Grain Elevator Failure Prompts Talk of Safety Net
In Nebraska, farmers say they’re left with about $9 million in unpaid claims when a grain elevator failed in the town of Pierce. It looks as if farmers’ losses could eventually top $4 million.
Without a financial safety net to depend on, farmers are watching this case in eastern Nebraska. They’re looking for lessons in order to avoid another massive financial wreckage in the future.
All over the Midwest, farmers sell their harvest through local grain elevators. They truck their crop to the elevator where it’s weighed and readied for transport, then they wait for a check representing months of work to arrive in the mail.
But that didn’t happen in Pierce.
Regulators from the Nebraska Public Service Commission (PSC) revoked the Pierce Grain Elevator’s license to operate in March after it became clear the owner, Brian Bargstadt, no longer had the funds to pay off expenses. The elevator had defaulted on a pair of loans from Citizens State Bank and ran out of money.
How badly did the closure hit the community?
“It’s going to be tough,” according to Pierce County commissioner Jim Maas. “I think you’ve got some pretty upset people.”
Farmers who did business with the Pierce operation filed claims for $9.7 million, according to the PSC. Selling the corn and soybeans seized after the closure will only raise about half of that amount.
The elevator owners also held $880,000 in bonds, purchased to cover claims in the event the business closed.
John Fecht, director of the Grain and Warehouse Division of the PSC, expects those farmers who can document that they were storing grain at the Pierce facilities will get most of their money back. Those who had their grain sold by Bargstadt may only get 10 cents out of every dollar from the sale proceeds they anticipated. Those claims exceed $4 million.
“The bond isn’t very adequate for all this grain when you’re dealing with that many dollars,” Maas said. “It was not adequate.”
There are a number of people who agree, but there are competing interests among agribusiness interests about who should put up the money for that protection.
Nebraska state law requires anyone who stores or ships grain be licensed and purchase a corporate surety bond. The bond must cover at least $25,000 in potential losses. The maximum bond would cover $500,000. Elevators are also required to have insurance against loss of grain.
John Meuret, an elevator operator and board member with the Nebraska Grain and Feed Association, says the bonds are intended to protect customers.
“It basically says in the event of a default that bond will be split up between the people who had a shortfall,” Meuret said.
In the Pierce failure, the $880,000 in total value of the bonds held by the owners for their three locations falls far short of matching losses faced by its customers. The cost of requiring a higher bond, as some farmers advocate, would be the responsibility of the elevator owners.
“If its $5 million, you would have to have a $5 million bond to get everybody cleaned up,” Meuret said. “That becomes expensive and really cost prohibitive for the elevator to do.”
A proposal for a farmer-funded insurance program does get the support of many grain elevators.
“The indemnity fund is actually money taken out of a corn check from the producer and put in a separate fund,” Meuret explained.
In states that have a similar program, elevator customers could be protected from loses up to $25 million.
“That money is just there in case of a shortfall like this, but it all goes back to the farmer in the event of a default,” Meuret said.
These funds are in place in Iowa, where they are called indemnity funds, and in Illinois where it’s called crop insurance. Unlike the farmer-funded proposal forwarded by Nebraska elevator operators, both states rely on grain sellers and storage facilities to pay for the protection.
That approach has not had the support of major farm organizations like the Nebraska Farm Bureau.
“In Nebraska every time that has come up there has not been a whole lot of support for trying to do something like that,” said Jay Rempe, the Farm Bureau’s lobbyist.
Farmers ask why growers, rather than the companies which manage the elevators, should pay into a fund that farmers don’t need unless the elevator makes a mistake, Rempe said.
“An elevator, knowing that they have a back-up, might engage in more risky behavior in the marketplace than they ordinarily would because there is this fund that they know would back them up,” Rempe said.
There have been no allegations the PSC overlooked anything in the last two major elevator failures in Nebraska. An examination of the Pierce Elevator’s condition in July 2013 showed “no issues” according to Fecht.
“Pierce was all right at the time,” Fecht said
One thing both farmers and elevator operators agree on is the need for producers to keep closer tabs on their business partners.
“Know who you are doing business with,” said Meuret, of the Nebraska Grain and Feed Association. “If the farmer understands the elevator's business I think it helps everyone in the industry.”
The courts are the last resort for some to get their money back. One former customer of the Pierce Elevator has already filed a civil suit for unspecified damages. Roger and Debra Woslager claim the elevator’s owner was diverting funds from the sale of their grain to pay off the contracts made with others in earlier transactions.
Grain elevator defaults are rare, but not unheard of.
“Nobody likes it,” Meuret said. “Unfortunately we see one of these every two or three years. It drives the industry crazy. It’s a black eye.”