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Five years lost as farmers wait for better default protection on grain sales

Leaving feed mills exempt from coverage under existing licensing and bonding leaves farmers vulnerable to losses

Doug Chorney

In 2009, western Canadian farm groups submitted a report to the Honourable Gerry Ritz, minister of Agriculture and Agri-Food Canada, outlining options for a program that would provide security to producers when grain buyers defaulted on payments. The main options were fund-based, insurance-based or bond-based programs.

It was not that there wasn’t already a form of protection in place. The Canadian Grain Commission did operate a bonding program, in which it required grain buyers to have adequate levels of bond capital prior to receiving a licence permitting them to buy and sell grain. This bond security had to be set aside to be used if a buyer defaulted on payment to a farmer.

The problem was the program had significant flaws. Producers were dissatisfied because they were often not compensated the total amount they lost. In addition, because feed mills were exempt from the program, farmers who sold to them were extremely vulnerable.

Grain buyers, especially the smaller ones, didn’t like the amount of capital that was tied up in bonding. And the federal government was concerned with the cost associated with administering the program.

Fast-forward five years, and the program used in 2009 is not — as one would expect — a thing of the past. It is still in place because none of the options presented has been adopted.

What happened along the way is the CGC chose to pursue the insurance-based option, but lengthy negotiations with a major insurance player were recently terminated. The reason, the CGC has indicated, is the proposal it received was not in the best interest of all stakeholders.

With the collapse of the negotiations, it is now very alarming the CGC has not informed the industry what the plan is for going forward. Producers selling to feed mills are still particularly vulnerable, with no solution in sight. When Puratone filed for creditor protection several years ago, Manitoba farmers lost hundreds of thousands of dollars.

This is an urgent issue, and KAP is not satisfied with the vague CGC statement that it will continue to look at other options. Producers need to know when this will happen, and that it is a priority.

Some farm groups, KAP included, support a fund-based program where a levy on grain sales would go into a fund to be used when a producer doesn’t receive payment. This type of producer security has been used successfully since 1985 in Ontario, where the fund is managed by a producer/industry board of directors which also administers and adjudicates claims.

If Prairie farmers were to adopt this model, the obvious advantage is that insurance premiums would not have to be paid to a third-party organization whose main goal is to turn a profit. Instead, producer levies would be set to cover administration and producer reimbursement — and that’s all.

The program would initially require a federal government guarantee, as was provided by the Province of Ontario. After a set amount of time — most likely five years — the fund would be robust enough to stand on its own.

Transparency is also a strong selling point for this type of program because producers would know in advance what it costs and what the coverage is. This was a concern with the insurance-based option because farmers had no idea what it might look like, and were dependent on an insurance company to make that call. The fund-based program, on the other hand, would be producer owned and managed.

As I have said, KAP supports this option, but we are not opposed to re-exploring the insurance option or fixing the current bonding system. The point is that it’s critical some form of action be taken immediately. With five years already gone, there is no further time to lose.

In the meantime, I urge the federal government to amend the Canada Grain Act regulations to include feed mills in the licensing and bonding system, so producers can be assured they will receive payment in the event of a default.

Farmers need federal action now, so that another half a decade doesn’t slip by.

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