Background

WHY TEXAS NEEDS A GRAIN PRODUCER INDEMNITY FUND

A grain producer indemnity fund is essentially a method for producers to self-insure against the financial risks associated with storing or selling grain.

Risk management is an important part of maintaining any successful business. Today, a piece of farm equipment can cost $250,000, production costs can exceed $4 or $5 per bushel and producers can be leveraged up to 80 percent of the value of their crop. Under these conditions an operation that took generations to build can be wiped out overnight by a catastrophic event like the closing of a grain elevator or the failure of a buyer to pay for a grain delivery. Crop insurance can provide some protection before a crop is harvested, but after harvest, a producer can be totally exposed until full payment for his crop is credited to his bank account.

Under current laws, warehouses are the only grain facilities required to carry a bond, which only applies to stored grain. Other grain buyers are not licensed by the TDA or any other agency and are not required to be bonded. The current bond requirement for state-licensed warehouses is 10 cents per bushel of storage capacity with a maximum bond requirement of $500,000, whereas federally-licensed warehouses must have a third-party surety bond based on the licensed capacity. The $500,000 bond, at today’s prices especially, does not provide adequate protection in the event of a financial failure.

Many producers in Texas have learned the hard way and have suffered large economic losses as a result. These losses impacted not only the producer, but also lenders, suppliers and other businesses. The economic impact of a grain buyer’s financial failure ripples across communities, and even across the state.

The realization that it is financially and physically impossible to mitigate the financial risks of the producer through bonding and oversight led to the proposal and passage of HB 1840, which allows Texas grain producers to vote on whether they want to create, and pay for, a grain producer indemnity fund.

A pdf of the TGPIB Backgrounder is available here