White addresses seed company’s bonding

Posted August 22, 2012 at 6:43 pm

At a recent gathering, I was asked, “How come Anderson Seed Company from Redfield, S.D., didn’t have sufficient bonding to cover grains purchased from producers in the area.”

To answer this question, I visited with Jim Mehlhaff of the South Dakota Public Utilities Commission’s Grain Warehouse Division. Jim stated that the PUC issues two types of licenses.

1) The first license is to store grain-for-hire, which means a license to store grain with producers retaining title to the grain. This is like putting money in a bank.

2) The second license is a grain buyer’s license, which is necessary when producers sell grain to a purchasing agent and the title to the grain passes to the buyer at that time.

The bonding on the stored grain license, also called a warehouse license, is a minimum of $25,000. Beyond that, you must be bonded for 50 percent of the market value of grain stored. These bushels and the cash value it represents must be reported to the PUC on a monthly basis (Example, 100,000 bushels corn @ $6.00=$600,000, requiring a $300,000 bond.)

On the grain buyers’ license, the license is based on the value of the average purchases for the last three years. This number is then applied to a grain buying formula: If you buy less than $2 million worth of grain, you must have a $50,000 bond. If you buy $2 million to $10 million of grain, you must have a $100,000 bond – which is at the Anderson Seed level. If you buy $10 million to $25 million, you must have a $200,000 bond, etc.

The purpose of a bond was never to make producers whole in the event of a failure; instead, the purpose of the bond requirement is to bring forth the added scrutiny of a surety company to reduce the likelihood of a failure.

Before a class-A grain buyer license is issued, the PUC does an in-house analysis of the audited or reviewed financial statements of the applicant. The surety company’s review of those same financial statements is a valuable tool in scrutinizing the financial stability of an applicant. Internally prepared equity statements are not acceptable for licensure. The financial statements must be prepared by an independent or certified public accountant at the review or audit level. Detailed financial statements prepared by a grain commission or management firm in accordance with generally accepted accounting principles are also acceptable. Therefore, bonding is intended to be a preventative tool rather than compensation for losses guarantee. Discussion regarding the bond levels and intent was part of the legislative process which established the current state grain laws.

This system has worked well through the years as South Dakota has experienced very few grain buyer failures compared to neighboring states. However, the Anderson Seed Company insolvency has demonstrated the need for more current financial information. Producers also need to be more diligent in reporting cases of non-payment. Many of Anderson’s open payable were significantly more than three months old when the PUC received notice of nonpayment. Had the commission been notified sooner, it would have triggered action sooner—reducing producers’ losses.

Mehlhaff relayed the PUC commissioners will be proposing legislation requiring license applicants to provide more current financial information and set tougher penalties for buyers failing to pay producers for delivered grain. He will look forward to working with them to strengthen protections for our producers.

Thank you for the opportunity to be your District 22 House of Representative. You can continue to reach me at 350-5127 or rep.white@state.sd.us.