Scope statements
Agriculture, Trade and Consumer Protection
The Department of Agriculture, Trade and Consumer Protection (DATCP) gives notice, pursuant to s.
227.135, Stats., that it proposes to promulgate an administrative rule as follows:
Subject
Agricultural Producer Security.
NOTE: This scope statement expands a scope statement published on December 1, 2006, related to agricultural producer security.
Administrative Code Reference: Chapters
ATCP 99,
100 and
101, Wis. Adm. Code.
Statutory Authority
Sections
93.07 (1),
126.11 (4),
126.15 (1),
126.26 (3),
126.30 (1),
126.41 (3),
126.42 (6),
126.46 (1),
126.56 (4),
126.56 (4) (f),
126.60 (1),
126.81, and
126.88, Stats.
Policy Analysis
Preliminary Objectives
Modify producer security fund assessments and license fees for grain dealers, grain warehouse keepers, milk contractors and vegetable contractors.
Modify required contractor disclosures to producers.
Make technical modifications to current rules governing the agricultural producer security program, as necessary.
Security Shortfall
DATCP administers the Agricultural Producer Security program under Chapter
126, Stats. The program helps protect agricultural producers against catastrophic financial defaults by grain dealers, grain warehouse keepers, milk contractors and vegetable contractors (collectively referred to as “contractors"). Contractors must be licensed by DATCP. Most contractors pay assessments to the agricultural producer security fund (“fund") administered by DATCP. If a contractor defaults, DATCP may reimburse producers from the fund.
The fund currently has a balance of approximately $7 million. DATCP may pay up to 60% of that amount to reimburse producers for losses in any individual contractor default. That amount is adequate to handle most potential defaults. But several large contractors have unsecured “default exposure" far in excess of fund capacity. If one of those contractors were to default, reimbursement might cover only a small fraction of producer losses.
DATCP has proposed legislation to remedy the security shortfall, but that legislation has not advanced. DATCP therefore proposes to modify current rules to do the following:
Increase fund assessments to provide greater default coverage for contractors who are not adequately secured. Without a change in fund assessments, most assessments are actually scheduled to decline over the next several years.
Adjustments may affect some contractors more than others, depending on default risks.
Strengthen contractor disclosures to producers, so that producers will be more fully aware of the security shortfall that exists for certain contractors.
DATCP must adjust fund assessments whenever the overall fund balance, or the fund balance for any contractor group (grain dealers, grain warehouse keepers, milk contractors or vegetable contractors) falls outside a specified statutory range. At this time, the fund balance for grain warehouse keepers falls below the specified range, so DATCP must increase fund assessments for grain warehouse keepers.
Administrative Costs and License Fees
Effective program administration is critical for managing potentially large financial risks under the producer security program. DATCP performs the following functions, among others:
Reviews and processes annual contractor license applications, and monitors compliance with license requirements.
Reviews confidential annual financial statements, to determine contractor compliance with financial standards.
Audits accounts, records and inventories, to verify contractor claims and ensure compliance with financial standards. Grain facility audits account for a substantial share of overall administrative costs.
Administers the fund.
In the event of a financial default, conducts default proceedings to determine the amounts owed to producers and to reimburse producer claims as appropriate.
Attempts to recover, from defaulting contractors, reimbursement of fund payments to affected producers.
Adopts and amends rules to regulate contractor practices, and establish trust fund contribution amounts.
Investigates law violations, and takes compliance action as necessary.
Prior to 2003, administrative costs were paid by a combination of general tax revenue (“GPR") funding and contractor license fees. However, the 2003-2004 Biennial Budget Act eliminated virtually all general tax revenue (“GPR") funding for program administration. That made it necessary to transfer 2.9 FTE staff (grain auditors and general support staff) from GPR funding to license fee funding. As a result, current license fee funding is no longer adequate to cover administrative costs.
Funding shortfalls are especially severe in the grain and vegetable programs, so administration of those programs is currently being subsidized by dairy contractor license fees. DATCP proposes to increase license fees by rule, to provide minimally adequate funding for all program sectors and to correct current inequities between sectors.
Grain dealer and grain warehouse keeper license fees have not changed since 1997. Milk contractor license fees have not changed since 1994. Vegetable contractor license fees have not changed since 1998 (except that
2005 Wisconsin Act 80 modified license fees for certain potato buyers who opt out of the security program). Without a change in license fees, most fees are actually scheduled to decline over the next several years.
Other Rule Changes
DATCP may make a number of technical changes to current rules, including changes to current definitions and changes to reflect
2005 Wisconsin Act 80 (related to potato contractors).
Comparison with Federal Regulations
Related Federal Programs
There is no federal program to secure milk contractor payments to producers. However, there are federal programs relating to grain warehouses and vegetable contractors. Federal program coverage differs from Wisconsin program coverage, so there is little if any duplication.
Grain Warehouses
The United States Department of Agriculture (“USDA") administers a producer security program for federally licensed grain warehouses. Federally licensed warehouses are exempt from state grain warehouse licensing and security requirements. State-licensed warehouses are likewise exempt from federal licensing and security requirements.
The federal program focuses on grain storage. Unlike the Wisconsin program, the federal program provides little or no protection related to grain dealing (the buying of grain from producers, also known as grain “merchandising"). However, USDA is proposing to regulate grain merchandising by federally licensed grain warehouse keepers. If that proposal becomes law, federally licensed warehouse keepers who engage in merchandising would likely be exempt from state grain dealer licensing.
Vegetable Contractors
The Perishable Agricultural Commodities Act (“PACA") regulates contractors who buy unprocessed, fresh market vegetables from producers. Wisconsin's vegetable security program applies mainly to processing vegetables, so there is little overlap with PACA (which applies to fresh market
vegetables).
2005 Wisconsin Act 80, which allowed potato buyers covered by PACA to opt out of participation in the trust fund, further limited potential overlap between state and federal programs.
Entities Affected by the Rule
This rule may affect grain, milk and vegetable contractors who are licensed under Wisconsin's agricultural producer security program. This rule may increase producer security fund assessments and license fees paid by contractors, and may require contractors to provide additional disclosures to producers. Fund assessments, license fees and disclosure requirements may vary by contractor type, size, financial condition, and risk practices.
Policy Alternatives
Security Shortfall
DATCP has proposed legislation to remedy the current security shortfall under the agricultural producer security program. The legislation would authorize DATCP to demand individual security from a contractor whose “default exposure" exceeds the capacity of the producer security fund, if that contractor fails to meet minimum financial standards. That legislation, if enacted, would reduce the need for increased fund assessments from other contractors. The legislation would currently affect no more than 5-6 (very large) contractors, and would cost those contractors an approximate combined total of only $150,000 per year. However, the affected contractors would need to tie up a significant amount of working capital as pledged security, at a time when their financial condition is weak.
DATCP will also be proposing legislation to eliminate the current statutory mandate for DATCP to obtain “contingent financial backing" for the producer security fund. DATCP has tried repeatedly, and without success, to obtain bonds or other “contingent financial backing" from bonding companies and other private sources. Those sources are simply unwilling to provide “contingent financial backing" at a price that is remotely manageable. DATCP has also evaluated potential alternatives for public financial backing, and has found no workable alternatives. The current statutory mandate provides an illusion of security protection that does not, in fact, exist.
Administrative Costs and License Fees
DATCP cannot continue to operate the agricultural producer security program, in its current form, without a restoration of funding for program administration. DATCP projects a rapidly growing operating deficit, beginning in the current fiscal year. Policy alternatives include the following:
Increase contractor license fees (as proposed in this scope statement).
Enact legislation to restore GPR funding eliminated in the 2003-05 biennial budget.
Reduce critical administrative functions, such as financial statement reviews and grain warehouse audits. That would put agricultural producers at great financial risk and threaten the solvency of the agricultural producer security fund. It could also have an adverse impact on competing grain, milk and vegetable contractors.
Statutory Alternatives
