Iowa Grain Indemnity Board Clarifies Coverage

Farmers affected by VeraSun bankruptcy have questions about coverage of forward contracts for corn.

The Iowa Grain Indemnity Fund Board sent a letter to the Iowa Corn Growers Association last week to clarify the coverage provided to Iowa farmers by the state of Iowa's Grain Indemnity Fund. The fund helps cover losses that farmers incur when a grain elevator or grain dealer goes bankrupt without paying the farmer for grain that was delivered by the farmer.

"Some recent reports in the press have not accurately described the covered offered by the fund," said the letter sent to ICGA executive director Craig Floss.

Questions have been raised because a number of farmers in Iowa are affected by the bankruptcy of VeraSun Energy, which has five ethanol plants in Iowa. VeraSun has contracts with many Iowa farmers to buy corn.

Confusion about forward contracts for corn

The letter states: "The most prominent inaccuracies involved press descriptions of coverage provided by the fund to producers that have contracts to deliver grain to an Iowa licensed grain dealer at an established price on an established date in the future (contracts for future delivery). Given the potential for confusion, the fund's purpose in issuing the following information is to clarify the general scope of coverage provided by the fund to those producers."

First and foremost, the fund provides no coverage for producers who have not yet delivered any grain on their contracts for future delivery.

Second, the fund will generally view any agreement by a producer to deliver and receive payment of less than full contract price from the dealer as a renegotiation of the original contract. As a result, the fund would not provide coverage for any amount above the payment received by the producer even though it is less than what would have been owed under the terms of the producer's original contract for future delivery. The following example may help explain this statement:

Example of when a farmer would not be covered

Example: A producer has a contract to deliver corn to dealer for $6.00/bu. in December of 2009. However, when the producer attempts to deliver his corn in December, the dealer informs the producer that it will only pay $4.00/bu. for the corn. If the producer decides to go through with the delivery and take the offered $4.00/bu. the Fund will generally view this as a renegotiation of the contract in question reducing the price to be paid to $4.00/bu.

Therefore, the Fund would deny any attempt by the producer to seek Fund coverage for the difference between the price in the original contract and the amount received under the "renegotiated' contract, i.e., the $2.00/bu difference would not be covered.

Fund will cover grain that has been delivered

The Fund does stand ready to cover farmers with grain on deposit in an Iowa licensed warehouse and grain sold to a state licensed grain dealer who are not paid. In the case of a failure in a state license warehouse, the indemnity fund will pay farmers 90% of a loss on grain up to a maximum of $150,000 per claimant.

The letter also states: "The information in this letter is not designed to replace the need for producers who find themselves involved with an insolvent dealer to obtain legal advice from an attorney who represents their specific interests. In addition, should any producer have any questions concerning either Iowa grain dealers or the coverage offered by Iowa's Grain Indemnity Fund, they should contact the Grain Warehouse Bureau of the Iowa Department of Agriculture and Land Stewardship at 515-281-5987 or visit the Department's Web site at www.IowaAgriculture.gov/grainwarehouse.asp."

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