USDA Seeks to Protect Farmers in Warehousing

February 6, 2003

USDA announced actions to increase producer protection in federally licensed grain warehouses under the U.S. Warehouse Act. The changes to the federal license requirements for grain warehouse operators result from collaborative efforts in recent months between USDA and various stakeholder groups. The changes are intended to improve producer protection requirements already in place for grain storage obligations and extend, for the first time ever, protection to producers who sell grain to federal licensees.

USDA also officially extended the moratorium on accepting new federal license applications under the U.S. Warehouse Act through February 14. The extension has provided the time needed to implement the enhancements to the federal licensing program.

The new federal licensing program coverage provides that in the event of a warehouse insolvency:

  • For producers and other entities (depositors) who hold title to grain stored in a federally licensed warehouse, continued 100% coverage for these storage obligations;
  • For producers with non-credit type sales contracts where grain has been delivered but payment has not been received, 80% coverage; and
  • For producers with credit type sales contracts, where grain has been delivered but payment has not been received, 80% coverage on the first $25,000 and 50% coverage on the balance.

USDA also modified the existing financial requirements for federal licensees in order to lower the risks and enhance protection for producers and depositors:

  • Increase the basic net worth requirement a warehouse operator must have to qualify for a license from the current $50,000 to $150,000; and
  • Increase the level of auditing required of the warehouse operator's financial statements by an independent certified public accounting firm.

In the event of an insolvency of a federal licensee, USDA will dispose first of stocks and use the liquidation proceeds to compensate depositors and producers with these sales contracts. Producers with storage obligations will be paid first. If the liquidation proceeds are insufficient to cover producers with storage obligations losses or are insufficient to cover producers with sales contract losses, the losses up to $5 million will be paid from funds obtained from an assessment levied on all grain federal licensees. For losses in excess of $5 million but less than $15 million, payments to producers will come from a nation-wide insurance policy funded by federal licensees. No federal funds will be used to make these payments.

As a condition of obtaining a federal license, each federal licensee must agree to pay this assessment based upon a combination of licensed capacity and producer contract volume. For the additional $10 million in coverage, USDA will obtain a comprehensive insurance policy on behalf of the federally-licensed grain warehouses to losses in between $5 and $15 million. Federal licensees will pay a proportionate share of the insurance policy premium as an additional licensing fee.

USDA said the primary objective in making these modifications is to provide a consistent program of improved producer protection nationwide. USDA designed this approach in hopes it would be the least disruptive to existing state programs, taking into account the need for USDA to have a uniform policy for all producers who deal with federally-licensed warehouses.

The federal license agreement or federal examinations will not regulate certain activities in federally licensed grain warehouses. Those activities such as security interests, the calibration and testing of scales conducted by state weights and measures officials, producer-funded commodity promotion and research programs, producer-funded indemnity funds and environmental programs will be specifically exempted in the licensing agreement.

USDA worked in recent months with a task force composed of representatives of National Association of State Departments of Agriculture (NASDA) and National Grain and Feed Association (NGFA). USDA officials also had numerous consultations with producer organizations, the warehouse industry and others to discuss the Warehouse Act and USDA proposals. These consultations will continue with these groups as implementation proceeds.

USDA will provide the new licensing agreement to current federal licensees this month with a 30-day window for review and return to USDA. USDA will complete the compliance program by the end of April. Beginning Feb. 17, after expiration of the moratorium, USDA will begin accepting applications for new federal licenses.