February 6, 2003

The National Grain and Feed Association (NGFA) responded to USDA's changes to provide enhanced protection to producers doing business with federally licensed grain warehouses. The NGFA said it supported USDA's efforts to develop a stand-alone product under the federal warehouse program that addresses both storage and merchandising-related activities of federally licensed warehouse to further enhance producer protection, so long as it could be done in a way that keeps the program affordable for the industry that foots the bill. Also, the NGFA said it continues to support strong, effective and prudent warehouse laws and regulations at both the federal and state level to protect the interests of producers and other depositors, and to provide regulatory choice for the grain warehouse industry.

Among other things, USDA said it would increase the minimum net worth requirement for federally licensed warehouses from the current $50,000 to $150,000; phase-in over a two-year period a requirement that federally licensed warehouses submit audited financial statements prepared by certified public accountants (currently, about 45% of federally licensed warehouses submit review-level or compilation financial statements, which no longer would be sufficient); and institute a new requirement that federally licensed warehouses provide additional financial assurance sufficient to cover up to 80% of unpaid cash contracts with producers in cases where grain has been delivered within 270 days if a federal warehouse becomes insolvent. All valid grain storage obligations with producers and other depositors would continue to be 100% covered.

U.S. grain elevators have the option to be federally licensed under the U.S. Warehouse Act or be licensed under state warehouse and grain dealer laws and regulations, where such state regulatory systems exist. Approximately 520 companies with nearly 4 billion bushels of commercial storage space - amounting to nearly 50% of total U.S. commercial grain storage - currently are federally licensed.

USDA's moves to increase the financial standards applicable to federally licensed warehouses and establish a system of producer contract protection came after USDA asserted that it had exclusive authority to regulate both the storage and "merchandising"-related activities of federally licensed warehouses, according to NGFA. "Specifically, USDA stated in its Aug. 4, 2002, final regulations implementing amendments to the U.S. Warehouse Act enacted in October 2000 that federally licensed warehouses were not required to submit to state regulation of merchandising and other activities pursuant to the warehouse operation. USDA based its finding upon its interpretation of the federal law, as well as case law resulting from several court decisions that it said upheld federal preemption," NGFA said.

"Given the administration's goal of providing additional producer protection, we believe that USDA has made a good attempt to put together a program that strengthens producer protection on a national basis and has developed a very cost-efficient way of delivering such protection," said NGFA President Kendell W. Keith. "If the goal of both the federal and state governments is to enhance producer protection, USDA's approach will make a solid contribution, provided federal warehouse operators are willing to bear the additional costs and remain in the program, and the federal and state governments can find common ground in pursuing the same goal."

The NGFA cautioned that it remains to be seen whether federally licensed warehouses who participate in this voluntary system of licensing will be willing to pay the additional costs that will result from the CPA audit requirement and the newly established - and industry-funded - coverage for cash grain contracts entered into between producers and federally licensed elevators.