Producer Payment Security: Fixing Something That’s Not Broken?
- July 2009
This analysis featured in the Summer 2009 issue of the Alberta Pulse Growers' Commission's Pulse Crop News.
David Walker
Transactions between farmers and grain dealers are quite different to those in other industries. Once grain is dumped or picked up at the farm, it is next to impossible to retrieve it, and for a variety of reasons, some cheques are slow in arriving or being cashed. In effect, this provides the grain trade with a significant amount of operating capital and while grain receipts or cash purchase tickets provide security, this is only as good as the financial stability of the buyer.
The Canadian Grain Commission’s (CGC) producer payment protection program is designed to ensure that licensed grain dealers are financially stable. This does not provide an unconditional guarantee and does not cover all situations, but it has for many years provided pulse growers with welcome protection.
A 2008 survey of farmers undertaken by Saskatchewan Pulse Growers indicated more than eight in ten believe it is very important that pulse buyers are licensed by the CGC, nearly nine in ten believe it is very important to have third party security to pay producers if a company defaults and eight in ten believe this third party security should be mandatory. It might, therefore, seem odd that consideration is being given to scrap this CGC program. But the interests of pulse and other grain and oilseed producers differ.
The first reality is that grain and oilseed producers are less dependent on the system than pulse growers. For board grains, protection has implicitly been provided for individuals through pooling, albeit at the expense of all. Most feed grain purchases, don’t use CGC grades, are cash deals and do not cross provincial borders. Hence, they are beyond CGC licensing requirements.
For oilseeds most of the players are major Canadian or international companies. While these companies are licensed, threat of financial failure is remote. The situation needs to be dire for them to walk away from physical facilities and the goodwill of their corporate identity.
Although major grain companies handle pulse crops, most pulse crops are handled by relatively small specialist dealers with limited resources. As a result, pulse growers are more at risk and have a much bigger stake in the CGC’s licensing system than grain or oilseed producers. Additionally, the interests of pulse growers are opposed to those of the feed market.
As long as there is an effective payment security system in place for regulated markets, it is more difficult to develop a system to meet the specific needs of the unregulated feed markets. For grain dealers the CGC’s monthly reporting requirements, which are needed to monitor financial stability, may be seen as an unproductive and time consuming chore. And the need to meet the CGC financial stability requirements may be regarded as a barrier to entering the business. It is, therefore, understandable that some dealers would prefer not to be subject to the discipline that aims to ensure payment protection for farmers. But for pulse growers this can be a benefit as it excludes those who are inadequately financed.
In Ottawa there appear to be two major considerations. The first is philosophical. While government is providing the protection, there is little chance that the private sector will take on the job, even if it can reduce costs and create a more flexible system. The second is that there is some political or financial risk for government. Although the CGC emphasizes that farmers may not be fully covered, perceptions may differ. If and when there is a default, and if the security held by the CGC is not sufficient to cover liabilities, the expectation may be that the government has a moral responsibility to cover the difference as has occurred in the past.
All this may explain the decision to try to fix something that, from a pulse growers perspective, was not broke. In December 2007, Bill C-39, was tabled in the House of Commons, which amongst other things, made provision for scrapping the CGC’s producer payment security program. The Manitoba, Saskatchewan and Alberta Pulse Growers were immediately concerned as no provision was made for a successor program. The timing was terrible because of very volatile markets at the time and the high risk of default.
The three Prairie pulse growers’ organizations, the Canadian Special Crops Association and the three prairie provincial components of the Canadian Federation of Agriculture successfully applied to Agriculture and Agri-Food Canada’s Private Sector Risk Management Partnerships Program for funding to study alternatives to the existing CGC program. The steering committee that supervised the study was later expanded to include the Canadian Canola Growers Association and Western Barley Growers Association.
The study provided valuable background information, see www.pulse.ab.ca, but was not able to draw a definite conclusion as to how the current system ranked against three general alternatives – an insurance based system, an assurance fund back system and the clearinghouse model. Meanwhile Bill C-39, which died when the federal election was called in September 2008, was reintroduced by the new government as Bill C-13 in February. But in early April, the Bloc Quebecois withdrew its support for the legislation. The legislation is dead unless the Bloc decides to support it again or the government can muster a majority.
Currently Manitoba, Saskatchewan and Alberta Pulse Growers only support change if:
- 1. Buyers are licensed by the CGC, or in a like manner.
- 2. There is third party oversight of the buyers with legislated support. The recent failures in poorly regulated global financial systems are a testament of this value. Regulated third-party oversight is also needed because of imbalanced market power between individual producers and buyers.
- 3. The system is administratively no more complex for producers than the current system.
- 4. No additional costs are incurred by producers.
- 5. The system is mandatory for buyers and producers.
- 6. Proposed new systems must be tested and proven before changes are implemented to avoid the possibility of ‘transitional gaps’ in payment protection.
The expectation is that this will be considered, if the issue is resurrected.
David Walker is a Risk Management Consultant for the Alberta Pulse Growers.top of page