Work is continuing on a new producer security program aimed at protecting farmers from insolvent grain companies.
The Canadian Grain Commission said earlier this month that it is still hammering out details of the program but it is not clear when it will be implemented.
The commission has been working for months on an insurance-based program to replace the current bond-based system.
“We had hoped to have … that new program in (place) in early 2014,” assistant commissioner Jim Smolik recently told grain producers in Nipawin, Sask. “Obviously that didn’t happen. It certainly has been a little bit more complicated than we first envisioned.”
The producer security program is intended to protect farmers against financial losses that arise when a grain company is unable to pay for grain that has already been delivered.
The new system will be an insurance-based program that requires licensed grain companies to pay insurance premiums, Smolik said.
The existing bond-based system requires grain companies to post bonds or other financial guarantees to ensure that their outstanding debts to producers are covered in the event of a financial meltdown.
The system will assess the risk profile of individual grain companies and determine premiums accordingly. Companies with acceptable risk profiles would be endorsed for coverage under a master policy that provides coverage up to $100 million.
The commission is currently conducting risk assessments.
Atradius, which is providing the coverage, will determine the premiums.
Grain companies with higher risk profiles, poor histories, large grain handling volumes or limited track records in the grain industry can expect to pay higher premiums.
Atradius is based in Amsterdam but has offices in 45 countries.
Smolik said details of the new security program are still being worked out, but producers can ex-pect a program that offers comparable coverage at a lower cost.
Producers who are owed money will likely be covered for 45 days from the date of delivery, down from 90 days under the current bond-based system.
The decision to shorten the claim period was aimed at keeping premiums low while still maintaining a reasonable level of protection for producers.
Coverage for eligible deliveries will be capped at 95 percent, with the remaining five percent retained as a deductible.
Smolik said the commission will act as the producer’s beneficiary.
“If an entity or grain company fails to pay you or goes into receivership, and if you are an eligible claimant, then you will send that information into us, we will do our due diligence … and will then pass that information on to the insurance company,” he said.
Payments on eligible claims will be submitted first to the commission and then forwarded to affected producers.
Licensed grain companies will be listed on the commission’s website.
Smolik said the new system will be easier and less expensive to administer than the existing bond-based system.
The current system requires grain companies to submit monthly liability reports to the commission to ensure that the financial guarantees put in place are large enough to cover current liabilities to farmers.
In some cases, coverage has been well below potential liabilities.
For example, the near collapse of Saskatchewan Wheat Pool a few years ago could have resulted in huge producer losses, potentially in the hundreds of millions of dollars.
Switching to the proposed insurance-based system will also free up significant amounts of grain industry capital that are now tied up as collateral.
“In our current security program … we’re holding about $1 billion right now, whether it’s letters of credit or bonds … or whatever type of instrument the companies are using,” Smolik said.
Federal agriculture minister Gerry Ritz has instructed the grain commission to ensure that feed mills and feed buyers are covered under the new system.
Insolvencies at high profile feed companies, including Puratone, have highlighted the need for better coverage in the feed grain sector.
The grain commission will likely have to determine whether all feed buyers, including small privately owned feedlots and Hutterite colonies, are required to take part in the insurance-based program.
“The minister has asked us to look into that,” Smolik said. “As you know, the issue is going to be, where do you draw the line?”