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Published July 29, 2013, 09:32 AM

In the wake of Anderson Seed

The South Dakota Public Utilities Commission is proposing new rules for credit sales between farmers and elevators.

By: Mikkel Pates, Agweek

CHAMBERLAIN, S.D. — The South Dakota Public Utilities Commission is proposing new rules for oral credit sales between farmers and elevators. Under the proposal, the contract must be mailed to the farmer, who then has 48 hours to object in writing, or the contract goes into effect.

A hearing on the rule is set for July 30 in Pierre, S.D. If approved, the rule could take effect in early September, allowing elevators and other grain buyers in the fall harvest to continue taking delayed-pricing and deferred payment contracts as they have in the past. Elevator operators say they need that flexibility.

The rule would change an April 15 PUC rule that does the opposite — requiring elevators that orally enter credit-sale contracts with farmers to mail the contracts to farmers, who then have 30 days to sign them, or they’ll become cash sale contracts, paid on the spot.

The 30-day-and-out policy was forced by an April 4 ruling by Judge Tony Portra of Spink County in Redfield, S.D. Portra agreed with Ray Martinmaas of Orient, S.D., that he was eligible for his $2,000 share of a bond in the Anderson Seed insolvency. Anderson Seed, based in Mentor, Minn., went insolvent in February 2012, leaving $5 million in claims for unpaid sunflowers. Legumex Walker of Seattle then bought much of the company’s assets.

Martinmaas had entered a credit-sale contract on sunflowers with the processor, but had not signed the contract, making it invalid. Portra agreed the contract wasn’t valid. Elevator officials asked Portra to change his mind, but Portra said the law would need changing in the Legislature or by appeal to the South Dakota Supreme Court. Portra did not mention, however, that the PUC can also go into a rule-making process.

Nelson tells Agweek that he thought Portra simply forgot about the rule-making option. “I don’t know why he didn’t mention that, but we have the authority to do this,” Nelson says. “I think he just didn’t think of that third option.”

The new rule

Chris Nelson, SDPUC vice president, says the PUC proposed the new rule because the industry has voiced concern about the existing “guidance.”

Nelson spoke at a July 17 meeting in Chamberlain, S.D., hosted by the South Dakota Farmers Union. He emphasized that the PUC is concerned about farmers being paid — even when they are unsecured creditors — but he doesn’t want any “feel good” lien priority rules he’s convinced won’t offer protection.

In the 2013 South Dakota Legislature, the PUC did not take a position on HB 1228, which would have made farmers the first secured creditor. The bill would have put farmers ahead of elevators for bond payments in an insolvency.

Instead, the PUC supported HB 1017, which among other things gave the agency more tools to know when an elevator is troubled. The new law went into effect April 1 and requires elevators with problems to self-report to the PUC, or face criminal penalties. Among other things, the law requires more current financial information, as well as mandatory notification if the company falls out of financial compliance.

“Once they start to unravel, would they call us or not? I don’t know, but if they chose not to, somebody will be sitting in jail, or at least under (felony) charges,” Nelson says. It would have required a 50 percent bigger bond, which he acknowledges would have little real effect.

He says the first report of problems at Anderson came four months after a payment delay.

“Unlike with Anderson, where it came to us as a surprise, in this case, with self-reporting, we can get in there and we can analyze and … make a determination: does this business have some plan to pull out of the problem they’re having, or is it something we need to monitor over time, or is it more crucial” to shut down immediately?

He notes the PUC stepped in immediately in August 2012 with Gregory Farmers Elevator, when the PUC was tipped by a customer one week after the elevator failed to pay.

Who pays?

The Chamberlain meeting was punctuated by sometimes argumentative exchanges between Nelson and a few farmers. Martinmaas questioned whether elevators will be willing to pay immediately, because of delays in completing quality matters. Dennis Stanley of Presho, S.D., says he thinks farmers need to have an automatic first-lien on grain that hasn’t been paid for, even if it’s a credit-sale deal.

Martinmaas wants to see the responsibility for farmer payment in an insolvency land on the end-user of grain, just as the U.S. Packers and Stockyards Act requires buyers of cattle to forfeit the animals if they had been stolen. He questions the logistics of the mail and the 48-hour rule.

Nelson says the South Dakota Grain and Feed Association asked the PUC to waive rules “to take care of this in the short term.” The PUC opted to immediately go into a rule-making process, to create “a specific rule that addresses the situation that Judge Portra had ruled on.” Nelson says the proposal is designed to mirror rules on other kinds of contracts and upholds the intent of the statute, even if it wasn’t changed in Legislative action.

The process

On July 30, at 1 p.m., the PUC will take testimony in a hearing at the State Capitol. There will be 10 days for written testimony on the proposed rule. Chiefly, the rule says if a farmer orally enters into a voluntary credit-sale contract, the elevator will mail the contract.

“If, for whatever reason, you don’t sign it and don’t send it back, you’ve got 48 hours to object to that,” Nelson says. “If you don’t object, it’s still a binding (credit-sale) contract.”

Whatever the three-person PUC decides by majority, it’ll take to the Legislative Rules Review Committee. That interim legislative committee has six members to review rules that agencies pass. If that committee approves, it could go into effect in early September, in time for the fall row crop harvest. If it can’t be fixed for the fall crop season, the issue would wait until the Legislature can act on it in July 2014.

“We can get this done sooner, and it has the appropriate legislative oversight,” Nelson says. If the Legislative Rules Review Committee doesn’t like it, “they can say no,” Nelson says.

Cash sales, costs

Jim Mehlhaff, PUC grain division director, says if farmers don’t trust credit-sale deals, they always have the option to do business with a warehouse and maintain title to grain.

“If the demand is that everybody wants to maintain title, I would imagine that storage rates need to go up so they can recover their costs for taking on the risks of the grain going out of condition and the cost of the steel, etc.,” Mehlhaff says.

Some elevators have “condominium-style” arrangements to guarantee storage in the facility, but he says when farmers hold title to their grain, they also hold the risk of market fluctuations.

Nelson, a lawyer, says it’s true that a North Dakota law gives farmers a lien priority in the grain at an elevator, but only until the elevator sells it “in the ordinary course of business.” “You sell the grain, you dump it this morning, and the elevator sells it in the afternoon, your security interest is gone. It’s gone,” Nelson says.

Nelson notes that the North Dakota Public Service Commission is on the verge of a lawsuit against Anderson Seed parties to return $1.5 million to North Dakota farmers, on the theory that the sunflowers they sold to Anderson Seed, which were then sold to Legumex Walker, weren’t done in the ordinary course of business. Under that assumption, Legumex Walker would be responsible for the payments to farmers.

“I told the folks in North Dakota that I think they’re not going to prevail in that lawsuit,” Nelson says, explaining that “if the elevator’s got a problem, they’re going to market that grain immediately. It’s sold, in the ordinary course of business … When you sell your inventory to someone else, that’s in the ordinary course of business.”

Kathy Zander, executive director and lobbyist for the South Dakota Grain and Feed Association, an elevator industry group, declined to answer questions from Agweek, saying only that she had been advised not to. Neither Zander nor any organization leaders spoke in the meeting.

But Mehlhaff spoke in defense of elevators when he disagreed with Martinmaas that farmer interests and elevator interests are not the same. Melhaff said elevator operators generally are supportive of policies that are “good for farmers, good for them.”

State Sen. Larry Lucas, D-Mission, rose at the end of the meeting to say that if farmers want increased protection, they need to work with lobbyists for the elevators, cooperatives and commodity groups. “If you want something to pass, we’ve got to develop some common interests,” Lucas said. He said he’s not opposed to an indemnity fund, but speculators need to assume some risk, and later said he didn’t think the Legislature would go beyond what it had passed in 2013.

“What happened with Anderson Seed Co. was a bad deal. Hopefully, it doesn’t happen again,” Lucas said.

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