Plans to develop a commodity clearinghouse for western grain producers have received a big boost from the federal government.
As part of a major restructuring of the Canadian Grain Commission, the federal government announced its intention to end the requirement that elevators and dealers post a security bond to cover liabilities to farmers.
Agriculture minister Gerry Ritz said the change will clear the way for producer groups to develop a clearinghouse or other system to manage risks associated with grain transactions.
The news was music to the ears of the Western Barley Growers Association, which has been working for more than a year to develop a clearinghouse.
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“This is absolutely a positive development,” said Russ Crawford, a Calgary consultant who has been co-coordinating the project.
He said the announcement came as a surprise.
“We felt there was a need for revisions to this whole area, but we never suspected the government would act so quickly and decisively on this.”
The clearinghouse project has been developed with federal money delivered through the private sector risk management partnership program.
The clearinghouse would use money put up as margin by buyers and sellers to guarantee performance on a transaction-by-transaction basis.
In addition to providing security, the clearinghouse system could assist farmers and grain handlers obtain financing by providing 100 percent assurance that the seller will be paid and the buyer will receive his goods as stated in the contract.
Promoters say it would also offer other benefits, such as arbitration procedures, standardized contract rules, impartial conflict resolution and increased confidence between buyer and seller.
Mike Bast, chair of the Western Canadian Wheat Growers Association, which is also involved in the clearinghouse project, said while the CGC bonding system has helped farmers in some cases, “we believe there are far more cost-effective ways to provide farmers with payment protection.”
Crawford said the next step is to find a service provider, most likely one of the existing trading exchanges in Montreal, Toronto, Winnipeg or Chicago.
“We’re looking at people who already understand the world of clearinghouses and exchanges and already have the infrastructure in place,” he said.
Customers will have more confidence dealing with an established entity, and an exchange would be neutral in overseeing the clearinghouse.
“There definitely is a business opportunity here,” he said.
“It won’t be big bucks on transactional security or contract execution, but a clearinghouse creates a lot of marketing opportunities and could provide good financial opportunities.”
Crawford said a clearinghouse provides more security to farmers than the CGC’s bonding system, noting that total CGC payments to farmers to cover losses totalled $12 million over the past 25 years. In some cases, farmers were paid as little as 17 cents on the dollar.
“I think we could see increased business by farmers if they have more certainty when dealing with buyers.”
He said banks and several producer groups support the plan. The most resistance has come from large grain companies that like the existing system.
The clearinghouse group hopes to have a pilot project ready early in the new year.
