Most Americans know someone who has been affected by the Great Recession: lost a job, suffered a home foreclosure, had his vehicle repossessed, found himself facing bankruptcy. But because most Americans live in urban and suburban communities, we don't realize how the economic collapse has affected small farmers across the country. Many of them are being denied access to their own assets, i.e., the crops they have raised, through no fault of their own.
A typical farmer spends the greater part of the year raising a crop, putting in the time, effort and money required to bring that crop to market. Come harvest time, he gathers his crop and then must store it until it can be sold. If the crop is a food crop, it is moved to market very quickly to avoid spoilage. However if the crop is a grain crop – wheat, corn, soy bean, sorghum or other grains – it is usually stored in grain elevators for weeks or months waiting for sale.
To be clear, this discussion is not about large agricultural concerns. Small family operations are those facing severe economic loss, and in many cases bankruptcy, by virtue of their crops being stored in grain elevators. Also, this diary does not discuss grain elevators run as farmer co-ops, which are regulated differently (and tighter) than for-profit grain warehousing concerns and, to date, do not suffer comparable levels of economic stress.
Once grain crops are harvested, they are transported to nearby grain elevators for storage. The farmer does not sell his crop to the elevator operator; instead, he receives receipts for the grain he deposits in the stoage facility, retaining ownership of his crop while it is stored. This arrangement is now presenting problems for farmers across the country, as elevator owners themselves attempt to weather the country’s general economic downturn. To describe what’s happening, the Austin American-Statesman made the perfect analogy:
Imagine you keep a couple of rooms of furniture at a local storage facility. Now, imagine that facility goes out of business, and your belongings have been sold to pay off the shuttered business's creditors.
A similar situation has played out, though on a much larger scale, in rural parts of Texas over the past two years, when 16 grain elevators — some full of corn, sorghum, wheat and other grains — abruptly went bankrupt or failed. The nine grain companies that owned the elevators fell victim to the national economic recession, according to the Texas Farm Bureau.
The insolvency of grain elevators has created economic havoc for hundreds of farmers across Texas and tens of thousands across the United States. It has caused the loss of farmers’ livelihoods, eaten up the savings of those farm families who had managed to save in more prosperous times, and thrown many others into total bankruptcy, costing them their largest asset, their land, and with it any chance of recovery through future planting.
When a grain elevator files for bankruptcy, the bankruptcy code requires judges to deem the crops stored in the elevator to be "unrealized assets" of the elevator which can be sold to satisfy the demands of secured creditors. Farmers whose crops are stored become unsecured creditors. This means that those farmers will be compensated after all secured creditor claims have been satisfied, which typically takes 14-24 months - at least one and perhaps more than two growing seasons. In most cases this means the farmers may receive little or no compensation at all, and certainly not in time to recoup their losses on stored grain
To exemplify how convoluted are the laws surrounding bankruptcy of storage elevators, the Corn and Soybean Digestattempted to explain to its readers the circumstances surrounding the Chapter 11 filing of VeraSun Energy and its 24 subsidiaries in October, 2008, which operated 17 ethanol plants in eight states:
VeraSun’s attorneys drafted the following language that is found in the Bankruptcy Court’s Order Affirming the Administrative Expense Status of the Claims of Creditor that provided goods (corn) within 20 days of the bankruptcy filing:
In return for receiving prompt payment on account of obligations arising with respect to any 20-Day Goods, the Vendors, through the endorsement of any check for payment or other written acknowledgment in respect of such 20-Day Goods, shall be deemed to have agreed to continue supplying Goods to the Debtors at prevailing market prices in accordance with the most favorable terms and conditions (including payment terms) pursuant to historical practices in effect between such Vendor and the Debtors in the twelve months prior to the Petition Date, or such other terms and conditions as are agreed to by the Debtors and the applicable Vendor.
In other words, farmers would be paid for crops they had already stored in VeraSun's elevators only if and when they had signed new contracts with the company that required farmers to accept current market prices for their corn (rather than the price they had originally contracted for) and to continue to supply corn to the company as it attempted to reorganize. In addition, any past payments that had been made to farmers, but not yet deposited, were void, and would not be reissued until a new contract was signed.
Farmers running large growing enterprises may be able to weather the financial setbacks caused by elevator bankruptcies, even though that may entail selling off other assets, such as livestock, or raiding accounts set up to finance their retirement. For younger farmers, however, who have little or no equity, elevator bankruptcies are apt to result in personal economic devastation when they miss out on those once-a-year checks.
Furthermore, elevator and farmers' financial failure leads to a ripple effect that can devastate other businesses in the community, just as urbanized businesses suffer when their consumer base loses jobs and purchasing power.
State legislatures responsible for regulating grain elevators have finally begun addressing the catastrophes by writing bills to increase bonding requirements on grain storage companies and allowing state Agriculture Departments to intervene earlier when company bookkeeping records don't add up. But legislatures are swamped with other situations they have prioritized, both economic (state budget shortfalls) and cultural (Kansas and Texas, for instance, will once again debate the merits of placing restrictions on abortion services). And of course elevator operators will lobby to keep state inspectors from delving too deeply into their accounting methods and financial statements.
This is a tragedy that could have been avoided had stricter regulations on elevator owners and operators been enacted in good economic times. Such damage in the future can be avoided only by enacting stricter oversight now, even though current economic conditions make it that much more difficult.