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Published June 04, 2013, 10:25 AM

SD PUC updates stance on verbal grain agreements

When Anderson Seed went out of business last year, it not only resulted in farmers losing $2.6 million, but brought into question the legality of long-held grain-buying practices. Simplified, the case relates to the practice of verbal agreements. The state Public Utilities Commission will discuss the issue at its meeting at 1 p.m. today at the Capitol in Pierre.

By: Jeff Natalie-Lees, Forum News Service

When Anderson Seed went out of business last year, it not only resulted in farmers losing $2.6 million, but brought into question the legality of long-held grain-buying practices.

Simplified, the case relates to the practice of verbal agreements.

The state Public Utilities Commission will discuss the issue at its meeting at 1 p.m. today at the Capitol in Pierre.

Because of a recent legal ruling, the commission no longer allows oral or handshake deals to defer payment beyond 30 days.

On April 15, the commission sent a notice to grain sellers and grain buyers. The notice stated that “all grain purchases more than 30 days old must be considered cash sales and must be paid by the buyer unless the grain buyer has in its possession a (Voluntary Credit Sale) contract signed by both parties.”

Ownership of the grain transfers to the grain buyer at the time of delivery. Historically, verbal agreements to delay pricing and/or defer payment have been recognized by the PUC. The PUC will no longer recognize these agreements unless the grain buyer possesses a VCS contract signed by both parties, per a recent decision by Judge Tony Portra.

If the delayed pricing contracts are not signed within 30 days, the buyer must price the grain and send the farmer a check for their grain based on the current market price, he said.

Historically, that is a big change.

Many farmers have routinely unloaded their grain at harvest time without formal signed contracts stipulating terms of sale. These terms include when the grain would be sold, the price and whether payment would be deferred until after Jan. 1 for tax purposes.

The elevator took ownership of the grain and handed the farmer a delayed price contract as a receipt with no written payment details. Details would be worked out later after harvest was completed.

The practice allowed farmers to stay in the field and allowed grain buyers the flexibility to store and ship grain as needed. They had title to the grain, so they could ship it out to make more room in their elevator if needed.

The South Dakota Grain and Feed Association wants the historical practices to continue.

The Public Utilities Commission will need to decide if it should provide a waiver of grain buyer rules and whether such waiver would adequately protect grain sellers.

Grain-buying practices came under scrutiny after the Anderson Seed collapse.

Some farmers had handshake deals to defer payment with Anderson Seed. They had receipts for the grain they delivered and a VCS contract signed by the buyer.

In one way, it did not matter whether a farmer had a handshake deal or a formal contract. None of them got money from Anderson. The company had transferred the seeds to Legumex Walker as part of a buyout arrangement. The money from the seed sales was used to pay off secured creditors, primarily US Bank, while farmers, as unsecured creditors, received nothing.

The handshake deal became relevant only when farmers applied for a portion of the $100,000 surety bond to be distributed by the Public Utilities Commission.

Ray Martinmaas, a Orient-area farmer who lost $47,000 to Anderson Seed, applied for his small share of the surety bond. The commission rejected his claim because it said Martinmaas had a voluntary credit agreement with Anderson and was therefore not eligible.

Martinmass appealed the decision. In Circuit Court in Redfield, he acknowledged that he had orally agreed to a delayed pricing contract, but he argued no contract was signed. Although an Anderson Seed representative had signed it, he had not signed it.

In an April 4 decision, Judge Tony Portra ruled that because the contract was not signed, it could not be considered a voluntary credit agreement. Martinmaas was entitled to a portion of the bond distribution.

The Public Utilities Commission then issued its new recommendation requiring signatures of both the buyer and seller in voluntary credit sales.

Portra in an April 29 written response to the South Dakota Grain and Feed Association’s request to change his ruling, said, “I am mindful of the effects my decision may have on the grain buying industry, but I cannot change my decision because of that fact. My job is to interpret and apply the law as best I’m able, which I’ve done in this case.”

He advised South Dakota Grain and Feed Association of their rights to appeal to the South Dakota Supreme Court and their option to ask the Legislature to change the law.

The grain and feed association is attempting to maintain current business practices through the Public Utilities Commission because of a statute which allows the PUC to make and waive “administrative rules” if it does not harm producers and is in the public interest, said Mehlhaff.

He said PUC attorneys will be weighing a number of case law rulings, including Portra’s, before making recommendations to the commission.

The commission must also consider how any ruling will affect bonding companies.

In an emailed statement, Mike Traxinger, legislative director for the South Dakota Farmers Union, said the union supports efforts to maintain flexibility in grain sales.

“South Dakota Farmers Union supports the efforts of the South Dakota Grain and Feed Association to continue allowing flexibility for both grain facilities and producers when contracting their grain,” according to the statement.

The union is also looking into broader issues

“The larger question, is why we need this change,” the statement reads. “The reason this administrative rule change is needed is because South Dakota does not have protections for all types of contracts or agreements between a producer and a grain warehouse or grain buyer. South Dakota Farmers Union believes that this is the time to continue the discussion on the proper protections for producers in South Dakota. It is also an opportunity to educate farmers and ranchers that just because a grain warehouse or grain buyer has a bond, doesn’t mean that they are fully protected or that those bond proceeds cover the entire value of the grain held. South Dakota Farmers Union will continue having these discussions with its members over the upcoming summer months and work with lawmakers to draft potential legislative solutions.”

Until there is a formal announced change, grain buyers and producers should make sure all contracts are signed by both parties, Mehlhaff said. If the contracts are signed by both parties, nothing changes.

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