Most farmers have been blissfully unaware of how the Canadian Grain Commission ensures they get paid for the crops they work so hard to produce and sell – unless they’ve had the misfortune to deliver to a company that doesn’t pay.
Even then, in most cases their losses have amounted to sweaty palms and restless nights. Since 1982, the CGC has intervened in 20 situations involving a licensee’s failure to pay, and farmers have received most, if not all, of the money they were owed.
The system isn’t perfect. In two cases, farmers received just 28 and 51 cents on the dollar because there was insufficient security posted. And there have been failures among companies not required to be licensed by the Canadian Grain Commission, and therefore outside its jurisdiction.
As well, some crops, such as canary seed and potatoes aren’t covered by the CGC security blanket.
All in all though, it’s not a bad track record. Of the 20 incidences, there has been a $9.3 million payout from the security licensed grain dealers are required to deposit with the commission. There was an additional $3.1 million payment the federal government of the day ordered the commission to pay as compensation for a crop that isn’t currently under the act, so there’s been $12.4 million paid out to somewhere between 700 and 1,000 farmers over the past 27 years.
It is estimated that the current producer payment security system assists in managing the payment risk to farmers of 75 to 80 per cent of the farm cash receipts.
Farmers have been equally unaware of how much this protection is costing them. According to the recent report on Producer Payment Security Mechanisms prepared for a coalition of farm groups, the CGC requires licensed grain dealers to post security of about 1.5 per cent of their outstanding liabilities. As of January this year, there was around $440 million in security posted with the commission’s 166 licensees.
It is estimated that costs the licensees $6.6 million with another $1 million in costs related to licensing, compliance and auditing – costs which are presumably passed on to producers through handling charges.
Grain commission costs for monitoring and enforcement amount to an estimated $1.4 million, which brings the system’s total costs to $9 million or 23 cents per tonne (based on a 40-million-tonne crop.)
Of course, there has been all sorts of griping about its so-called inefficiency related to its cost, mainly from grain companies and Agriculture Minister Gerry Ritz.
Grain companies are understandably reluctant to tie up funds for payment security. And it’s a safe bet they have things they’d rather be doing than submitting audited financial statements and outstanding liability reports for the commission’s scrutiny.
Smaller companies have complained the system infringes on their ability to operate because it ties up too much of their operating capital. Some argue that restricts competition in the marketplace. But strangely enough, if there was no producer security provisions in place, the risk of delivering to a small undercapitalized buyer would be high enough that many farmers would be afraid of doing business with them.
So deregulation could in fact reduce the number of companies competing for farmers’ grain.
The Producer Payment Security Mechanism report found that alternative options, such as an insurance-based model, a producer-financed security fund or a clearing house concept, are plausible. But none offers clear advantages either in cost or effectiveness.
The clearing house model would be voluntary, which is advantageous to some. But it would cost between 50 cents and $1 per tonne to operate. It would be financed solely by buyers and sellers who would pay per transaction as well as maintain margin calls to protect their position.
This report presents a dilemma for Ritz in his bid to “modernize” the Canadian Grain Commission. It underscores that a producer security strategy of some description is crucial to stability for the grain sector, and ensuring there is competition in the marketplace. And it would appear that making participation mandatory and providing regulatory oversight by a third party are the preferred routes.
At a time when global government is moving into a post-deregulatory phase, perhaps the most modern option available to Ritz is to leave well enough alone.