Rule-Making Notices (Hearing Notices)

•   A surcharge of $100 if the grain warehouse keeper failed to file an annual financial statement by the applicable deadline.

•   A surcharge of $100 if the applicant fails to renew a license by the license expiration date of August 31.

Proposed Fees. This rule changes the calculation of grain warehouse inspection fees, but makes no other changes to current grain warehouse keeper license fees or surcharges. The current inspection fee schedule (see above) is replaced by a formula. Under the new formula, a grain warehouse keeper pays an annual inspection fee equal to the lesser of the following amounts:

•   The warehouse keeper's highest daily grain obligations to depositors (in bushels) in the preceding license year, multiplied by 0.3 cent per bushel.

•   $15,000.

Grain Warehouse Keeper Fund Assessments

Current Assessments. Under current law, a grain warehouse keeper must pay an annual fund assessment based on a formula that considers the warehouse keeper's licensed storage capacity, current ratio and debt-to-equity ratio. Other things equal, the formula yields declining assessments over time. There is a minimum assessment of $20.

Proposed Assessments. Under this rule, a grain warehouse keeper must pay an annual fund assessment that is 50% higher than the assessment generated by the current formula (the formula does not change, and continues to yield declining assessments over time). There is a new minimum assessment based on storage volume:

•   $20 for grain warehouse keepers whose storage capacity is less than 300,000 bushels.

•   $100 for grain warehouse keepers whose storage capacity is at least 300,000 but less than 500,000 bushels.

•   $250 for grain warehouse keepers whose storage capacity is 500,000 bushels or more.

Milk Contractor License Fees

This rule makes no changes to current milk contractor license fees.

Milk Contractor Fund Assessments

Current Assessments. Under current law, a contributing milk contractor must pay an annual fund assessment based on a formula that considers the milk contractor's total Wisconsin milk payroll obligations for the contractor's last completed fiscal year, the milk contractor's current ratio, and the milk contractor's debt-to-equity ratio. Other things equal, the formula yields declining assessments over time. There is a minimum assessment of $20.

Proposed Assessments. This rule does not change the calculation of milk contractor fund assessments (the current formula continues to generate declining assessments over time), except that this rule creates a new minimum assessment based on the contractor's total Wisconsin milk payroll obligations in the contractor's last completed fiscal year:

•   $20 for milk contractors with annual Wisconsin milk payroll obligations of less than $1,500,000.

•   $200 for milk contractors with annual Wisconsin milk payroll obligations of at least $1,500,000 but less than $6,000,000.

•   $500 for milk contractors with annual Wisconsin milk payroll obligations of $6,000,000 or more.

Vegetable Contractor License Fees

Current Fees. Under current law, vegetable contractors must pay the following annual license fees and surcharges:

•   A nonrefundable license processing fee of $25.

•   A fee of $25 plus 5.75 cents for each $100 in Wisconsin vegetable procurement contract obligations (to vegetable producers) that the contractor incurred during the contractor's last completed fiscal year. This fee does not apply to “nonparticipating processing potato buyers."

•   A $500 fee if the vegetable contractor is a “nonparticipating processing potato buyer."

•   A $500 surcharge if the vegetable contractor operated without a license at any time during the preceding year.

•   A $100 surcharge if, during the preceding year, the vegetable contractor failed to file a required financial statement by its due date.

•   A $100 surcharge if the vegetable contractor failed to file a license renewal application by the license expiration date of January 31.

Proposed fees. This rule increases the license fee component that is based on annual Wisconsin vegetable procurement contract obligations. It increases that fee component to $25 plus 8.75 cents (currently 5.75 cents) for each $100 in contract obligations.

This rule replaces the current $500 fee for “nonparticipating potato buyers" with a fee equal to the lesser of the following amounts:

•   $25 plus 8.75 cents for each $100 in annual contract obligations (same as other vegetable contractors).

•   $2,000.

This rule makes no other changes to current vegetable contractor license fees or surcharges.

Vegetable Contractor Fund Assessments

Current Assessments. Under current law, a contributing vegetable contractor must pay an annual fund assessment based on a formula that considers the contractor's total vegetable procurement contract obligations during the contractor's last completed fiscal year, the contractor's current ratio, and the contractor's debt-to-equity ratio. Other things equal, the formula yields declining assessments over time. There is a minimum assessment of $20.

Proposed Assessments. This rule does not change the calculation of vegetable contractor fund assessments (the current formula continues to generate declining assessments over time), except that this rule creates a new minimum assessment based on contract volume:

•   $20 for vegetable contractors with contract obligations of less than $500,000.

•   $200 for vegetable contractors with contract obligations of at least $500,000 and less than $4,000,000.

•   $500 for vegetable contractors with contract obligations of $4,000,000 or more.

Business Impact

Agricultural Producers

This rule will benefit Wisconsin producers of grain, milk and vegetables, by preventing the erosion of the producer security program that helps protect them against catastrophic financial defaults by grain dealers, grain warehouse keepers, milk contractors and vegetable contractors (collectively “contractors").

This rule will generate enough license fee revenue to continue critical financial security monitoring activities, such as grain warehouse inspections and review of contractor financial statements. Without this rule, DATCP would have to curtail key monitoring activities that help control potentially catastrophic financial risks to producers and to the producer security fund.

This rule will also reverse the current diversion of fund assessment revenues from the agricultural producer security trust fund (to subsidize operating deficits in the grain and vegetable sectors). That will yield a slightly increased rate of fund growth which will, in turn, provide greater protection for producers in the event of a catastrophic contractor default.

This rule will not increase costs for agricultural producers, or have any significant impact on commodity prices paid to producers.

Contractors

This rule affects license fees and fund assessments paid by grain dealers, grain warehouse keepers, milk contractors and vegetable contractors, but does not change other contractor regulations.

Current Cost to Contractors. Current license fees and fund assessments represent a very small share of overall contractor costs. For example:

•   Current grain dealer license fees and fund assessments represent only about 11 hundredths of one percent of the grain dealers' annual Wisconsin grain procurement costs ($672,000 in fees and fund assessments, compared to $599 million in grain purchased from Wisconsin producers in FY 2005-06).

•   Current grain warehouse keeper license fees and fund assessments represent less than 2 hundredths of one percent of the grain warehouse keepers' annual Wisconsin “cost of sales" ($210,000 in fees and fund assessments, compared to about $1.7 billion in “cost of sales" for FY 2005-06).

•   Current milk contractor license fees and fund assessments represent only about 3 hundredths of one percent of the contractors' annual Wisconsin milk procurement costs ($1.2 million in producer security license fees and fund assessments, compared to about $3.5 billion paid for milk produced by Wisconsin farmers in FY 2005-06).

•   Current vegetable contractor license fees and fund assessments represent only about 8 hundredths of one percent of the contractors' annual vegetable procurement costs ($138,000 in producer security license fees and fund assessments, compared to $170 million in procurement contract obligations to Wisconsin producers in FY 2005-06).

Current contractor license fees and fund assessments represent an even smaller share of overall contractor costs (including costs for labor, buildings, equipment, debt service, overhead, etc., in addition to commodity procurement costs).

Declining Costs. Total contractor license fees and fund assessments will actually decline over the next few years, because of fee credits and declining formula rates built into the producer security law itself. This rule will reduce the rate at which overall contractor fees and fund assessments decline. But even with this rule, the total of all contractor license fees and fund assessments will be about 5% lower in FY 2009-10 than in FY 2005-06 (other things equal).

Total license fees and fund assessments will decline in every business sector except the grain dealer and grain warehouse sector, where license fees and assessments will increase to pay a proportionate share of administrative costs and to provide a proportionate contribution to the producer security fund.

The following table shows combined total license fees and fund assessments by business sector for FY 2005-06. It also compares projected totals for FY 2009-10 with and without this rule:

Total Contractor License Fees and Fund Assessments (Net of Credits)
	FY 2005-06	FY 2009-10* Without this rule	FY 2009-10* With this rule
Grain Dealers	$672, 000	$395,000	$674,000
Grain Warehouse Keepers	$210,000	$169,000	$428,000
Milk Contractors	$1,272,000	$1,018,000	$1,027,000
Vegetable Contractors	$138,000	$42,000	$48,000
TOTAL	$2,292,000	$1,624,000	$2,177,000

* Projection assumes constant procurement volumes, commodity price levels and contractor financial strength.

The projected decline in total license fees and fund assessments (with or without this rule) results from the following features built into the current producer security law (this rule will not change those features):

•   License fee credits. If the fund balance contributed by an industry sector reaches a specified statutory threshold, a portion of the balance is returned to contributing contractors in that sector (as a credit on their license fees). Contributing vegetable contractors are already enjoying credits that significantly reduce their license fees, and milk contractors began receiving credits in May, 2007. Those credits will dramatically reduce fees for contributing contractors, even when this rule is in effect.

•   Falling assessment rates. Under the producer security law, fund assessment rates decline after a contractor has contributed to the fund for a specified number of years (4 to 6 years depending on contractor type and financial condition). Because the producer security fund is about five years old, most contributing contractors are now beginning to pay significantly lower fund assessments than they were a short time ago. That trend will continue, regardless of this rule.

Effects Vary Between Contractors. The impact of this rule may vary considerably between individual contractors within a business sector. License fees and assessments may be affected by a number of variables, including contractor size, contractor financial strength, contractor risk practices and commodity prices.

For many contractors, this rule will slow the rate at which the contractor's fees and fund assessments would otherwise decline. Some contractors (especially grain warehouse keepers) may have increased fees and fund assessments. For a few contractors, this rule will actually speed the reduction of fees and fund assessments. Many contractors (especially milk contractors) will be unaffected by this rule.

Federal regulations

There is no federal producer security program related to milk. The United States department of agriculture (USDA) administers a producer security program for federally licensed grain warehouses that store grain for producers. Grain warehouses may choose whether to be licensed under state or federal law. Federally-licensed warehouses are exempt from state warehouse licensing and security requirements. State-licensed warehouses are likewise exempt from federal requirements.

The federal grain warehouse program provides little or no protection against financial defaults by grain dealers. Grain dealers are persons who buy and sell grain. Sometimes, grain dealers also operate grain warehouses. DATCP currently licenses grain dealers. Licensed warehouse keepers must also hold a state grain dealer license if they engage in grain dealing.

USDA has informally proposed to regulate grain dealer activities (grain “merchandising") by federally licensed warehouse keepers, to the exclusion of state regulation. But USDA has not yet officially introduced its proposed regulations. In any case, the federal regulations would not apply to state-licensed grain warehouses, or to grain dealers who do not operate a warehouse.

There is a federal security program for vegetables. That security program is mainly limited to fresh market vegetables, and consists of a priority lien against vegetable-related assets. Wisconsin's vegetable security program applies only to processing vegetables (not fresh market vegetables covered by federal regulations). Wisconsin's program uses an indemnity fund, rather than a priority lien-type program. Unlike the federal priority lien program, a state priority lien program would not work because it would be preempted by federal bankruptcy law.

There may be some limited overlap between the Wisconsin and federal programs, but that overlap is justified because the scope of federal coverage is not entirely clear. Overlap was reduced by recent Wisconsin legislation, which permits certain potato buyers covered under the federal program to opt out of most of the state program.

Surrounding states regulations

In Minnesota, contractors must be licensed to procure grain, milk or processing vegetables from producers, or to operate grain warehouses. Regulated contractors must file bonds as security against default. The program is financed through industry fees and general tax revenues.

Neither Iowa nor Illinois have producer security programs for milk or vegetables. However, both states maintain indemnity funds to protect grain producers. Fund assessments are based solely on grain volume. In Wisconsin, by contrast, fund assessments are based on grain volume and financial condition. Iowa and Illinois finance their programs through industry fees and general tax revenues.

Michigan has the following producer security programs:

•   Potato dealers must be licensed, and must post bonds as security against defaults. (Wisconsin's vegetable security program includes, but is not limited to, potatoes.)

•   Dairy plants that fail to meet minimum financial standards must file security or pay cash for milk.

•   Grain producers have the option of paying premiums into a state fund. In the event of a grain default, the fund reimburses participating producers.

•   These programs are financed through industry fees and general tax revenues.

Fiscal Estimate

Under the agricultural producer security law:

•   Licensed contractors must pay license fees to fund DATCP administration of the agricultural producer security program. Administration includes grain warehouse inspections, review of contractor financial statements, license administration, and response to contractor financial defaults and law violations.

•   Most contractors (“contributing contractors") must pay fund assessments to finance the agricultural producer security fund. The fund is held in trust, for the benefit of producers. If a contractor defaults on payments to agricultural producers, DATCP may reimburse producers from the fund.

Prior to 2003, DATCP administrative costs were paid by a combination of general tax revenue (“GPR") and contractor license fees. However, as part of the GPR reductions in Act 33, the 2003-2005 Biennial Budget, 2.9 FTE positions and support costs were converted from GPR to the Agricultural Producer Security SEG fund. Partly as a result of that change, current license fee funding is no longer adequate to cover administrative costs. There has been a gradual growth in administrative costs, due to factors (such as statewide union contracts for accountants and auditors) that are outside DATCP control.

Funding shortfalls are especially severe in the grain dealer and grain warehouse keeper programs. Administrative costs now annually exceed license fee revenues by over $200,000 in each of those programs, and each program has a negative cash balance of more than $336,000. In the vegetable contractor program, administrative costs now annually exceed license fee revenues by over $20,000.

Deficits in the grain and vegetable administration sub accounts affect the total cash balance in Agriculture Producer Security Fund. This unfairly affects milk contractors since the total fund balance is incorporated into the formula that calculates their required security amounts and also affects the total funds available to pay a default.

This rule increases annual license fees for grain dealers, grain warehouse keepers and vegetable contractors, to remedy current inequities and provide minimally adequate funding for program administration (the fee increases for vegetable contractors will be largely offset by fee credits built into the producer security law). This rule also adjusts fund assessments, especially for grain warehouse keepers (for whom an adjustment is required by law).

Notwithstanding this rule, total revenue derived from contractor payments under the producer security program (license fees plus fund assessments) will actually decline over the next few years, because of fee credits and declining formula rates that are built into the producer security law itself. This rule will slow, but not reverse, that overall decline.

License Fee Revenues. The following table shows actual license fee revenues for FY 2005-06, compared to projected license fee revenue in FY 2009-10 (with and without this rule):

Total License Fee Revenues (Net of Contractor Credits)
	FY 2005-06	FY 2009-10* Without this rule	FY 2009-10* With this rule
Grain Dealers	$160,000	$155,000	$405,000
Grain Warehouse Keepers	$159,000	$149,000	$393,000
Milk Contractors	$363,000	$159,000	$159,000
Vegetable Contractors	$16,000	$5,000	$8,000
TOTAL	$698,000	$468,000	$965,000

* Projection assumes constant procurement volumes, commodity price levels and contractor financial strength.

Projected milk and vegetable contractor license fee revenues for FY 2009-10 are affected, to a very considerable degree, by license fee credits built into the producer security law itself. When the producer security fund balance attributable to an industry sector (such as milk or vegetables) reaches a specified statutory “trigger" amount, a portion of the balance is returned to contributing contractors in that sector (as a credit on their license fees).

Contributing vegetable contractors are already enjoying credits that significantly reduce their license fees, and milk contractors began receiving credits in May, 2007. Grain dealers and grain warehouse keepers do not yet qualify for these credits, because their fund contributions have not yet attained the required level (nor are they likely to do so prior to FY 2009-10).

Increased annual license fee revenues will be adequate to cover annual DATCP administrative costs. To the extent that annual license fee revenues exceed annual administrative costs, the additional revenues will offset the deficit in the administrative sub account.