Class

1
Class 30 -- October 30, 2002Chapter 12 -
Marketing of Ag Products

• Quiz 10 ?
• Recitation
• Case Student
• Farmers Elevator Jason Morehouse Brian Myers
• Gotham Prov. Co. Scott Priebe Cale Russler
• LeHigh Valley Farmers Donald Shoemaker Lee
  Stanish

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Chapter 12 Marketing Agricultural Products

• Many state and federal laws control and regulate
  the marketing and selling of farm products.
• Sales Contracts
• A sale is a contract, a promise of a quantity of
  commodity for a price or the promise to pay,
• i.e., a contract for sale.
• The title to the goods may not pass until a
  selection is made, e.g., 10 calves from a herd,
• Versus 1,000 bu. of corn from a bin of
  homogeneous grain

3
Grain Sales

• Grain is typically sold by weight or bushels
  adjusted for moisture content.
• E.g., 2 yellow, corn at 56 lbs./bu. at 15.5
  moisture at a stated price.
• A price quote for 1 soybeans is at 60 lbs/bu. at
  13 moisture.
• If the corn or beans are above that moisture,
  there is a discount from a going price for drying
  cost and shrinkage.

4
Livestock Sales

• Sales may be by head or weight, typically
• --- Slaughter animals by weight
• --- Grade and yield these days.
• --- Breeding animals by the head.
• Generally, animals must be fit for the purpose
  intended of the quality advertised
• for production, e.g., milk
• for breeding
• for slaughter.

5
Auction Sales

• UCC Sec. 2-328
• Specific lots are separate sales
• Bidding ends with the fall of the hammer
• A bid that comes while the hammer is falling may
  allow the auctioneer to reopen the bidding.
• Auctions are with reserve unless it is specified
  otherwise
• When with reserve, the auctioneer may withdraw
  the goods at any time before a final bid is
  accepted.

6
Auction Sales

• Puffing, is the practice of bidding on the
  sellers behalf.
• ---Illegal without notice of such in advance
• --- A buyer who experiences such may take (buy)
  at the last good faith bid.
• It is unlawful to offer for sale animals known to
  be diseased,
• and buyers of such may reject them.

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Grower Producer Issues

• Integration Contracts
• Arrangement between a grower/farmer and a
  non-farm business (integrator), e.g. canners
• Integrator may supply key elements for production
  including credit, and supervision.
• Key Points (see Hamiltons book on reserve)
• -- period of contract
• -- renewal provisions - auto renew if without a
  notice. Similar to a farmland lease in this
  regard.

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Integration Contracts Key Points

• -- Cancellation provisions - tend to be in favor
  of the integrator (non-farmer company)
• e.g., may be good against farmers heirs, but the
  integrator may escape for various reasons.
• -- Assignment of interest
• -- What if the farmer wants to retire, but keep
  the contract going in the family
• Legal status of the farmer

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Integration Contracts--Key Points

• Critical for fed. Tax and certain legal reasons
  discussed before.
• Independent contractor or employee or -partner
• Supplies furnished
• -- What by whom?
• -- Quantity quality or grade
• Ownership and possession
• -- who owns production inventory?

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Integration ContractsKey provisions

• Supplies furnished
• -- what by whom?
• -- quantity quality or grade
• Ownership and possession
• -- who owns production inventory?
• Insurance on each item of inventory and of
  production facilities
• Management decisions
• Producer payments
• -- how are they determined wrt what market

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Integration ContractsKey provisions

• Arbitration provisions
• -- even if contracts are well written and
  understood disputes may arise
• -- detail the arbitration provisions

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Direct Marketing

• DefinitionSale or production by the producer
  directly to the consumer.
• Issues ( see Hamilton book on Direct
  Marketing)
• Employees may have a different relationship and
  rights
• Tax responsibilities change with non-farm
  production activities
• -- withholding for employment taxes
• -- It is a loss of ag (production) exemption
  status.
• -- Retail sales tax may apply, in Indiana?

13
Federal Grain Warehouse Regulation

• Country elevators commonly buy from and store
  commodities for farmers.
• Farmers tend to be vulnerable to mismanagement by
  the warehouse.
• Elevator bankruptcy happens.
• U.S. Warehouse Act addressed these problems to a
  degree
• requires bonding
• but only for a percentage of storage
• and financial oversight

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State Regulation of Warehouses

• Warehouse may be federally and/or state licensed.
• If state licensed, then there is bonding
  requirements and financial checks
• -- again, the bond is not sufficient to cover all
  losses in many situations
• -- bonded only for a fraction of the size of the
  facility.

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Grain Dealer Regulation

• Most warehouses are also grain dealers
• They buy and sell grain and soybeans.
• Historically, Indiana has been negligent in
  regulating grain dealers.
• The 80s was effective deregulation
• While other states, e.g., Illinois, put insurance
  programs in place.

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Grain Dealer Regulation

• Indiana has taken action in recent years to add
• to the laws and regulations protecting
  farmers who sell and store at warehouses.
• One of the biggest problems was deferred pricing
  activity-- buyer takes title farmer waits for
  months to price, and be paid!

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Grain Dealer Regulation - Indiana

• The Indiana Commodity Warehouse Licensing Agency
  was operational since 1975.
• This agency is in the Lt. Gov/Ag Commissioners
  Office
• This agency was responsible for doing Grain
  Storage Agreement exams for the USDA
• Essentially monitoring warehouses on a regular
  basis, and taking care of state warehouse
  licensing requirements.
• In 1997, the law was modified to set-up The
  Indiana Grain Buyers and Warehouse Licensing
  Agency.

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Current, Indiana Grain Buyer and Warehousing Rules

• As of July, 97, license required for anyone who
  buys 50,000 or more bushels of grain or beans a
  year. Note, previously all grain buyers were not
  necessarily regulated.
• Licensing fees are charged according to the
  capacity of the facility, e.g. warehouses or
  buyer warehouses between 250,000 999,999 bushels
  is 500/yr.for the first facility and 50 for
  each additional facility. -- 750/yr.and 1,000
  for larger facilities.

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Bond Requirements per 1997 Law

• A. Warehouse bond minimum is the greater of
  10,000 or 10 cents/bushel of storage capacity.
• B. Grain Buyer bond is the greater of 10,000 or
  0.5 of the total amount of grain purchased
  during the preceding year.
• For a buyer/warehouse (grain elevator), the bond
  is the greater of A or B above.

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Grain Dealer Regulation - Indiana

• Indiana licensing requirements, continued
• Annual review of financial statements
• Net worth requirement, 10,000 plus .10/bu.
  times licensed capacity.
• Grain stocks insured for full value
• Equipment
• truck scale, scale tickets, adequate record
  keeping

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IC 26-3-7-3 (a) The director may

• May do and require many things
• (11) Require a grain buyer and all persons
  purchasing grain to show evidence of training or
  licensing
• on the risks associated with grain marketing
  practices only if a grain buyer engages in a
  risk factor higher than a standard defined by
  the director ???

22
Indiana Grain Indemnity Program

• 1995 legislation, following the Merchants Grain
  bankruptcy saga over 10 years after Illinois
  established an insurance fund for grain sales and
  storage losses.
• An insurance program funded by farmer sellers to
  protect farm producer sellers and storers against
  an elevators financial failure.
• Funding is by assessing a two tenths (.002)
  percent premium on the gross sale price of each
  producers payment for grain or beans.
• The grain buyer collects and remits quarterly to
  the Fund administered by a 12 person board.
• Sellers may demand a refund if they wish to forgo
  coverage under the program.
• See www.in.gov/igbwla/igic/

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Current law dictates language

• 12) Require all contracts executed after June 30,
  1997, for the purchase of grain from producers,
  except a flat price contract notice immediately
  above the place on the contract where the seller
  of the grain must sign "NOTICE - SELLER IS
  CAUTIONED THAT CONTRACTING FOR THE SALE AND
  DELIVERY OF GRAIN INVOLVES RISKS. THESE RISKS MAY
  INCLUDE FUTURE PAYMENTS BY YOU TO MAINTAIN THIS
  CONTRACT, A LOWER SALES PRICE, AND OTHER RISKS
  NOT SPECIFIED. .
• BE SURE YOU UNDERSTAND THE NATURE OF THIS
  CONTRACT AND THE ASSOCIATED RISKS."
• or an addendum where the seller of the seed must
  sign
• http//www.in.gov/igbwla/igic/

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Current law dictates language

• (13) Require all contracts executed after January
  1, 2000, for the production of seed to include
  the following notice,
• "NOTICE - IF THE TERMS OF THIS CONTRACT STATE
  THAT THE CONTRACTOR RETAINS OWNERSHIP OF THE SEED
  AND ITS PRODUCTS, YOU MAY NOT BE ELIGIBLE FOR
  PARTICIPATION IN THE INDIANA GRAIN INDEMNITY
  PROGRAM.
• TO BE ELIGIBLE TO PARTICIPATE IN THE INDIANA
  GRAIN
• INDEMNITY PROGRAM, FARMERS MUST OWN AND SELL
  GRAIN OR SEED.
• BE SURE YOU UNDERSTAND THE NATURE OF THIS
  CONTRACT AND THE ASSOCIATED RISKS."

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Indemnity Program Coverage

• Coverage in the event of a failure
• 100 for storage loses at a licensed warehouse
• 80 for all other deliveries not paid for
• Losses yet un-priced, will be priced at the
  market on the buyers last day of business.
• Note warehouse receipts are required for grain
  in storage
• Those holding scale tickets for un-priced grain
  are often the most vulnerable to losses.

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An Indemnity Example

• A producer has delivered 1,000 bushels of corn on
  a deferred pricing contract with a deferred
  pricing charge of 5 cents a bushel.
• The price of corn on the last day of the buyers
  business was 2.55.
• Sellers gross indemnity is
• 2,000
• 2.55 x 1000bu.2,550-50 (1000 x .05)x.80
• Note, the sellers premium is 5.10 .002 x
  2,550.
• Net indemnity is 1,994.90

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Farmers Elevator Mutual Ins. Co. v.Jewett, U. S.
Ct of App. 10th Cir. 68

• Action Recovery from a bond
• Issue Does Jewett get denied coverage due to
  warehouse failure to issue a warehouse receipt as
  required under the U.S. Warehouse Act?
• Facts Pl was the bond holder for a grain
  warehouse and dealer
• Jewett group delivered grain to Croft, but held
  only a scale ticket at Crofts failure

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Farmers Elevator Mutual Ins. Co. v.Jewett

• Jewetts wheat was mixed with wheat covered by
  warehouse receipts
• Farmers paid off those with warehouse receipts,
  but denied the Jewett group
• In this case, the total claims did not exceed the
  bond.
• Dist. Ct. gave a summary judgment to Jewett

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Farmers Elevator Mutual Ins. Co. v.Jewett

• Holding Upheld the lower ct./for Jewett
• Licensees under the Warehouse Act are required to
  issue receipts for stored grain, but not for
  non-stored grain.
• Both parties are charged with the knowledge of
  the law of warehouse receipts.
• Jewetts scale tickets do not show any indication
  but storage.
• Under the facts, the warehouse is obliged to
  Jewett as those who had warehouse receipts.

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Federal Packers and Stockyards Act

• In 1921, when the Act was enacted, 80 of the
  livestock was sold to terminals, like Chicago.
• Today, over 80 of the livestock are sold
  directly to the packers.
• Modern protections of the Act
• Bonding may be required by the Sec of Ag
• Prompt Payment
• payment by the close of the next day,
• but this requirement may be waived and is
  necessarily so in grade and yield pricing.

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Federal Packers and Stockyards Act

• Trust fund
• Applicable to packers whose average annual
  purchases exceed 500,000.
• -- All livestock purchased for cash and the
  proceeds from the products therefrom are to be
  held in trust until all sellers are paid.
• -- To get the protection, an unpaid seller must
  file a written notice to the packer and the
  Secretary of Agriculture!

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In re Gotham v. Gotham Prov Co, Inc,et.al U.S.
Ct. of App 5th, 82

• Action to prevent sellers from recovering from
  Gothams trust fund ahead of Gothams fully
  secured creditor/Bank
• Facts Packer went into CH. XI bankruptcy
• Packer had given security in proceeds to Bank for
  a line of credit.
• Packer left sellers unpaid at time of bankruptcy
  filing.
• Bank argued that banks security interest in
  proceeds was a claim superior to the sellers
  trust fund claims.
• Lower court held for the sellers, and the Bank
  appeals.

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In re Gotham v. Gotham Prov Co, Inc,et.al

• Issue Are the unpaid sellers entitled to the
  protection of the trust fund, or are their
  interests inferior to the Banks perfected
  security interest?
• Holding for the livestock sellers.
• The sellers are covered unless it can be shown
  they agreed in writing to sell on credit which
  cannot be shown in this case.
• Bank does not have a legal interest as a secured
  creditor superior to the sellers interest under
  the trust fund.

34
In re Gotham v. Gotham Prov Co, Inc,et.al

• The court looked at the history of the 76
  Amendment to the Packers Act, and
• concluded it was the Congressional intent to give
  the sellers the superior claim, based on the
  history of the ABP failures shortly before the
  Act was amended.
• The sellers were cash sellers, not for credit,
• and did the necessary acts to preserve their
  rights in the trust, but for Perkins whose claim,
  was upheld in the lower courts, remanded for
  further proceedings do to lack of info.

35
Milk Marketing Orders

• Policy tool to set minimum prices for milk.
• -- for producers via cooperatives usually
• -- orders become effective via referendum
• -- a system for classifying milk, and
  distribution of proceeds
• -- classification and price is based on the
  handlers use of the milk
• -- fluid milk products get the highest price
• -- lowest price for storable milk products
• A key feature is the imposition of financial loss
  for surpluses equally among producers.

36
Milk Marketing Orders

• Orders are to prevent disorderly market
  conditions.
• Producers receive a blended price regardless of
  the ultimate use of the milk.
• The blended price is a weighted average value of
  all milk sold in the marketing area under an
  order.
• Settlement funds are used to account for the
  difference between handler receipts and what
  producers receive.
• Handlers who supply more fluid milk than the
  average utilization for the area regulated, and

37
Milk Marketing Orders

• Handlers who supply more fluid milk than the
  average utilization for the area regulated, and
  therefore have a higher use value than the
  blended price, must contribute to the fund.
• Conversely, those handlers whose use value is
  less than the blended price receive the
  difference from the fund.

38
Lehigh Valley Farmers v. BlockU.S. Ct. of App,
3rd Cir.87

• Action To block the inclusion of unregulated
  counties in two milk market order areas by Sec of
  Ag
• Facts This case is about milk marketing orders.
• Involves the Secretarys decision to expand the
  Mid Atlantic(4) and New York-New Jersey (2)
  orders.
• Sec after hearings added 20 unregulated counties
  to areas 2 and 4, and there was an appeal.
• A district court agreed with pl. The counties
  should not be added to areas 2 and 4 for lack of
  substantial evidence.

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Lehigh Valley Farmers v. BlockU.S. Ct. of App,
3rd Cir.87

• Issue Did the Sec have the basis to add the
  counties to the two marketing order areas?
• Holding Dist Ct ruling against the Sec was
  affirmed
• Sec argues that unlike the past when the order
  expansion failed, the conditions were different
• Secs main argument was the unregulated producers
  receive a higher blend price
• court noted the difference in 1975 was even
  greater, and the overlap areas also existed

40
Lehigh Valley Farmers v. BlockU.S. Ct. of App,
3rd Cir.87

• Secretary argues that all he has to do is show
  that the change sought would be consistent with
  the goals of the law.
• But the court says Sec has a substantial evidence
  requirement
• Sec did not have a satisfactory basis for a
  change now that could not be supported in 1975.
• Rule Cant regulate without good data or with
  only general and speculative opinions.

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Quiz 10

• 1. Strict liability may apply to manufactured
  products.
• 2. A manufacturer generally avoids UCC
  liability with a disclaimer of warranty if the
  product does not work.
• 3. Puffing is the practice of bidding on the
  buyers behalf.

• 4. Under the Indiana Grain Indemnity Fund(GIF),
  deferred payment sellers can get 100 payment.
• 5. Under the Indiana Grain Indemnity Fund,
  Indemnities to a farmer are based on a delivery
  date price.