Ag Clearing Insert in the Western Producer

[charliep]

I would encourage everyone to read the insert in this week's western producer. For anyone involved with the project, is the insert available as a PDF elsewhere for those who do not get the Producer?

Information on the ag clearing concept can be seen at:

www.agclearing.ca

Thoughts? Questions? Concerns?

[charliep]

Contact information for the program (including a request for the insert).

info@agclearing.ca

Phone - 403 912 3998

[charliep]

Here are thoughts (from WBGA thread):

TOM4CWB posted Feb 23, 2008 15:55
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Charlie,

You will have to explain the margining requirements to me:

So

If I see 500t of Canola for fall 08 to someone/grain co/processor... I must margin the sale as a grower?

And if I want a grain buyer to buy my produce... and they refuse to be a part of the Clearing House... what exactly do I do then?

I must put up security... and the buyer must put up security... double the security required that we deal with currently.

And people think the present CGC bonding requirements are too problematic... and costly!

The Clearing House will cost 4X as much... with 4X the paperwork.

They projected 16mmt to make the Clearing house work @ $1/t plus security.

Then there is all the extra work on paper work. Then all the legal fees to fix problems when they occur.

I project western Canada would be fortunate to have 4mmt secured through this system... and at least $2.50/t.

The grain co's can bond through the present system... for less than 1/10th of this cost... and we have mediators t the CGC on staff... without extra cost to either farmer or Grain Co's ... to mediate and resolve security and payment issues.

Then there is the need for a backstop and start up funding... that is needed from Government... to even start the Clearing House.

This is NOT free enterprise.

This is re-regulation that is going to give a different group o people jobs... paid by the taxpayer... and many times more cost... being paid by growers and grain buyers.

Or the most likely case...

NO security at all.

Throw the 49th open... I will deal with bonded US grain co's/warehouses... if CDN's will not provide decent services.

[charliep]

Will post the Ontario alternative to protecting transactions.

http://agricorp.com/en-ca/programs/gfpp.asp

[TOM4CWB]

Charlie,

The WBGA past a resolution, that I supported, that we attempt to get the Ag Clearing functioning.

If the CGC Bond is left in place, there is still 30mmt that could be put through the Ag-Clearing system... that is NOT covered by CGC bonding now.

These are basically CGC exempt sales... that are primarily sales within the province you produce in.

If we could get the Ag-Clearing Security system to function in this sales area... THEN I would be much more satisfied that it could also work on Inter-Prov./Export Grain Security, with CGC authority to back the Ag Clearing in the trade and commerce authority it would take... to have proper and effective rules for the Ag Clearing Security System.

I am not at all opposed to change. I do loathe change just for the sake of change... while in the same breath loosing good viable systems that have served many well.

I have not know of anyone going to JAIL... over a CGC Bonding issue. Growers have won virtually all cases... before recent gutting by Goodale that needs to be reversed... to make CGC Bonding activity better motivated.

KEY MESSAGE;

VOLUNTARY Bonding, Ag-Clearing Security, and clear notification when dealing with those grain dealers who choose to have no Security. Marked on the Grain Receipt.

1.)CGC Bonded
2.)Ag-Clearing Security
3.)NO SECURITY or BONDING.

The grower and the grain buyer decide.

If more than $10M in purchases as a grain purchaser... must provide and opportunity for #2. if #1. is not in effect...at the grain growers call... no questions asked. The CGC Act would be needed... to enforce this clause.

[TOM4CWB]

Charlie,

Want to know what ripps me the most?

The CGC, THe CWB, and the Agents of the CWB stealing wheat and barley from grin growers in the "designated area" at -half- !/@, 1?2, HALF of its FAIR MARKET VALUE.

If only they could stop all 'designated area' samples from leaving the slaves coumpound... they could keep the slaves quiet.

Too Bad Fedex exists... for the Agents of the CWB!

[padron]

I’m going to respond to some of the comments and questions regarding the clearinghouse but before I do that I’ll come clean on my identity. “Padron” is Russ Crawford, the WBGA’s consultant on the clearinghouse project. I’ve been working on this project since its inception, and well before that time on this concept, as well as other electronic exchange and clearinghouse projects – including AgraLink. As much as I believe in the value of these tools I’ll try to confine my comments to facts we have discovered as part of this project’s process and leave my opinion out of my responses.

[padron]

Re Margining

Posting margins in a clearinghouse is no different than posting a margin to trade futures. You make an initial deposit and then respond to margin calls as your position is affected by market moves. The critical distinction is that if you get a margin call for a futures position it means you are losing money. If you get a call for a clearinghouse margin it simply means your contract is offside with the market and you must post performance security. Your margins are returned when you make delivery - or pay for the commodity – depending on which side of the deal you are on. In every case the only cost for margining is interest on the capital. It is never at risk as long as you perform on the trade. This is why lenders like the idea of securitizing inventory and are much more inclined to consider it as an asset rather than a liability as they currently do. If your open contract position is favourable to the market no additional margins will be required. Only one side of the deal will pay variance margins and, as stated, these will be returned.

Because clearing is transactional based rather than entity based margins are only required if risk exists. This introduces a much more efficient approach to transactional risk management. Bonding was required to cover the worst case scenario all day, every day. It created a cost of $4-5 million to the industry to cover annual average losses of $550,000. No good businessman would invest in or even condone this type of waste. No wonder a private sector entity has opted not to introduce a competitive alternative to bonding.

Grain companies are very familiar with clearing and posting margins. They do it every day on their futures positions and their financial activities. Its good business. It introduces a much more professional approach to grain transactions by introducing more efficient cash flow and centralized credit.

Clearing will cost more than bonding but it is voluntary, targeted and vastly more comprehensive in benefits than bonding. Buyers and sellers will have to decide for themselves if features like performance guarantees, standard contracts, price transparency, arbitration and dispute resolution, reduced financing costs and enhanced marketing opportunities are worth more than the miniscule and uncertain benefits bonding offered to some producers.

And don’t worry about the paperwork Tom. Much of this is automated – or will be – and the service provider will decide if the income justifies the expense - a novel concept in agriculture for everyone except farmers it seems.

[padron]

Re Backstop funding

Just to be clear, the project has proposed a solution to address the fact that a clearinghouse needs a backstop from Day 1 and this can take time to build. Other clearinghouses rely on member equity or an insurance policy. In order to attract an investor we felt it would help to have some form of transitional funding in place until such time as the clearinghouse has sufficient equity of its own to guarantee performance. The key word here is transitional. EVERYONE we polled felt it would be best if the clearinghouse was not operated by the government or a participant in the industry. Impartiality was critical. So the backstop is a temporary guarantee to help get things rolling but it definitely includes an exit strategy. No new jobs paid for by taxpayers.

One has to realize that the government is currently footing the bill for payment guarantees via the CWB initial payments and the CGC bonding. This is a poor use of taxpayer money. The clearinghouse project gives them an opportunity to get out of the business and leave a legacy of private sector risk management products at a time when their very actions may introduce more risk – removal of barley from the CWB’s exclusive control.

[padron]

Comparing Ontario’s Agricorp to clearing

I’ve done some research on this Charlie and discovered that their system is very similar to bonding although delivered in an entirely different way. Agricorp collects a portion of the producer association check-off on every tonne delivered into the commercial system. The rates vary from 1/10 of 1 cent on corn to $.20/tonne for canola. The money is held in trust and paid out if a dealer fails to pay. Both bonding, and Agricorp’s check-off fund, approach protect primary sellers only and only from the time of delivery until payment clears. Both “react” to a problem as opposed to “preventing” it from happening. And both approaches incur annual costs that greatly exceed the benefits they pay out on a yearly basis. In fairness, a major failure such as the Enron collapse in energy would require sums in excess of what is currently held but one still has to question the method of securitization when clearing exists.

In Ontario the reserve fund is in excess of $10 million. This is farmer money held in a fund adding no value to the industry beyond “peace of mind” that it is there if someone craters.

Agricorp does a lot of other useful things for agricultural producers in Ontario. The Grain Financial Protection Program is one of many services they administer including CAIS, Advance Payments and Production Insurance. But you really have to ask yourself once again “Is this the best use of producers’ money?”

[parsley]

Such clear information.

Thank you.

Parsley

[TOM4CWB]

Padron,

My word is my bond.

The majority of grain growers are exactly the same way as I am.

When a S-Bee leaves my yard.... I am often a month without seeing a cent. No official paperwork.

The CGC requires Grain-co's to pay me... and pay fair... or it is FRAUD.
They, because they are licensed, and security is part of that license... are required to pay me under the CGC Act within 90 Days.

Trucks are moving interprovincially and internationally.

Good luck... tracking your load down... and paying the legal fees trying to collect... with no CGC Act to back up your rights as a grain grower to that grain!

RISK.

We would think it is smart... to save $1M/yr. to Risk $$$ Billions like happened in Enron and Worldcom?

Where the $b's are.... without regulation... involving trusting and caring folks like grain growers...

WE are perfect objects for SCAMs and Thieves... and the most vulnerable of any segment of Canadian society to unscrupulous people... simply because our word is our bond as grain growers... and we naturally expect others to be like we are.

This is why the CGC Act has had security in it... for over 100 years.

We both know this Russ... now lets do the right thing!

Russ; Go after the 20mmt of unbonded grain... and prove the system works in this market!

Domestic sales are at risk just as much... and CGC exempt in just about all cases!

If we can make this system function well here... then we can consider International Grain Trade!

[TOM4CWB]

Tom
still at a bit of a loss for your concerns. AgClearing may not fit your needs. It won't cost you a cent if you choose not to participate in it. If you choose to use your word as your bond on a deal, as I have too, then you know your buyer and have that level of trust there.
AgClearing will work excellently into the future where more and more producers choose to market their own grains. By having the support of the financial institutions knowing that the clearing house 100% secures the contract, will free producers from the risk of a lost truck, or complete transaction failure.
For you Tom it might not be an answer, for a solution to the removal of bonding under the CGC I believe it is an excellent choice.
Erik

[Kodiak]

Tom4CWB

Would you sell grain or a specialty crop to a buyer who:

1) For reasons that are not apparant, is offering a significantly higher price than other buyers?
2) Refuses to clear the transaction through a clearing house such as the one discussed here?
3) Is managed by someone you did not know, or is new to the business?

[charliep]

Just a couple of couple of other thoughts.

Has anyone thought about the risk side of transactions in today's environement. A "B" train of feed barley is worth about $8,000. A "B" train of canola is worth about $25,000. If red lentils are worth 40 cents/lb, a "B" train is worth about $35,000.

On the paperwork, I assume the paperwork will only be critical if there is a dispute. What steps do you take today to document sales agreements/contracts? Who writes the contracts/sets the terms? What will be different with the clearing house except that more rigor and process will have to be applied including registering the trade? With the improve confidence in contract execution(both for you and your banker), maybe the extra (perhaps discipline and rigor) will be worth it?