Flawed Security Program Bilks Wisconsin Dairy


Volume 139, No. 11, Friday, September 5, 2014

It’s time to fundamentally change or dismantle Wisconsin’s Agricultural Producer Security program.

The collapse and bankruptcy of Arkansas-based vegetable processor Allens Inc. last fall left $8.8 million owed to 19 vegetable producers in Wisconsin. In July 2014, the trade division within the Wisconsin Department of Agriculture reached into the indemnity fund – the cornerstone of the Ag Producer Security program – and paid out $6.1 million to these producers. (Farmers earn a percentage of their actual losses in the program.)

It’s a severe blow to the indemnity fund built by payments from dairy processors, vegetable processors, grain dealers and grain warehouses over the past 12 years. The fund held $12.7 million before the payout on July 11, and now holds between $6 million and $7 million.

Fallout from this vegetable industry bankruptcy hits dairy hardest. The dairy industry had poured $7.5 million into the indemnity fund over the years; the vegetable industry $1 million. In essence, Wisconsin dairy processors and their dairy farm patrons just bailed out 19 vegetable farms because someone in Arkansas failed to pay them.
It’s an absurd outcome for a failed program.

A Failed Program
Wisconsin’s Ag Producer Security program was “sold in” as a shared fund that would exist to provide premium payments on a blanket security bond to cover payment defaults in the grain, dairy and vegetable industry. However, after years of trying, Wisconsin regulators failed to gain a bond. Private bonding firms could not quantify the broad, variable risk in the program and offered no bond or bonds with sky-high premiums.

At that point, the $12 million indemnity fund alone became the state’s producer security blanket. In 2011, trade division staff estimated the total “default exposure” faced by grain, dairy and vegetable farmers in Wisconsin at $726.5 million. The $12 million fund has 1.6 percent of that risk covered.

Now, with about half the fund depleted in July, Wisconsin Department of Agriculture staff have announced that dairy must renew payments into the fund.

If assessments are re-instated (starting in May), collections from dairy processors in the first year would range from $450,000 to $850,000. About 81 organizations would pay the minimum assessment ($500), 13 would pay between $10,000 and $50,000, and four companies would pay between $50,000 and $200,000. About 20 milk buyers in Wisconsin are able to opt-out of the program due to strong financial statements or because they file cash security vs. paying into this program.

Vegetable processors currently pump $35,000, in total, into the fund each year.

Time for Change
The Ag Producer Security program in Wisconsin features a small fund that curiously allows dairy processors to bail out vegetable farmers, and protects a select group of farm businesses from risk in the marketplace while not protecting, for example, apple growers, cherry growers, cheese makers, shoemakers or outboard motor companies.

Should a state protect the financial interests of a fraction of its business community? Is a fund that protects 1.6 percent of that fraction’s risk worth the effort?

In addition to paying into this fund, the dairy, grain and vegetable industries also support more than $1 million in salaries and supplies each year for the Wisconsin Department of Agriculture staff that run the program.

Agriculture leaders in Wisconsin should consider two policy options this fall for this failed program: 1) end the program or end all future assessment payments into the fund; 2) put up “walls” within the indemnity fund so that dairy contributions only flow to dairy defaults and vegetable contributions only flow to vegetable buyer defaults. Each option would require a bill to change the state statute.

The second option above has merit, but a closer look at “walling off” portions of the fund reveals more program flaws. In the most recent financial statement from the program (March 31, 2014 data), grain dealers held $4.2 million in the fund while grain warehouse keepers had -$61,531 in the fund. That’s a negative balance because the staff salaries for this portion of the program have always outstripped grain keepers’ payments into the program.

The March 31 data shows the dairy industry with $7.5 million in the fund and vegetable contractors with $1.08 million. Wisconsin Department of Agriculture staff announced that the July payout of $6.1 million would be booked against the vegetable processors, placing their “book value” in the producer security fund at -$5 million. Another negative balance in the fund.

Building walls between industries in the program might make sense if each industry has dollars in the indemnity fund. Wisconsin’s fund has two of four industries with negative values.

Pooling industries to create a shared producer security fund and blanket security bond didn’t work.
Change is needed before the dairy industry pays in millions of dollars to repeat the mistake. JU

John Umhoefer has served as executive director of the Wisconsin Cheese Makers Association since 1992. You can phone John at (608) 828-4550; Fax him at (608) 828-4551; or e-mail John Umhoefer at jumhoefer@wischeesemakersassn. org

 

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An Interview With Jim Sartorii
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 The Successful Idea Of DBIC
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Wisconsin's Future: Growth
Keeping Sustainability Real
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Consider This...
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Implement Make Allowances ASAP
Security Reforms
Spring Forward
A Week of Clarity






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