CGC Bonding VS Voluntary Insurance for special crops

[TOM4CWB]

Much is being made recently about the failures of 3 special crop dealers recently.

As a consultant for the CGC I spent Hundreds upon Hundreds of hours trying to work this situation into a reliable one for farmers but the gov. will was not there to get the job done.

The Insurance system that was proposed, didn't assure any more payment to farmers than the CGC bond does now...

The same basic accounting system was to be used as is used now for reporting liabilities, so there was no benefit there for coverage assurance.

If the amount the dealer had approved in business liabilities was exceeded, then everyones coverage was pro-rated... down till everyone got a little...

Delivery rules were basically the same as for the bond, so insurance didn't make things simpler regarding how long the farmer had to get a cheque and cash it...

All the voluntary system did was down load the cost of bonding directly to those farmers who were in the insurance program.

The farmers who were not in the insurance program had all the benefits of CGC supervision of all the dealers, but didn't have to pay a cent for it... and on top could just demand cash and be paid or not deliver the next load..., or just deal with a large stable company...

These are the reasons the voluntary insurance system was not implemented:

1. The gov. would not backstop the producer for 100% of covered insured deliveries, and neither would the Insurer EDC.

2. The paper work involved was no less demanding than it was for bonding now, and still demanded a high level of finacial information from the dealer, as the bonding system now.

3. An extra level of fees were going to be charged dealers for licensing in the program, to cover the increased administration the new and expanded CGC licensing and financial reporting depts. there were to be created to administer this new program.

The Legislation was past for the insurance system, and it could have easily been changed to solve the above listed problems but...

The Canadian government didn't find this issue of enough importance to fix it and give farmers reasonable protection...

I hope this adds a little light to the subject, as obviously some farmers have been really hurt by the present system, and just because the Canadian gov. doesn't care...

[charliep]

Were any costs (both government and industry level? The reason I ask is that Canada seems willing to spend millions on crop insurance and other safety net programs but not willing to put a least some money into something like this. In the overall scheme, the cost may not be that large.

[TOM4CWB]

Charlie,

The costs were to be all paid for by indusrty, and it would not have taken that much to have got an assured reliable system working.

A 20million dollar fund would have made things work out very well, with an insurance backstop.

I don't think the Canadian government wants to get into this area, because it can be argued it is provincial jurisdiction.

Ontario has a provincial assurance system that was built up by farmers and the specific comodity groups... Alberta even has a cattle payment assurance system, with noting being paid for by the feds.

The reason that it is at least shared provincial jurisdiction is that Agriculture is constitutionally a shared jurisdiction, the reasons that provinces are paying 40% of saftey net programs.

It really looks like the feds want the provinces to pay for part of CGC costs, as these costs have grown over the years.

Provincially Alberta grain producers are not covered at all when selling to:

Seed Dealers and Brokers;
Feed Mills;
Feed Lots;
Unlicensed grain dealers and brokers.

All these grain buyers are under provincial jurisdiction because they normally only buy and sell within the province, and even if they do sell outside the province, they usually sell to other brokers...

Selling to other brokers brings up the other big downfall of the voluntary insurance system, many smaller farmer owned grain process/dealers wanted insurance coverage, that they were willing to pay for, for coverage with other special crop brokers/dealers that were exporters.

I believe that 3 special crop buyers have gone down, because once one is sunk, then a chain reaction happens... the liabilities of the first bankrupt company are receivables for many other grain buyers, and margins are not good enough to be able to write off that much receivables...the domino effect...

So we need more than just an insurance system for farmers, we need it for the trade as well...

It is strange that more people are not interested in this issue, which brings up the issue that FIDP/AIDA does pay for some of these losses, by farmers, if their income drops low enough.

Will the saftey net being developed continue this coverage through enhanced NISA?

[parsley]

Farmers just need to ask for cash up front when the load is delivered.
Parsley

[TOM4CWB]

Parsley,

It may be fine to say this but...

You and I both know that farmers are far too trusting, and don't want to insult the buyer, therefore they don't normally ask unless they themselves are really really tight on cash... then they will ask...

This has to do with trust, and the whole farmer attitude in human nature... we want and need to believe that people are trustworthy and fair, as we ourselves are as farmers, otherwise we likely wouldn't be farming...

Sure 5% of farmers may be shady, but the majority really care for their neighbour...

[charliep]

Many of the problem pulse companies down the road are likely to be farmer owned. Given there are no effect hedging tools, these companies face a lot of risk given both the competition in the industry (too many companies have gotten in recently) and difficulty of matching sourcing from farmers and final sales in terms of price. Even if they can back to back sales, there is still a gap between when the farmer is paid and the plant collects from the customer (assuming paid on delivery). Somebody has to finance.

A question in my mind from the business risk management chapter of the Ag Policy Framework is that gov't (perhaps me included) tells people to do things different but when funds are paid out for income stabalization, they are weighted to traditional ways of doing things. Trying something a different enterprise/value adding involves learning new skills/additional investment - more risk. The farmers who do this are close to 100 % exposed to this risk.

A case in point now is the pulse industry. Are there things that be done to help these businesses manage their risk/cashflow? Is the type of insurance fund against potential payment defaults warranted?

[TOM4CWB]

Charlie,

Just try to get a straight answer from any bank on the finacial stability of any grain company, and they laugh straight to your face... they all won't say anything bad, because if they themselves are involved they don't want to lose even more money by scaring away business... and if they are not there must be some kind of pact between the banks to keep their mouths shut, or they truthfully don't know.

Value added increases risk, as EDC doesn't get into domestic business, of if export is involved, the big multinationals have enough dealings with most importers that they can leverage the money through trading for something else they can sell, therefore reducing the risk for their company.

You are right that the small farm/farmer based processors/dealers are by most at risk.

Why, because they don't take enough margin to cover off problems in normal business, partly because of the co-operative/anti-broker grain trader culture that the CWB and NFU say are ripping off farmers...

I would rather deal with a profitable grain company than one that is loosing money, because one day dealing with the unstable company may mean I don't get paid at all...

But competition is needed, and a heathy industry means that we need to support all the players, and not put all our eggs in one basket... and not deliver more grain to the weaker co's than we can afford to lose...