Many in the grain industry are raising questions about the value in forcing grain dealers to post bonds to ensure farmers are paid when companies become insolvent.
They are right to do so.
The Conservative government’s strong-arm tactics in rushing its lengthy and complex budget through Parliament without allowing enough time for proper oversight are troublesome, but the part of the bill that would change the Canada Grain Act should not be dismissed.
The act now requires grain dealers to post bonds as insurance should they ever declare bankruptcy or seek protection from creditors.
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This bonding system adds onerous costs into the system, tying up much-needed capital that could be better invested elsewhere. And there are serious doubts as to how effective it is in protecting farmers anyway.
There have been several situations in the past in which bonds held by insolvent companies have fallen short of the amounts needed to pay money owed to farmers.
In some cases, farmers have been forced to accept payments worth only cents on the dollar for amounts owed.
It’s time to explore other options.
Having grain dealers take out private insurance offers one potential solution. This eliminates the need for companies to have a pool of money set aside at the ready for a bond.
By most insider accounts, insurance would cost only a fraction of what companies now put up in the bonding system.
This type of change has raised questions in the agriculture sector about who will pay the costs of the premiums. There are fears that grain companies would pass along the insurance costs to farmers.
In reality, however, farmers are already paying those costs.
As astute business operators, it’s safe to assume grain companies have found ways to ensure that their operating costs, including bonding expenses, are covered in their fees and payment schedules.
In fact, with a more effective and lower cost insurance scheme, farmers could become beneficiaries of some of the efficiencies.
Another option being circulated to reduce risk in grain sales is a clearing-house model, similar to what is used at many stock and commodity exchanges.
These systems safely manage millions of dollars in deals between buyers and sellers, and there is every reason to be-lieve that a properly constructed and managed system would work effectively for farmers delivering grain.
A clearing house is a neutral entity that settles trading accounts, clears trades and regulates delivery and payments. It acts as third party guarantor.
At futures exchanges, all members are required at the end of each day to clear their trades and post enough money to cover their deals. The clearing house is responsible for fulfillment of all contracts.
The finer details of how this type of system would work for grain deliveries would have to be worked out, but it is not difficult to see how something similar could fit the bill.
One possible drawback of whatever system is in place is that farmers would have a learning curve while they adjust.
However, proper business practices, as well as awareness campaigns to ensure farmers know how best to protect themselves, should address those issues.
Making the system mandatory for deals above a certain value would further ensure farmers aren’t left out of pocket.
There seems to be little to lose.
