BISMARCK, N.D. - Last fall, Rep. Dennis Johnson knew something would have to change when he heard and read about upstart Hunter Hanson-a recent high school graduate from the New Rockford area, with no training or experience in grain marketing-who had stiffed farmers and savvy grain elevators for millions of dollars in grain transactions.
A few months later, in one of its last actions before adjourning, the North Dakota Legislature approved removing grain regulatory authority from the Public Service Commission. As of July 1, funding for the regulation of grain will be placed in the hands of the North Dakota Department of Agriculture, which will take over the program on Aug. 1, according to Agriculture Commissioner Doug Goehring.
The Legislature delayed substantive changes for two years and recommended a major study of grain regulation in the meantime.
The move was not without controversy.
Wanzek wanted to increase PSC's authority to study grain marketers' books-more frequent reporting, with confidentiality to keep proprietary information from competitors. He wanted to expand a state indemnity fund that covers credit-sale contracts (price-later and deferred pricing) to include cash-sale contracts, but with coverage at lower amounts.
Luick said the Ag Department will do a good job, but he agreed with PSC commissioners who said they were "very much slighted" in the previous three legislative sessions when asking the Legislature for funding and authority to fix the problem. The PSC had been doing the work with 1.75 full-time-equivalent job positions, Johnson said.
Goehring said he's been promised four people, including three inspectors, one in-house auditor, and one in-house operations employee. Further, the Ag Department received up to $100,000 appropriation to deal with the Hanson case.
Johnson is a Republican who represents the Devils Lake area, the home base for Hanson's two businesses. From 2017 to 2018, Hanson did business as Midwest Grain Trading as a "roving grain buyer" and in 2018 added NoDak Grain, with a warehouse license with rural facilities at Tunbridge, near Rugby, and at Rohrville, northeast of Devils Lake.
Johnson said he was appalled when Hanson's unpaid bills climbed to $8.6 million for grain delivered and unpaid for or paid for with bounced checks. Total claims against Hanson's businesses, still in the process of being verified, are at $11.5 million.
"How did the PSC give this guy a license in the first place?" Johnson wondered.
He heard that the PSC had been "warned," by grain industry figures that the young Hanson shouldn't have gotten a license. Legally there may have been no way the PSC could have prevented Hanson's situation, Johnson acknowledges. But Johnson thought the PSC might have made "phone calls within 30 days, or followup to see how things are going." He admits Hanson had paid the fees and acquired bonds at the required amounts and initially was paying his bills.
Johnson said he regrets that the conflict became personal. He praised the PSC for ably handling other large and fast-changing industries, including oil, gas, coal and wind energy. But he thinks the Ag Department employees who often have an "aggie background" and will "understand this stuff."
Luick did a personal study of grain regulation and found that 38 of the 50 states regulate grain handling. Of those, the state ag department supervises grain in 34 states. That's how it is in Minnesota and Montana, he said. In South Dakota, it's the Public Utilities Commission.
Sen. Kathy Hogan, D-Fargo, the only conference committee member to vote against the conference compromise, said the current cost-price squeeze in farming and the ongoing Hanson problem makes this the wrong time to change the regulatory structure. She wants regular-perhaps quarterly-reports on how the transfer to the Ag Department is working, but that wasn't part of the bill.
Sen. Janne Myrdal, R-Edinburg, a farmer and a member of the conference committee between the two agriculture committees on the bill, regretted that a "convoluted" process sparked a "kind of a World War III in this building" with conflict among Republicans and ag groups. Moving jurisdiction and minor tweaks will be a "Band-Aid" for now, she said, until the study and a permanent fix.
Sen. Jerry Klein, R-Fessenden, chairman of the conference committee on the bill, said he was only "51 percent sure" that the Legislature did the right thing by "kicking the can" down the road with the study.
Luick said he's been assured by his legislative leadership that the grain regulation will be studied. The topics include studying grain buyers, "roving grain buyers," like Hanson and "grain brokers."
East Central Grain Marketing of Minnetonka, Minn., was the "introducing broker" in 98 percent of the dollar volume of the Hanson claims. ECGM itself has a claim in for $595,000, including $300,000 were initially charged to Hanson. According to an online listing by the PSC, East Central Grain Marketing obtained 80 different sellers with more than 4 million bushels contracted for Hanson. On Sept. 12, 2018, ECGM's owner, Dan Stommes assured a seller (later a claimant) that Hanson paid in a timely fashion.
The study also will look at protection for farmers involved in prepayment of fertilizer, soil amendments, seed and fuel in the cases of insolvency.
It will look at whether and how "confidential financial and physical audits" can be done. It will study processors, where the "end product is refined and no longer reflect the original product."
It will look at whether the self-funded Credit Sale Indemnity Fund, should be changed and expanded. (Currently, farmers pay one-10th of 1% of the value of any credit sale until the fund rises to $6 million. Then the collections are stopped until withdrawals diminish the fund to $3 million.)
Some legislators want the fund to be expanded to cash sales, or to require merchants to pay the fees themselves if they fail to collect it from farmers. Wanzek would have lowered the indemnity fund's payout from 80 percent to a lower amount in the event of a company's insolvency.
Goehring said he won't count on the legislative study to be funded and completed as hoped. He said he'll do his own set of meetings with ag industry partners and will promulgate rules as he sees fit to regulate the industry in the meantime.
Higher bonds, fees
Johnson said the big picture is that there are 373 warehouse grain companies in the state, of which 109 are also federally licensed. There are 99 roving grain buyers who don't own facilities for grain storage and handling.
In its final form, HB 2345 increased warehouse license fees by $100 per year. The law currently requires annual warehouse licensing in the first six years of operation, going to every two years after that. Annual fees will go to $400 for annual warehouse licenses for facilities under 200,000 bushels, to $500 for 200,000 bushels to 500,000 bushels; to $600 for anything more.
Roving grain buyers' bonding levels will double from a minimum of $5,000 to a minimum of $10,000. The PSC frequently exercises an option of increasing that minimum by a factor of 10, effectively requiring a $50,000 bond in Hanson's case. The new, higher figure theoretically is factored to a $100,000 bond-still a small amount compared to the grain transaction dollars.
Bond amounts also go up based on a formula, involving the number of bushels the licensee expects to market in a one-year period.
The PSC has said Hanson's Midwest Grain Trading had the proper bond for expected purchases of 1.25 million bushels. But Hanson almost immediately exceeded that amount in the months of September and October 2018 alone.
Hanson's failure has led to a string of legal actions. On April 5, a group of three Italgrani elevators won a total of $2.74 million, and the total in civil actions stood at $3.29 million.
In a Mountrail County case, Hanson entered an Alford plea, meaning he did not admit guilt but acknowledged there was evidence that would convict him, when he was accused of writing a check with non-sufficient funds to United Quality Cooperative for $94,480.41.
In a McLean County criminal theft case, state investigators describe Hanson's grain business as one operated as a Ponzi scheme and stopped paying entirely when the amount he owed grew exponentially.
Hanson now sits in the McLean County jail in Washburn, N.D., with a June 19 hearing set in his criminal case.