The federal government has tabled legislation that will transform Canada’s producer payment security system.
Bill C-48, the Modernization of Canada’s Grain Industry Act, paves the way for the Canadian Grain Commission to create a producer compensation fund to protect growers when a licensed grain buyer fails to pay for deliveries.
“That’s good news for producers,” said Rob Brunel, chair of Keystone Agricultural Producers’ grains, oilseeds and pulse committee.
The farm group has been pushing for a fund-based system ever since Scott Wolfe Management recommended it as the most efficient payment security option in a 2009 report.
The fund would replace the existing bonding system, which is capital intensive, expensive to maintain and has failed to adequately cover growers when grain companies have gone under.
“It’s a positive step. Nobody was really satisfied with the bonding in the current state, so I think the fund mechanism has promise,” said Brunel.
The Canadian Grain Commission had been exploring an insurance-based option that was supposed to be in place in time for the 2014-15 crop year, but that option was derailed when negotiations with Atradius Credit Insurance fell apart in July.
KAP president Doug Chorney wrote an opinion piece that ran in The Western Producer in September that was critical of the commission’s failed attempt and pushed for the adoption of a fund-based system.
At that time he had no clue the government was contemplating Bill C-48.
“I didn’t know it was even in the works. It was almost like they wrote it after reading my op-ed,” he said with a laugh.
“Hats off to them for taking the lead on this and listening to farmers.”
Brunel was also blindsided by the government’s quick response to the failed insurance-based scheme.
“There really wasn’t an inkling. In some ways, it did catch us by surprise, but it was a good surprise.”
Details about how the fund will work are scant. The Canadian Grain Commission was contacted for this story but nobody was available for an interview.
According to a government press release, licensees would contribute to the fund based on their expected risk of failure and volume of grain purchases.
They would essentially be pooling the risk of payment failure rather than putting up individual bonds.
“The hope is this system will remove costs from the payment security options and make it more affordable,” said Chorney.
“Even though the licensees are the ones who are supposed to be paying into this fund, we know it will all come out of the farmers’ basis levels.”
The current system requires a significant amount of capital in the form of bonds or letters of credit.
The 2009 report by Scott Wolfe Management determined that $440 million was tied up in security with the commission at that time. The report estimated the system cost the grain industry $9 million a year to operate.
There are some estimates that the amount of capital tied up today has blossomed to $1 billion. Despite the huge dollar amount in posted bonds, there have been a number of cases where there wasn’t enough security to fully cover producers.
“Over time there has been some pretty major holes in this mechanism,” said Brunel.
He believes a fund would provide better coverage, but he hopes Ottawa will rely heavily on producer input in developing the new system.
“What we would like to see going forward is that there is broad consultation from the grain commission and from the federal government about how this fund will work and who will manage it and what it will cost,” said Brunel.
There are many outstanding questions:
• What period of time will it cover for outstanding payments?
• Will the fund be commodity specific or industry-wide?
• What crops will be covered?
• Will there be flexibility to add new commodities?
The biggest outstanding question for KAP is whether feed mills will be covered under the new system. They are not covered under the existing bonding system, and that has been problematic.
Manitoba farmers lost more than $1 million when Puratone went out of business two years ago.
“We definitely would like to see feed mills included in this,” said Brunel.
Bill C-48 does expand the program to include container-loading facilities.
Brunel is also concerned about the potential lack of transparency with the way fees will be collected from licensees and how those costs will be buried in the basis.
KAP wants the commission to publicize the rates it is charging grain companies so farmers can calculate the real basis they are getting.
Brunel has heard that the government wants to have the fund in place by the start of the new crop year on Aug. 1, 2015.
The other main feature of Bill C-48 is that it extends producer access to binding determination of grade and dockage to include process elevators, grain dealers and container loading facilities. Currently, that right is limited to licensed primary elevators.