Security Reforms

Wisconsin Needs Better, Lasting Solutions

Volume 132, No. 48 Friday,June 6, 2008

Like no other state, Wisconsin has worked to develop an optimal program to protect dairy producers, and farms producing grains and vegetables, from a potential buyer default on payment. Perhaps no other state should try.

Wisconsin’s “working group” studying the state Agricultural Producer Security program met for six months this winter, continuing years of efforts to refine Wisconsin's security program. The group applied another 10 pounds of effort for a pound of cure.

The effort of Wisconsin regulators and this volunteer working group of producers, processors and academia has been honest and transparent, resulting in some positive suggestions to alter the five-year-old security program in the state. The group will submit a final report of recommendations in June.

But to meet a statutory goal of covering mega-defaults, state regulators slaved through this winter to develop a relationship with trade credit insurance companies to cover the “Big One,” a large-scale default by one of the 19 companies (currently) that buy more milk, grain or vegetables from Wisconsin than this program can cover.

To review, Wisconsin overhauled its security program in 2002 to create an indemnity fund - a pool of dollars collected from processors to make quick payouts in case of a payment default. The pool has grown to about $8.6 million, and the state has failed for five years to meet a statutory requirement to provide a back-up bond to cover defaults that could more than wipe out the pool.

In addition to this concern, processors look to reform program costs, best illustrated by the fact that payments into the pool rise as companies acquire more debt (compared to equity). In effect, the program punishes acquisition of debt to remodel or expand a business.

Trade Credit Insurance
The key effort of the working group that examined Wisconsin’s producer security program is the revival of a search to find major backing for the program’s indemnity pool. This winter, Wisconsin regulators found the insurance industry open to the innovative idea of partnering with a state to ensure that large processors pay producers.

Regulators met with several firms, and have focused on one company that would pay producers if one of Wisconsin’s 19 largest buyers defaulted. It’s an extraordinary innovation, but the pounds of effort may exceed the cure.

First, the insurer will pay only after the state pays a $5 million deductible from the pool. Second, annual premiums would begin in the range of $300,000 to $400,000. And in the end, the insurer may not pay the 80 cents on the dollar mandated for dairy producers in the state security law.

The insurer plans to evaluate each large buyer separately, and promises to pay out a different amount based on each buyer’s financial strength.

The insurer would reserve the right to lower this payout amount or even refuse to cover a buyer whose financial statements are deteriorating. And while insurers would not likely cancel a program after starting, the premium payment would be reset annually.

In the end, the state’s mandate for back-up coverage for this program may be fulfilled by an insurance provider that holds all the cards.

Additional Reforms
The working group, in cooperation with state regulators, has worked out some solid recommendations to reduce costs and simplify the program. For example, the working group:

nRecommends that the Wisconsin Department of Agriculture, Trade and Consumer Protections (WDATCP) reduce security staff by two persons.

nRecommends raising the trigger level that forces processors to send audited financial statements to the state. Smaller processors would be spared this $20,000 or greater expense by submitting CPA-reviewed statements, rather than audited.

nRecommends adjusting the debt-to-equity ratio to reduce the pool assessment paid by some processors.
The working group and WDATCP staff also recommended a “holiday” for payments into the pool when an industry reaches a target level of dollars. WDATCP staff wanted the holiday tied to two targets - the size of the entire fund pool and the size of each industry’s share of the pool. (The dairy industry, for example, has contributed nearly $6 million to the $8.6 million pool.)

Some members of the working group recommended that only one target level is needed - the amount each industry has contributed. It’s unclear if this recommendation will make the final report in June.

Lasting Solutions?
Recommendations from this working group will require changes to state law and regulatory rules. It’s a difficult path, particularly when legislators in a cash-strapped state take note of a program holding nearly $9 million.

If successful, these reforms will provide insurance to back this indemnity pool and will reduce costs to industry. But a plan that relies on a complex and expensive public/private partnership for backing will require annual review and modified expectations from producers, including the possibility that protection from default may vary from buyer to buyer. •

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


Other John Umhoefer Columns

Spring Forward
A Week of Clarity
The California Whey

Success Despite Federal Orders
Modest, Affordable Producer Security
The Dry Whey Gap
Feeding Frenzy
Strategic Diversity In The Cheese Industry
Life After Federal Orders
Federal Orders: Enhancing Prices, Crushing Margins

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