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Published March 05, 2012, 11:14 AM

Should grain broker bonds be increased?

FARGO, N.D. — The Anderson Seed Co. Inc., case — with some $4 million in unpaid sunflower deliveries in two states — is the latest case that screams out for higher bond amounts for elevators in cases of insolvency, a North Dakota lawyer says.

By: Mikkel Pates, Agweek

FARGO, N.D. — The Anderson Seed Co. Inc., case — with some $4 million in unpaid sunflower deliveries in two states — is the latest case that screams out for higher bond amounts for elevators in cases of insolvency, a North Dakota lawyer says.

Anderson Seed customers are protected by only a $280,000 bond in North Dakota, and only a $100,000 bond in South Dakota. Minnesota’s bond amount is not immediately available.

Lowell Bottrell, a Fargo, N.D., attorney who has been involved in several insolvency cases, says the bond amounts were fitted for agricultural prices that were far lower than today. He says the bonds currently are set on the bushel capacity of elevators and brokers, and should be set on the dollar amount they handle.

Money owed to three of Bottrell’s farmer clients in the Anderson Seed case would “more than cover” the entire bond the state of North Dakota has in place, he says. If the bond falls short of total unsecured claims, it is simply prorated in a cents-on-a-dollar basis.

“You’ve got wheat at $8 a bushel; you’ve got soybeans at $12. You’ve got corn at $6, plus,” Bottrell says. “What’s one semi-load of corn worth? What’s one semi-load of soybeans worth? One load gets delivered. That’ll eat up most of the bonds you’ll find in North Dakota. There’s very few bonds that are anywhere close — anywhere close to the values going through the elevator.”

“Elevators don’t fail in a week, they fail over a period of time,” he says. “So if an elevator gets crosswise in its contracts, and people don’t deliver under contracts that they have, things may build up for 60 days before they’re paid. Now you’re backwards 60 days in all of this grain going through the facility. Where do you think that puts the liability at? It’s substantial.”

Bottrell says the North Dakota Legislature in 2003 created a price-later indemnity fund after the Wimbledon (N.D.) Grain insolvency in January 2002. The fund started accumulating money in August 2003, to compensate losses from that kind of contract only. Rep. Phil Mueller, D-Wimbledon one of the creditors, pushed for it. The fund was established to be assessed on those contracts. Assessments would stop when the fund grew to $10 million, and only resumed if pay-outs depleted the fund to $5 million. Republicans in 2007 cut the fund cap to $6 million.

Bottrell and colleague Mike Gust haven’t looked at specific contracts for their clients that might be eligible for payment from the special indemnity fund.

Why not a fund?

“Why not have a fund out there that if you took 1 cent a bushel for any one of these commodities, and set up a fund, and capped that fund out at $10 million, the Legislature could do it without . . . making elevators pay a lot more for bonds,” Bottrell says. Producers would fund it themselves through a check-off program.

“What could you do if it was in all the commodities — wheat, barley, canola, sunflowers, corn, soybeans? If it was just a little bit from each one of them, and they could put that into a general fund in the state for catastrophes.”

Bottrell says the answer may be a combination of both ideas — increasing the bond, and creating a fund. He says the North Dakota Bar Association has a similar fund, to compensate if a lawyer is stealing money out of a trust account. “We pay into that every year,” he says.

Bottrell, who represents some elevator clients, says he thinks the North Dakota Grain Dealers Association would be interested in “having that discussion” about changing bond levels, and creating such funds.

“It’s the producers that are hurt by this, whether they’re Democrat, Republican or Independent,” Bottrell says. “They’re delivering to these elevators and are trusting that they’ll be paid for the grain that they’ve delivered. You can’t expect that the farmer’s going to ask for a balance sheet of the people he’s doing business with.”

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