Risking it

FARGO, N.D. - Two farmers who in 2003 helped create a self-funded indemnity fund that protects farmers when a grain buyer goes broke, say that that fund has been cut when it should have expanded.

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FARGO, N.D. - Two farmers who in 2003 helped create a self-funded indemnity fund that protects farmers when a grain buyer goes broke, say that that fund has been cut when it should have expanded.

A key legislator who sponsored the bill to cut the fund, says it's adequate, but that he doesn't know whether he would have cut it if he'd known how much grain prices would change.

Mike Clemens, a Wimbledon, N.D., and state Rep. Phil Mueller, D-Valley City, say that - especially with record-high grain prices - farmers may be sorry the 2007 Legislature cut the fund from $10 million to $6 million.

The two have a personal perspective on the risk, involving grain and farm input businesses.

They were among those stung by Wimbledon (N.D.) Grain Co., which was declared insolvent by the Public Service Commission in early January 2002. Different farm accounts had different levels of exposure.


Wimbledon Grain customers owed money for stored grain were paid $2.5 million. The farmers hired an attorney to retrieve $625,000 in unsigned and forged contracts. The North Dakota Public Service Commission helped farmers receive another $170,000.

But after that, about 36 farmers still were owed another $1.2 million in unsecured credit sales contracts. They had delivered grain and made arrangements to price it later - effectively turning over title to the elevator. Common examples are deferred-price and delayed-price or deferred-payment contracts.

Clemens and Mueller spearheaded a group called Wimbledon Grain Farmers Group, which went to North Dakota Supreme Court and ended up achieving some 33 cents on a dollar on price-later contracts.

Some 36 farmers owed money on credit sales contracts. A typical credit sale turns title over to the buyer and the buyer agrees to pay the farmer more than 30 days in the future.

Mueller says he was personally on the hook for $125,000 at Wimbledon Grain.

"We did better than I thought we would," Mueller says, adding, "It wasn't a lot of fun. It was a full two years before we realized one nickel, and that was after we paid out a lot of money for legal counsel."

Clemens says he was owed about $140,000 in deferred contracts. In addition, he'd made early payment to Wimbledon Grain for $33,000 in chemicals that were sitting in a warehouse, unavailable to him.

"When it came out in the wash, the grain was one issue and the fertilizer and chemical was a different issue," says Clemens, who has since served as president for the North Dakota Corn Growers and the National Sunflower Association.


Since then, Clemens says he's become more wary about delivery of chemicals from his suppliers. He now picks up his products within 10 days of making payment and puts it in his own warehouse.

Self-funded insurance

Mueller says farmers in the Wimbledon Grain deal were hurt by the loss. Two or three of the farmers no longer are in business.

"I don't know if that was the entire reason, but they were young enough and viable farmers," Mueller says.

In the 2003 legislative session, Mueller went to work to help farmers in similar situations.

He checked in surrounding states for laws on the books and helped create a law that he thinks is one of the best.

Essentially, the law required that two-tenths of 1 percent of the value of a credit sale contract must be collected by the elevator and sent to Bismarck, N.D., where a state fund is kept under the management of the Bank of North Dakota.

"If you put $1,000 on a credit sales contract, you owe $2 to protect that and make sure you got it back at the end of the day," Mueller says.


The fund was to be collected until about $10 million is in the fund. Then, collections would stop.

If there were elevator insolvencies and claims against the fund, the collections wouldn't resume until the fund was depleted to $6 million. The North Dakota Public Service Commission, which regulates elevators, is in charge of the fund. An individual farmer could receive up to 80 percent of a loss from an individual insolvency.

As of January, the fund had increased to $5.6 million, according to Sue Richter, PSC's director of licensing. In the fourth quarter of 2007 alone, the fund had accumulated another $827,000, representing credit sales contracts of about $414 million.

Richter says it's likely the fund will hit the $6 million cap after the first quarter funds are included. Those aren't due until April 30.

"This past quarter would have just about paid for the loss at our elevator," Clemens says. "I sure wish that would have been in place when our elevator went under."

That figures the 1.2 million in credit sales protected at 80 percent level.

In 2007, the fund paid out about $110,300 in an insolvency of Minnesota Grain Inc. in Rhame, N.D. Four farms received payments ranging from $12,050 to $67,223.

One of those four was Mike Madler of Madler Brothers of New England, N.D. Madler says his farm received $18,837 from the fund.

"I wouldn't think they'd want to lower that" fund cap, Madler says. "With the higher price of commodities, you're going to need more to cover those losses instead of going back the other way. With the volatility in the market right now, there's more of a chance of an elevator going belly up."

Philosophical difference

Rep. Craig Headland, R-Montpelier, was the prime sponsor on the bill that cut the fund to $6 million. Headland says he'd tried to cap it at $4 million, but doesn't know whether the current price run-up would have changed his mind about cuttinng the fund.

The cap level is a philosophical difference, Headland says.

"You have to be somewhat responsible for decisions you make, in handling your money," he says.

As a farmer, Headland says he got tired of paying into the fund, and he talked to elevator operators who were tired of collecting it. He says that while smaller elevators and specialty crop buyers are more vulnerable, many of the credit sales deals are with large companies.

"If we have to worry about ADM or ConAgra - some of these large facilities going broke on us overnight - this whole agriculture business is going to find themselves in some trouble," he says.

Headland notes, however, that he was the prime sponsor on a separate but related bill that put the fund under the state treasurer's management, allowing a higher interest rate than when it was at the Bank of North Dakota.

Mueller says it's possible he'd work to restore the original cap of $10 million or even increase it.

"The value of our commodities have skyrocketed," Mueller says. "But there's always another side of these good times. We have elevators out there with an immense amount of dollars on the books. And if they go insolvent, they go with an immense amount of money - with commodities or grain - in their storage."

Mueller says ethanol companies are a new kind of player in the mix, creating large storage of grain and subject to industry downturns or even plant shut-downs. If those plants go out of business, the fund could help farmers who delivered grain there on credit sales arrangements, too.

Clemens says it's hard to describe the impact of being involved in an insolvency.

"Until you've been down that road - until you have your elevator go insolvent - you don't know what that impact will be," he says.

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