Ag producer security rules being strengthened

Jan Shepel

Subhead: Funds intended to protect farmers in case of processor or grain dealer default

Madison — The state’s rules that protect producers of grain, processing vegetables and milk in the state are being updated to make sure there is enough money in each of those industry funds to protect farmers, but not so much that it hurts processors.
            At a meeting December 6, the Agricultural Producer Security Council, which includes industry representatives that offer their advice on the program, pored over a draft scope statement (the first step in official rulemaking procedures) and a proposal for legislative action that outlined changes that would need to be made by lawmakers to tune up the statute that governs the producer security program.
The Wisconsin Department of Agriculture, Trade and Consumer Protection is in charge of the rules that put in place how the state law for producer security is administered. The program, which has been in place for decades, is called into action when there is a default or situation of non-payment that leaves producers unpaid for milk, grain or vegetables that they have delivered for processing.
The Agricultural Producer Security Fund is set up as a public trust administered by DATCP. Separate funds are managed by the department for milk, vegetable and grain producers. Money comes into those funds from milk and vegetable processors and grain dealers. They must purchase a license from the state to operate and most contractors are required to pay into the fund annually.
Sometimes the program faces the challenge that the funds have fallen below minimum amounts set up by lawmakers. In 2014, a default by Allens Inc. caused the fund to pay vegetable producers more than $6 million. That means that the vegetable processor portion of the fund is currently well below the threshold of $800,000 set by law.
Then in 2015 a $1 million default in the dairy business further drew down the fund. Those two defaults were among the reasons the department set out to evaluate the entire producer security program. An outside firm was hired to do an actuarial study to examine the overall sustainability of the fund and analyze how equitable the assessments were from each of the three industries relative to anticipated losses.
 Sometimes there’s too much money in a given fund because there has not been a need to pay producers, and processors would like to have the chance to stop paying into the fund.
The scope statement, which is still considered a “draft” because it needs to go to the governor’s office for approval first and then to the department’s citizen policy board, would modify the current administrative rules to increase vegetable contractor assessments, as required by statute, to address the part of the Agricultural Producers Security Trust Fund that is currently below its minimum threshold.
Eric Hanson, chief of the department’s Producer Security Division, said the proposed scope statement for rule changes and the proposal for legislative action are based on the results of the actuarial study and on recommendations from the advisory council.
Several stop-gap emergency rules were passed by the department to manage the fund while the study was being done and while permanent rule changes were considered.
The department plans to consider how possible future defaults and payments to and from the fund would impact the fund’s balance thresholds and fairness between industries, Hanson said.
At this point the vegetable portion of the fund is too low and the study’s conclusion was that without a significant increase that vegetable contractor portion of the fund balance would remain negative for the foreseeable future. But the overall conclusion of that study was that the fund was sustainable in the long term, while adjustments would be needed to assessments or individual fund balance thresholds “to provide more equity across all industry segments.”

Need to rebalance funds

Jeremy McPherson, director of the Bureau of Trade Practices said that what the department is seeking is the ability to rebalance the funds. In general, the intent of the draft scope statement is to increase the assessment on vegetable contractors to shore up that fund and to lower the assessment on dairy processors.
In addition to the draft scope statement, the council last week looked at a draft proposal for legislative action that Hanson and McPherson have been working with lawyers and legislative specialists on. The working title of the proposed law – which would be a stand-alone item, not something rolled into a larger bill like the state budget – is Modernization of Agricultural Producer Security.
It amends several sections of the old law Ch. 126. It also does the following:

  • Combines fund balance thresholds for grain dealers and grain dealer warehouse keepers;
  • Allows milk contractors to enter into deferred payment contracts with milk producers;
  • Provides an exemption for vegetable processors that spend less than $15,000 per year to procure vegetables; and
  • Updates requirements for producers filing default claims.

McPherson said the change combining fund balance thresholds for grain dealers and grain warehouse keepers was suggested by the actuarial study, noting that these balances would benefit the fund as a whole without significantly impacting fees. The grain warehouse keeper segment of the program is very small so the danger in not combining it with the larger grain dealer fund is this – one default among the small number of warehouse keepers would have a significant and long-term impact on the remaining grain warehouse keeper license holders.
In the dairy business state law now requires that milk contractors (dairies and cooperatives) pay dairy farmers by the 4th and 19th of each months for the previous month’s milk. The second proposed legislative change would allow a portion of dairy farmers’ milk checks to be deferred beyond the current statutory requirement.
Hanson explained that due to the volatility of milk prices some producers would prefer to have a portion of their income deferred to a later date. But allowing for these deferred payments increases the default risk to both producers and to the fund. As part of its package of rule changes, the department wants to establish a deferred payment assessment to cover this risk.
McPherson said that this change brings Wisconsin in line with surrounding states that currently allow for this type of arrangement and will benefit producers who want to use this as a cash management tool. Similar provisions are already in place for the grain industry.
The council spent a lot of time discussing this legislative change because, as John Umhoefer of the Wisconsin Cheese Makers Association said “milk is very different from grain.”  McPherson noted that with grain, both parties know how much grain is delivered. With milk, the quantity isn’t entirely known.

Council supports changes

The danger in spelling everything out in the rule or in law is that it might exclude some of the contracts, Hanson said. After some discussion the council registered its support for the general outline of the legislative proposal and scope statement with the stipulation that the department address some of the concerns discussed at the meeting.
Council chair John Manske asked members if they thought the rule and legislative package were headed in the right direction and they voted “yes.”
There is a push to get lawmakers to make these changes before May 1, 2017, McPherson said.
Another change proposed in the draft legislation would affect producers caught up in a default of their processor. First, the department would be granted the authority to deny any producer’s claim against the fund if that producer fails to file a claim in a state receivership or federal bankruptcy action of their processor. This change is being sought because if the farmer fails to file for those rights in a receivership or bankruptcy proceeding, it can jeopardize the department’s ability to file its own claim to recover money paid out of the fund.
The proposed legislative change also cleans up some vagueness about whether or not the rights of farmers in such cases also flows to the department and the producer security fund.
In addition, Hanson explained that the legislative proposal would exempt certain small vegetable contractors from having to get a license and pay assessments into the fund. Two charitable groups were mentioned – Porchlight and Our Lady Queen of Peace -- that buy small amounts of vegetables for processing.
“The vegetables that are going to these processors are primarily from fresh market sellers with extra produce to sell and they sell it to these folks for processing,” Hanson said.
The proposal would exempt vegetable contractors like these who spend less than $15,000 per year to procure processing vegetables from growers.

Ag producer security rules are being strengthened.