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When a Family-Owned Elevator Goes Belly Up: Building a Better Safety Net

Part 3: Minnesota works to update legislation to provide better protection

In part three of this four-part series, we look at efforts to update Minnesota legislation in the aftermath of the 2015 Porter Elevator bankruptcy.

It’s not an issue until it affects you. It’s a harsh reality that a number of Minnesota farmers have come to realize with the recent folding of the Porter Elevator in Porter, Minnesota.

As unsecured creditors, farmers who delayed payment or received a bad check for grain sold to the elevator were last on the list when it came time to collect what they were owed.

Leon VanDerostyne, one of the nearly 90 farmers affected, not only received a bad check for his corn but had also delayed payment on his soybeans. While he could make a claim against the $125,000 state bond the elevator had, it didn’t come close to covering the almost $150,000 he was due. When all was said and done, VanDerostyne was only able to recoup about 20% of what his original paycheck should have been for those commodities.

“As we saw with the Porter Elevator bankruptcy, there is serious concern that farmers may be left in limbo without any confirmation they would receive payment for grain sold or credited to the elevator,” says Chris Swedzinski, a Minnesota state representative. “As a farmer myself, I understand the problem that the Porter incident presents.”

Under the current legislation, Minnesota state bonds are calculated based on the gross revenue of an elevator. Because the Porter Elevator’s annual revenue was between $12 million and $24 million, it was only required to have a $125,000 bond (Minnesota statute 223.17).

According to Nick Milanowski, the Minnesota Department of Agriculture (MDA) received $2,001,042.45 in claims against the bond from 12 producers.  

“All submitted claims, associated paperwork, internal documents, and records from inspector visits were reviewed to determine which claims were valid and which were not,” says the MDA fruit, vegetable & grain unit supervisor, Plant Protection division. “Once final determinations were made, 11 producers who had filed $1,106,435.17 in total claims were found to be valid. In the case of multiple claims, a pro rata share is calculated and dispersed.”

The Legislation History

Minnesota’s first legislation regulating the relationship between elevators and farmers was enacted in the late 1800s. Its main purpose was to try to offset a farmer’s loss should an elevator become insolvent. While there have been changes to the legislation through the years, many believe it has failed to keep up with modern agriculture.

“The statutes were passed when we had small elevators and grain markets didn’t move very much,” says Kevin Stroup, an attorney with Stoneberg, Giles and Stroup, in Marshall, Minnesota. “Today, we have large elevators handling huge dollar amounts and markets that move in much bigger swings. The current system is not set up to cover all of the gyrations and risk.”

This isn’t the first time the legislation has come under fire. A paper written in 1987 by Todd Gillingham, Mitchell Hamline School of Law, cited the increasing number of elevator bankruptcies and outlined the magnitude of the problem. During the 1980s farm crisis, when farmers were struggling to stay solvent, they also had to worry about their local elevator going under, he stated.

His argument for change mirrors what is being heard today. “While some modifications have been made to the legislation through the years, the statutes have failed to keep pace with modern agriculture and its accompanying financial problems,” writes Gillingham.

USDA’s Ned Bergman says that from around 2005 to 2012, when commodity prices were generally good, issues like this were few and far between. In fact, their records show that no elevators licensed under the USDA’s Warehouse Act filed for bankruptcy from 2007 to 2012. Today, the department sees one about every 18 months. Other recent bankruptcy and liquidations include: 

  • In 2014, Texoma Peanut Company in Madill, Oklahoma
  • In 2013, G&R Feed & Grain Co. in Portsmouth, Iowa   

“An elevator going bankrupt is obviously something you don’t have to worry about when the ag economy is good, but it is something you have to be aware of when times are bad,” says Swedzinski.

A Call for Change

In an effort to better protect farmers, Swedzinski introduced House File 3186 on March 16, 2016. The bill was coauthored by six other members of the House of Representatives. Senator Gary Dahms authored a companion bill, Senate File 3161, which was heard on March 23, 2016.

House File 3186 would do the following:

  1. Repeal the sales tax on grain bins beginning in 2019.
  2. Establish a grain credit indemnity program that would compensate farmers if a grain elevator files for bankruptcy and is unable to pay for outstanding payments to farmers. The indemnity program is funded using a portion of the sales tax on grain bins.
  3. Direct the commissioner of agriculture to implement a gross receipts sales tax on grain bins in future years – after the sales tax is eliminated in 2019 – if the grain credit indemnity program account is anticipated to be less than $2,000,000. The gross receipts tax turns off if the account will be above $6,000,000. A farmer would get paid up to 80% of what he is owed up to $280,000.
  4. Increase bond amounts for licensed grain buyers, particularly for those who purchase larger amounts of grain. For example, the bond amount for an elevator that had revenue similar to the Porter Elevator would increase from $125,000 to $500,000.

A retroactive date of January 1, 2015, was also included in the bill. This would allow farmers impacted by the closing of the Porter Elevator to receive payments that were due in January 2016.

“The proposed legislation is modeled after a program in North Dakota,” Swedzinski notes.

In general, states have either indemnity funds or bonding programs. North Dakota has both.

“Several years ago, there was an elevator insolvency where the vast majority of claimants were credit sales,” says Konrad Crockford, director of compliance, North Dakota Public Service Commission. “Once a farmer converts a scale ticket into a credit sale contract, he no longer has any protection under the elevator’s bond. The legislature decided to put some protection in place to help offset any future losses.”

Its bond program has two parts: the grain warehouse licensing and bonding program and the grain buyer licensing and bonding program.

“North Dakota licenses warehouses (country elevators) for storage and requires bonding, with a minimum bond of $50,000 up to a maximum of $2 million. The minimum-bond requirements are assessed from a bond schedule based on storage capacity,” he explains. “We also take into account a facility’s throughput. If the annual throughout is seven times the actual physical capacity, we require an additional amount on top of the normal bonding amount.”

In addition, a facility that has been licensed for less than seven years requires a larger bond because it’s seen as high risk. For example, he says a facility licensed for less than seven years that has a million-bushel capacity would require a $455,000 bond. A facility licensed for more than seven years with the same capacity would need a $350,000 bond.

A grain buyer license can be either facility based or issued to a roving grain buyer. The bond amount depends on average sales over the last three years for facility-based and projected annual purchases for the roving grain buyer license. “A facility-based grain buyer would be a grain warehouse that has a federal license but is required to have a state license so it can buy grain,” says Crockford.

The second program is the credit sale contract indemnity fund.

“This fund was established in 2003 to cover credit sale contracts, which is any contract where payment is made more than 30 days from delivery,” says Crockford. “It pays 80% of a claim, up to a maximum of $280,000 per farmer.”

The fund is financed by farmers who are assessed $2 per $1,000 on a credit sale contract sale. Originally, the fund had a $10 million cap. At that point, the assessment stopped until the fund fell to $6 million. In 2007, the maximum was lowered to $6 million, and the minimum was dropped to $3 million.

“We haven’t been collecting that assessment since 2008,” he says. “When that fund gets down to $3 million, it will turn back on.”

Not An Easy Fix

Leon VanDerostyne
Ultimately, Minnesota’s proposed bill didn’t pass.

“If it works in North Dakota, I don’t understand why it wouldn’t work in Minnesota,” says VanDerostyne. “If it’s a question of cost, I believe the basis would be widened to offset the cost of the indemnity fund, which would ultimately come back to the farmer.”

“There’s not an easy fix when you’re dealing with trying to create accounts that are going to cover a farmer’s losses in situations like this. We got a lot of resistance on both the indemnity fund and raising the bond amounts,” Swedzinski says. “We’re going to work with stakeholders to come up with a better funding mechanism and will reintroduce it later this year.”

To see what type of producer protection your state has in place, visit The Association of Grain Regulatory Officials’ website at

Bob Zelenka, Minnesota Grain and Feed Association, says one thing people need to understand is that bonding is not insurance.

“Bonding is a screening mechanism,” he explains. “Essentially, the third party that is providing the bond is the one that’s doing the in-depth analysis of a facility and determining if that risk is manageable. Ultimately, it’s how it is determined whether to provide a bond or not. If everybody does their job correctly, there shouldn’t be any losses.”

Raising the bond amount, says Al Kluis, will not solve the underlying issue.

“All that raising the bond does is pass the increase on to legitimate elevators,” says the grain commodity trader and market analyst. “These elevators are dealing with big numbers. Whoever was auditing the Porter Elevator should have realized there was an issue. Why have audits and pay fees if a problem like this is not caught? Auditing, to me, is where the buck stops.”

“If you’re a publicly traded organization, your books are made public and you can see what kind of condition the company is in,” Swedzinski says. “When you’re privately held, like Porter was, you only have to show what you want people to see. You can paint an awfully rosy picture when in reality, you’ve got some deep, dark secrets to hide.”

As a federally licensed warehouse, the elevator was required to submit an audit or review level financial statement annually to the deputy administrator for commodity operations (DACO), and it must correspond with the warehouse’s fiscal year-end. In addition, a warehouse has 120 days from fiscal year-end to submit the statement. As the FSA designee, the DACO is responsible for administering the provisions and regulations of the U.S. Warehouse Act to elevators. This includes the acceptance of applications such as financial statements, the issuance of warehouse licenses, and conducting warehouse examinations for compliance purposes. 

According to the licensing agreement for grain and rice warehouse operators, those financial statements, at the very least, must include (1) a balance sheet; (2) a statement of income (profit and loss); (3) a statement of retained earnings; (4) a statement of cash flow; and (5) notes to the financial statement. A detailed list of company-owned inventories, including unpaid grain must be included in the notes. 

In addition, those required documents had to be reviewed or audited by a certified public accountant or an independent public accountant, as approved by the DACO.

The operator of the elevator also had to certify, under penalty of perjury, that the statements submitted, as prepared, accurately reflected the financial condition of the elevator.

The review of financial statements is done by commodity operations financial reviewers located in FSA’s office in Kansas City, Missouri. The reviewers are trained specialists and technical experts. A USDA spokesman says the Porter Elevator’s fiscal year-end was August 31, and the business has 120 days from that date to submit the statement. The last statement it submitted was reviewed by FSA financial reviewers in November 2014, which reflected close of business as of August 31, 2014. Because the elevator was licensed under the Warehouse Act, its financial statements are considered confidential and are not available from the USDA as a public record.

In addition, warehouse examinations are performed by warehouse examiners who conduct inventories and assessments of grain in storage, review grain records, compare inventory results to book records, review operating procedures, and randomly test records of the licensed warehouse. They do not review the financial statement of the licensed warehouse because of the specialized technical skill required and the time required to assemble a factual statement that is prepared according to generally accepted accounting practices (GAAP). According to the USDA spokesperson, the last FSA warehouse examination took place on February 12, 2014.

At the state level, the Porter Elevator was not required to file annual statements with the Department of Agriculture.

“The federal license is solely executed by the USDA, and has no coordination with the state or its required documents,” says Milanowski. “Statute 223.17 states that the commissioner may require financial statements, and if they are requested, then outline the standards it must meet.”

It was, however, subject to inspections.

“The last exam from a state examiner was on November 5, 2015. The elevator’s obligations were evaluated as it relates to its grain buying license,” he says. “At the time of inspection there was no indication, based on its daily position report and other requested documents, that the Porter Elevator could not meet its grain buying obligations.”

With what seemed like solid checks and balances in place, many were left scratching their heads over what went wrong.

“This is not the old days where grain moved 5¢ in a year and there’s not much risk. Today, grain markets are moving $2 up, $2 down,” says Greg Bucher, an attorney with Stoneberg, Giles and Stroup. “If somebody sells high and doesn’t hedge, they’re not capitalized to cover these losses. Grain elevators are operating on a fairly thin margin. They don’t make enough money to cover unhedged positions if there’s a big movement in the market.”

It also begs the question – were there signs?

“The financial troubles brewing at the Porter Elevator were well hidden,” says Kluis, who works with farmers who did business with the elevator. “I’ve been in business for 40 years. I’ve heard rumors in the past that a company was going to go under and then it went under. There were no rumors with the Porter Elevator. They were just done.”

“When it went down and we started making calls, it was clear from comments by creditors that they’d been in serious financial trouble for a long time,” says Stroup.

“I think there were some farmers who could have and should have seen the signs, but they chose to stick with it because of the history they had with the owners,” says Zelenka.

“How are farmers expected to see the signs when an audit didn’t show that something was wrong?” questions VanDerostyne.

“This was a family-owned operation and had been for a number of years,” adds Stroup. “It’s why people were so comfortable with them.”

Unfortunately, they were too comfortable. But hindsight is 20/20. What matters most going forward is ensuring that farmers do their due diligence.

“Farmers need to have a good sense about who they’re doing business with and understand that business as best they can because you can only do so much with regulations and legislation,” says Zelenka.

In the final installment of this four-part series, experts share insights on ways farmers can be proactive in protecting their paychecks. 


Laurie Bedord, Advanced Technology Editor, first learned about the Porter Elevator bankruptcy in February 2016. At the time, farmers were hesitant to talk because the investigation was ongoing and it was still a very sensitive subject in the community. Nine months later, she began contacting farmers who did business with the elevator, a vendor hired by the elevator, two attorneys who offered legal advice to some of the parties affected, as well as a representative from the Minnesota Department of Agriculture and USDA officials involved in the case.

Bedord also interviewed a Minnesota state representative working to change the legislation affecting elevator insolvencies. In addition, she spoke with the North Dakota Public Service Commission to compare the legislation it has in place with Minnesota to protect farmers in an elevator bankruptcy situation.

Hundreds of pages of court documents provided detailed information on the financial situation of the family-owned elevator as well as the names of the numerous farmers, suppliers, and vendors affected by the bankruptcy.

Attempts to reach the president of the Porter Elevator for comment were unsuccessful.

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