BISMARCK, N.D. — A bill that has passed the North Dakota Legislature will give the North Dakota Agriculture Commissioner more autonomy and discretion over who gets grain merchandising licenses in North Dakota and over how much financial and other information they must provide.
House Bill 1026 was sparked by the Hunter Hanson fraud in 2018. The House passed the bill 89-0 and the Senate Agriculture Committee unanimously came out 6-0 with a do-pass on Feb. 24. The Senate on March 3 passed it 46-0, sending it to Gov. Doug Burgum.
Sen. Larry Luick, R-Fairmount, chairman of the Senate Agriculture Committee, said testimony largely was favorable to the bill. Stuart Letcher, executive vice president of the North Dakota Grain Dealers, said his organization is in “full support” of the version.
For elevators, it will mean increased financial scrutiny, particularly when applying for an initial license.
For farmers, it will mean less flexibility in how they choose between cash and credit-sale contracts claims in the event of an insolvency. Every time a grain seller enters a deferred-payment contract (delivered now, paid at a later date), the elevators must offer them an opportunity to purchase their own “bond” protection for deferred sales in excess of what they could be eligible for in an indemnity fund.
For grain brokers, who charge commissions to arrange transactions, it allows the commissioner to “join” them and their bonds into insolvency proceedings.
A response to Hanson
Hanson, from the New Rockford/Sheyenne communities, at age 19 in 2017, established Midwest Grain Trading, a roving grain buying business. In 2018, he set up Nodak Grain, a warehouse business with locations at Tunbridge in Pierce County and the rural site of Rohrville in Ramsey County.
Hanson, who at times lived at Leeds and West Fargo, had no formal education in grain merchandising and had no lenders. He ran his grain marketing as a Ponzi scheme, losing money on every transaction. Elevators paid Hanson immediately but he gave himself 45 days to pay farmers.
Sales in the scheme often were arranged by East Central Grain Marketing, of Minnetonka, Minn., and Sioux Falls, S.D., a company led by owner Dan Stommes.
Appalled legislators — some of them farmers with constituents who were burned — took action.
In 2019, the Legislature yanked regulatory power over grain traders from the North Dakota Public Service Commission. The PSC said it had operated within existing laws, but the Legislature moved authority to the North Dakota Agriculture Department.
Agriculture Commissioner Doug Goehring held field hearings and worked with the interim session, with the grain dealers and farmers. The result was HB 1026.
Among other things, the bill imposes new responsibility for “grain brokers” who arrange transactions and profit from them.
In the Hanson case, the broker — Stommes and East Central Grain Marketing — escaped financial liability. ECGM only collects commissions of pennies on a bushel and never owned grain. ECGM reportedly voluntarily repaid at least some farmers the commission fees on the deals, but the PSC couldn’t call on its bond in the insolvency because a broker never owns grain in the transaction. (ECGM did, however, file a claim against the trust for the fees, but asked that the farmers be paid first.)
Stommes did not immediately return messages from Agweek left by phone, text and email asking for an interview about the bill. ECGM, on its website, says it is a “family owned and operated company that aims to provide its customers with liquidity in the commodity markets,” and “does the work necessary to best benefit all parties in the trade.”
A quick, big stick
Here are some of the major changes:
The commissioner has the final say on determining an insolvency, which occurs when the commissioner receives a complaint that the entity can’t or won’t (“upon written demand”) pay its grain bills in a timely fashion. Under the bill, the commissioner acts as trustee without court approval, a process that can take weeks, especially in situations like the pandemic.
Like the PSC, if the commissioner believes continued operation of a warehouse business is “likely to result in probable loss of asset to receipt holders,” the commissioner can “suspend, close or take control of the assets held in a trust fund.”
Once declared insolvent, the commissioner’s staff can immediately determine the status of bonds and start collecting claims and establish the entity’s trust, which could include grain, money and bond funds. Under the existing system, they have to ask the district court in the county where the warehouse exists (or in Burleigh County in Bismarck in the case of a roving grain buyer, who has no facilities).
Goehring notes that under the new system, insolvents have still have a chance to challenge the decision in an administrative hearings, and of course through lawsuits. If the Legislature doesn’t like how he does it, they can get involved. Ultimately, the public could vote him out of office, he said.
The bill tweaks definitions of categories, and raises the license fees somewhat. Significantly, it bases the fees on dollar volume traded, not bushels or volume. (This is also important in the bond levels, below.)
Goehring said that since taking over the job after the 2019 Legislature, his department discovered and licensed 130 or more businesses that were dealing in grain and were operating without a license.
It further defines various categories including “grain brokers.” In the future, the ag commissioner has the ability to “join” the broker and its bond into an insolvency trust, even though the broker never took possession of any grain.
The commissioner will have the power to determine if the grain broker negotiated a grain transaction "… with an insolvent grain buyer,” or has acted with “discriminatory, predatory” or “bad faith” practices.
Under the bill, bonds will be set by dollar value — not bushels, or volume, as currently is the case. Bond will be calculated based on the value of grain “intended to be purchased by a new licensee during the first year of operation, or the three-year rolling annual average of the value of grain purchased at the time of license renewal.” Currently, the maximum bond for warehouses is $2 million, but will be increased to $2.5 million.
For the first time, the state law requires elevators to “offer bonding” on deferred-payment contracts (but not price-later).
The law doesn’t require elevators to include deferred-payment in their existing bond.
Instead, the elevator will tell farmers they can arrange for the farmer to purchase their own bond to cover losses in excess of what the state’s Credit-Sale Indemnity Fund already covers. Generally, it gives the commissioner authority to set amounts of bonds.
The bill requires a warehouse license applicant to submit “current financial information” on net worth and working capital, with amounts unspecified and “determined by the commissioner.” The department is already doing that administratively, but under the bill, that would be law.
Applicant/license holders buying up to $10 million in grain must submit “balance sheets and income statements” annually. They must produce “any financial record or bank verification release the commissioner deems relevant.”
Goehring said, “If you’re new, and we’re not comfortable with you,” this would involve some kind of probationary status. “We’ve done this several times in the last 18 months,” he said.
In the bill, the applicant would have to a) pass a criminal background check; b) have a “satisfactory credit score, as determined by the commissioner;” c) be a “responsible person with good reputation, as determined by the commissioner.”
Goehring said the department pays for criminal background checks, including whether the party has operated under other aliases. The commissioner can “refuse to issue, renew, or may revoke” a license, “for any reason determined by the commissioner.” Separately, the department is asking for an increase in funding to four inspectors, up from three.
Besides more responsive oversight, farmers will be most affected by shifts in credit-sale contracts.
There are two kinds of credit-sales contracts. First is “deferred” payments contracts, in which a price is set and payment is delayed for a period, typically after a new year for tax purposes. Second is “price-later” contracts, where the seller agrees to set a price or “basis” at a later date.
In both cases, the farmer transfers the title (ownership) of the grain to the elevator or purchaser, who can load a train with it or otherwise move it into the marketplace. Under the bill, credit-sale contracts must be signed by both parties and executed in duplicate, but an “electronic signature satisfies the requirement” and an “unsigned contract must be considered an unconverted scale ticket.”
The state offers special protection for these contracts.
In 2003, North Dakota established a Credit-Sale Indemnity Fund, after a major insolvency of Wimbledon Grain Co. Farmers self-insure on this fund by paying (at 0.2% of the value of grain under credit-sale contracts) until the fund hits a maximum of $6 million.
The Legislature created it because the grain dealer bonds in North Dakota cover only the cash sale transactions.
The indemnity fund pays out 80% of a farmer’s qualifying losses up to $350,000, or $280,000.
Under the new bill, a farmer wanting protection higher than that can buy their own bond protection, offered by the elevator.
If the farmer in an example is trading $500,000 in deferred contracts, can buy bond protection on the $150,000 difference between what’s protected under the indemnity fund. The bond company sets the premiums — likely $5 to $10 per $1,000 of protection. That calculates to $750 to $1,500 on a $150,000 difference.
Further, a farmer delivering grain would have only 30 days to “convert” the scale ticket into a cash, credit-sale (deferred or price-later) or put it into warehouse receipt (storage). After that, the producer will lose insolvency protection on that grain.
Goehring said the change is prompted by farmers keeping unpaid scale tickets or unsigned credit-sale contracts. In an insolvency, they can decide whether they can make more money from cash trust funds or credit-sale indemnity fund.
Goehring will enforce the 30-day conversion period, but says it “should almost go to 20 days or zero,” Goehring said. “Very few states operate this way. You sell something in other states, it’s converted that day.”