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Risk deferred?

Agriculture.com Staff 11/14/2008 @ 9:42am

Price later or credit sales contracts have been around for years. They allow you to deliver grain, get "free storage," and set a price at a later date. This is one approach to pricing grain that has worked well for many producers.

This year could be different.

Iowa State University Extension Farm Management Specialist Steve Johnson says the risk is also high.

Under this arrangement, the elevator owns the grain, he says. "If it fails, in most states you'll be an unsecured creditor. That means you're likely last in line when the business's remaining assets are divided up."

In recent months, Iowa's agriculture secretary, Bill Northey, and the state's attorney general, Tom Miller, have added voices of caution.

Northey, who was combining soybeans when he talked to Agriculture Online, says he understands why growers sometimes use credit sales.

"You're just worried about getting grain under a roof someplace, and you worry about what you're going to do with it later on."

And, with the nation's banking crisis adding to harvest pressure on grain prices, deferred pricing may seem even more attractive.

If an elevator fails, Iowa farmers who delayed setting a price are not protected by the state's grain indemnity fund. That fund pays farmers 90% of any losses on sold or stored grain still owned by the farmer -- up to $150,000 (about 37,500 bushels of corn at $4).

Iowa has lifted some grain dealer licenses recently, but an elevator hasn't failed in that state since 2003. And Northey says his department's grain warehouse bureau can stop an elevator from issuing deferred pricing contracts.

"We have additional regulatory authority to go in and catch something before it happens," he says. According to Rich Wahl, chief of Iowa's Grain Warehouse Bureau, state inspectors can stop a warehouse from using credit sales if its debt-to-asset ratio is over 85%.

Inspections occur about once a year if an elevator appears sound, more frequently if it's approaching levels of concern, something that seems slightly more common this year, he says.

Thirteen other states have grain protection funds, Wahl says. Some cover a part of losses from credit sales. Check with your ag department in those states: Idaho, Illinois, Indiana, Kentucky, Michigan, New York, North Dakota, Oklahoma, Ohio, South Carolina, Tennessee, Washington and Wisconsin.

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Price later or credit sales contracts have been around for years. They allow you to deliver grain, get "free storage," and set a price at a later date. This is one approach to pricing grain that has worked well for many producers.

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