Legislation to create indemnity fund aims to make grain sellers whole when buyer fails

Martin Phillips, who operates Blue Sky Farms south of Mankato, had an organic corn contract with Pipeline Foods. But less than two weeks after he made his last corn delivery, he was informed the company had filed for bankruptcy.

The result was a loss of $121,000.

It crushed his farm’s credit rating, lifeblood for a farmer, and wiped out any profits earned the previous few years.

Minnesota requires grain buyers to purchase a bond as insurance against insolvency. But payouts are often woefully inadequate to cover the money owed, perhaps 10 cents on the dollar. And if the money comes, it may be months or years overdue as sellers wait in line among other creditors. 

The solution, say supporters of HF2718, is a grain indemnity fund operated by the Department of Agriculture where sellers could receive between half and all money owed when a grain buyer fails.

The House Agriculture Finance and Policy Committee approved the bill Tuesday, with three amendments offered by Republicans, and sent it to the House Judiciary Finance and Civil Law Committee.

“Much like a bank, grain elevators hold community wealth,” said Rep. Ethan Cha (DFL-Woodbury), the bill sponsor. “When they go under, Minnesota families and communities are hurt.”

The indemnity fund would be comparable to the Federal Deposit Insurance Corporation that protects depositors when a bank fails, said Brian Herbst, a farmer who lost $350,000 when Pipeline Foods failed.

To start, the grain indemnity fund would get $5 million from the General Fund. Premiums of up to 0.2% on grain sales would be paid until the fund reaches $15 million and would cease until the fund falls below $9 million. A similar bill in the Senate has proposed starting the fund with $15 million from the General Fund, and Rep. Paul Anderson (R-Starbuck) unsuccessfully offered an amendment to match that amount.

Premiums to participate would be less than $20 on $10,000 market value, though $7 per $10,000 is more likely, Cha said.

Those opting out of the program would apply to the Department of Agriculture for a refund on premiums paid. Farmers could opt back into the system with a delay on claims to prevent gaming the system.

Cha said it is time to step up and protect families, following the example of 14 other states, including Iowa and Illinois.

Opponents, including the Minnesota Farm Bureau, balk at premiums paid through grain sales and at an opt-out process at the back end rather than before premiums would be paid. Others expressed worry the fund could encourage overly risky behaviors and doesn’t address the root cause of insolvencies.

“Without comprehensive preventative measures, grain buyers and warehouse operators have latitude to engage in speculative risk management practices and be highly leveraged in volatile markets at the expense of farmer capital,”  wrote Rick Dusek, executive vice president of country operations at CHS Inc.