Grain industry reacts to CGC’s insurance-based security scheme

Response to the Canadian Grain Commission’s (CGC) proposal to replace its current producer security program with an insurance scheme is mostly positive.

But support is contingent on the new program being cheaper than the current one — something the CGC says will be the case, even though no figures have been released yet.

Keystone Agricultural Producers (KAP) want non-licensed grain buyers, including feed mills, to be covered too.

That’s not going to happen when the new scheme is implemented in December or early next year, said CGC spokesman Rémi Gosselin. However the CGC might consider it in the future, he added.

KAP has pushed for that change since Puratone went broke last year owing dozens of Manitoba farmers more than $1 million.

“We would encourage the minister (of agriculture) and (CGC) chief commissioner to keep moving in that direction,” said KAP president Doug Chorney.

National Farmers Union president Terry Boehm said the insurance scheme will mask the problems that cause grain buyers to fail, such as poor transportation service or some other factor.

Currently CGC-licensed Western Canadian grain companies must post security to cover what they owe farmers for the grain they’ve delivered.
“While the current model has been relatively successful, it is expensive for both licensees and the CGC to administer,” the CGC says in a web document discussing the proposed changes. “The current model is based on a costly reporting structure and results in a high volume of work duplication. A high volume of security shortfalls can occur, and there are no efficiencies of shared cost and shared risk.”


Under the proposed program all grain company defaults to farmers would be covered up to an annual maximum of $100 million, with a five per cent deductible.

The deductible, which doesn’t exist now, is intended to encourage farmers to be more careful who they deliver to.

Company premiums will be based on how much they buy and their risk of going broke.

“We are still uncertain on how the costs will come out exactly,” said Wade Sobkowich, executive director of the Western Grain Elevator Association, which represents the major elevator companies. “It will be superior if we can keep our costs down.”

Premium costs will soon be available to companies, Gosselin said.
KAP is disappointed the new program includes a deductible.
“My message to members is to take more time to see who is qualified to buy their grain,” Chorney said.

KAP also wants farmers to have as much time to report a default as they do now, which is 90 days, or 30 days after a cheque has been issued.
A cheaper security program will save grain companies money, which they can use to bid on farmers’ grain, Chorney said.

The combination of recent changes to CGC user fees and converting to an insurance-based security scheme will cut grain company licensing fees to $3,000 a year instead of $6,000, Gosselin said. Savings will come through reduced administration costs.

“Part of the work is being done by the insurance company (Atradius Credit Insurance, which is running the insurance scheme with CGC oversight),” Gosselin said.

Lower cost

The CGC will continue to conduct field audits of grain companies, track annual grain company purchases and collect and audit their financial statements, he said. However, the companies will no longer have to report monthly to the CGC how much they owe farmers.

The CGC says small companies spend 21 hours a month preparing those reports, while medium and large firms average 13 hours a month. Assuming 24 hours of preparation at a $150 an hour it costs companies $3,600 a month, the CGC says.

Under an insurance program companies will no longer have to collectively post around $1 billion to cover farmer liabilities. That will also save companies money.

Annual farmer payouts under the CGC program have averaged $723,000 (inflation adjusted), over the last 32 years, the CGC says.

The biggest payout was $6.75 million (inflation adjusted), in 1981. Sixty per cent of the time there was a year with at least one default.

Actuaries estimate the annual loss due to grain company defaults is $3.6 million a year. That’s higher than the historical average, but also includes the possibility of a large company failing.

Add a five per cent deductible and limit the annual total payout to $100 million and the annual loss estimate drops to $2.6 million, the CGC says.
There have been calls for changes to the CGC’s security program on and off for years, in part because of the headaches and liability it creates for the CGC.

Several years ago Agriculture Minister Gerry Ritz, pointing to payout shortfalls, said the program didn’t work well. He suggested farmers create and administer their own program. Farm groups said there should be no changes until an acceptable replacement was up and running.
A 2009 study prepared by Scott Wolfe Management concluded there are several viable options, including insurance as well as the current program.

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