Still, the number is
small ”
Although bankruptcies are few
and far between, that’s little con
solation for farmers unlucky
enough to put their crops in a finan
cially shaky elevator at the wrong
tune. Their crops—and the money
they need for next year’s
plantings—are often tied up as
courts sort out the legal tangle.
Both gram and cotton facilities
can go bankrupt, but most of the
focus is on gram elevators. There
are more of them, and cotton
warehouses are less likely to fail
because they are only involved in
storage and not in speculation.
Occasionally, failing elevators
sell the gram to avoid bankruptcy.
This usually doesn’t save the
elevator, and farmers lose their
crops and money. Even if all the
gram is in the elevator when it goes
bankrupt, legal expenses often eat
away farmers’ returns.
In addition to providing storage,
elevators and warehouses fre
quently market crops under
delayed-pnce and deferred-
payment contracts. In both cases,
the warehouse receives title to the
crop but delays payment untd the
crop can be sold at a price or tune
advantageous to the farmer.
If the elevator fads before pay
ment is made, bankruptcy laws
give other creditors priority claim
to the facility's assets. The farmer
holding a price-later contract is
one of the last to be reimbursed.
The producers who are only stor
ing gram in the elevator are in
much better shape because they
retain title to the gram.
According to one study, just over
3,000 farmers were claimants in
elevator bankruptcy suits m 23
states between 1974 and 1979.
Although this number is relatively
small, a single, well-publicized
bankruptcy can affect how
farmers view normal transactions
with warehouses.
So, how can farmers reduce their
risk’ That’s not an easy question.
“A farmer may lose valuable
time trying to check out the solven
cy of local gram elevators,”
Wright says. “Many tunes that in
formation is not even available.
Perhaps the best protection is
given when elevators are licensed
under USDA’s Federal Warehouse
Act or meet the Commodity Credit
Corporation’s Standards for Ap
proval of Warehouses. But, USDA
can only regulate warehouses and
gram elevators that choose to be
licensed under the Act or approved
by the CCC. The financial prac
tices of most other storage places
still fall under some state review,
even though requirements vary
from state to state.
To be federally licensed, storage
facilities, net assets must equal to
20 cents per bushel of approved
capacity. Elevators also must put
up a bond of 20 cents per bushel on
the first million bushels, 15 cents
per bushel on the second million,
and 10 cents on the next million and
a half. The bond doesn’t exceed
$500,000.
In addition, USDA recently pro
posed regulations that would give
some protection to fanners who
deposit their gram in federally
licensed warehouses for marketing
under delayed-pnce and deferred
payment contracts. Just as the
present regulations guarantee net
assets to partially cover the worth
of the bushels stored in a facility,
the proposals would cover the
amount of money involved in
marketing transactions—2o cents
per bushel sold An additional
$250,000 bona wuum (ildO lA* 1 li'
qinred.
The standards are different for
storage operations under contract
with the CCC. Warehouses with
capacities between 250,000 and 2.5
million bushels are required to
have a net worth equal to 10 cents
per bushel of storage capacity.
Ten and 20 cents per bushel
aren’t enough to cover the total
value of the gram, but, in most
elevator bankruptcies, at least
some of the gram is returned to
farmers.
“ Elevators volunteer to be
licensed because frequently they
operate as gram merchants as well
as storage warehouses,” says
James Springfield, director of the
USDA warehouse division. “The
gram merchant is then able to use
warehouse receipts as collateral
for a loan. Because the elevator is
licensed, the bank would be more
willing to grant a loan.”
Over 70 percent of the U.S. cotton
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crop will be stored in federally
licensed warehouses sometime
before use, and 30 percent of all
gram producers will deal with
licensed elevators. During the last
2% years, only eight federally
licensed warehouses declared
bankruptcy. In these cases, the re
quired bond assured farmers of 20
cents on every bushel lost.
The threat that bankruptcy can
strike anywhere, at anytime—
sometimes with few safeguards—
has been a growing concern to
farmers, especially in the wake of
recent elevator failures. Even the
statistically remote chances of a
bankruptcy provide little comfort
when an entire year’s earnings
may be at stake.
Responding to these concerns,
USDA Secretary John Block ap
pointed a task force shortly after
taking office. The purpose: to
review current gram elevator laws
and regulations to find out what
more could be done to protect the
agricultural community from
elevator bankruptcies. The task
force solicited suggestions from
representatives of farm organiza
tions, the warehouse industry,
state governments, and the public.
In May, it presented several pro
posals to Congress.
“The options concentrate on
ways elevator bankruptcies can be
prevented,” says Merrill Marx
man, a member of the task force
an area director with USDA’s
Agricultural Stabilization and Con
servation Service. “They’re not
aimed at solving the problem after
it happens.”
The task force ruled out creating
a bankruptcy insurance program
or starting a new federal agency to
deal with the problem. Among the
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task force’s recommendations:
greater cooperation and consisten
cy between the federal govern
ment and ... tates.
“We recognize there are some
good state programs for regulating
warehouses, but some states do not
have strong laws. That’s why we
need to work together for greater
uniformity,” Marxmansays.
USDA is also considering ways it
can get more involved under cur
rent laws and regulations, as well
as what possible changes could be
made. For example, the task force
proposed that the net worth of
CCC-approved elevators be raised
to 20 cents per bushel of the
elevator’s capacity, and a $20,000
to $500,000 performance bond.
Since 1963, CCC has not asked
warehouses to carry performance
bonds, but it does require other
types of approved security if the
warehouse owner can’t meat the
net worth requirement.
According to the proposals,
warehouses and elevators that con
tract with the CCC could be re
quired to be licensed under the
U.S. Warehouse Act or under state
laws and regulations that are com
parable with the Act.
Another possible change is that
both licensed and CCC-approved
storage operations would be re
quired to submit a financial state
ment prepared by an independent
certified public accountant. As
well as including an operating
statement, it would verify inven
tory, confirm storage obligations
and payments for grain, and list
bank loans and the facility's
market position.
“This sort of audit is a good
working tool for management and
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m
rertitners.