“The grain marketing environment may be at a point in time where producer payment security is most warranted.”
A report comparing programs to protect farmers against payment defaults when they deliver grain doesn’t reveal any clear winner.
The evaluation also shows the current security system administered by the Canadian Grain Commission (CGC), which the federal government wants to scrap, is a viable option, although it could be improved.
The report, prepared by Scott Wolfe Management for a number of farm groups, including pulse and canola growers and Wild Rose Agricultural Producers, says farmers want protection.
“The grain marketing environment may be at a point in time where producer payment security is most warranted,” the report states, alluding to increased price volatility and the worldwide credit crisis.
MUST BE MANDATORY
It also says any security program adopted must be mandatory. “Buyers will not voluntarily provide producer payment security,” the report says, adding that mandatory participation would reduce the overall costs.
The report also says there’s a role for “a regulatory authority to help ensure there is adequate producer protection in place.”
“Third party administration is important to a complex and diverse industry,” the report says.
Under current Canada Grain Act rules, licensed grain buyers must post security with the CGC to cover what farmers are owed for the grain they deliver.
According to the report, some in the grain industry claim the current program is inefficient. Agriculture Minister Gerry Ritz has said it doesn’t work well enough.
CGC records suggest otherwise. Between 2002 and 2008 farmers received 77 per cent of their money after a buyer failed to pay them. Out of nine cases farmers were 100 per cent compensated in six and in one they received 99.8 per cent. In two cases, farmers were not fully covered receiving just 28 and 51 cents on the dollar.
The report says since 1982, 20 CGC licensees have failed. Payments of $9.3 million were made with the security held by the CGC. The CGC was ordered by the federal government to pay farmers another $3.1 million, bringing total payouts of $12.4 million to an estimated 700 to 1,000 farmers.
Other grain buyers have failed, but there is no reported data on the extent of the failures.
The report says the CGC has made “considerable improvements” in recent years, doing a better job monitoring and auditing grain buyers.
One of the criticism of the current program is that costs are hidden. The report puts the current cost of CGC security at $9 million – $1.4 million for CGC administration, $1 million for grain buyer administration and $6.6 million for companies to post security. The report says the average cost is 23 cents per tonne, based on 40 million tonnes of grain covered annually.
GRAIN COMPANY COSTS
Farmers don’t pay anything directly for the coverage, but they pay indirectly to offset the $7.6 million in grain company costs (19 cents a tonne) through lower grain prices.
“Under the current system, the CGC’s cost to administer the program is approximately $1.4 million, or $8,400 per licensee, or one-tenth of one cent per $1 of average total farm cash receipts,” the report says.
The report compares three other options to protect farmers – insurance, collecting money for a fund and a clearing house.
The report puts the cost of insurance at one cent to $10 a tonne; a fund, which is what farmers in Ontario have, could cost one cent to 20 cents a tonne, while the cost of using a clearinghouse could be 50 cents to $1 a tonne.
The report warns cost shouldn’t be the main factor in picking a program.
Seeking the lowest-cost alternative may lead to selective use of producer payment risk management tools, placing producers at significant risk of not being paid, the report says. [email protected]