Guest Editorial
Modest, affordable producer security

by John Umhoefer

John Umhoefer is executive director of the Wisconsin Cheese Makers Association. He contributes this column monthly for Cheese Market News®.

Nearly one year ago in this column, the Wisconsin Cheese Makers Association (WCMA) described producer security programs in the nation’s 10 largest dairy states to illustrate how Wisconsin could simplify and improve its program. Change in America’s Dairyland may be at hand.

At the urging of the industry advisory council to the state’s security program, the Wisconsin Department of Agriculture, Trade and Consumer Protection (WDATCP) has called together a broad-based working group to address change. In a memo to this working group, WDATCP wrote: “…(T)here may be some deficiencies or inefficiencies in Wisconsin’s Producer Security Program. It is the charge to this work group to review and analyze the Wisconsin Producer Security Program, and then make recommendations for improvements.”

WCMA as well as other producer and processor organizations on the security program’s advisory council have several ideas to retool a program that has proven too burdensome for industry while offering less security than intended.

Wisconsin is one of six states in dairy’s “top 10” that offer a producer security program. These programs release money to milk producers when a milk buyer defaults on payment. Among these six states, Wisconsin, California and New York operate indemnity fund pools that provide ready cash in case of a default. The Wisconsin indemnity fund now holds $8.3 million.

What Wisconsin lacks is enough dollars to pay out on a large default — a default larger than the pool. When conceived and initiated in 2000, Wisconsin’s program intended to back this fund pool with purchased bonds. Wisconsin’s fund is built by assessments on dairy processors, grain dealers and vegetable processors. WDATCP had planned to purchase bonds to back each of these three industries and a “blanket bond” to cover the entire program.

But affordable bonds or similar insurance or credit tools have not emerged.

Without back-up bonds, some Wisconsin dairy producers face a gap in coverage and the upsetting potential that a default in the grain industry could wipe out dollars collected from dairy processors for the past six years.

Other aspects of Wisconsin’s producer security law have proven a burden to industry. For example, Wisconsin bases its assessment payments into the indemnity fund on each processor’s financial status as reflected in debt-to-equity ratio and current ratio. In effect, when processors acquire debt to build capacity, purchase equipment or expand product lines, the program punishes these processors with a higher assessment.

The program also requires audited financial statements for relatively small dairy processors (those purchasing more than $6 million worth of milk in a year.) For many of these smaller processors, the state is demanding costlier information than even their lender desires.

In Wisconsin, an additional fee on processors covers the salaries of the regulators that operate the producer security program. Fees for grain dealers and vegetable processors are set to rise this year while dairy fees have been high enough to avoid a new adjustment.

To its credit, the working group gathered by WDATCP in October will work swiftly (two months) and will be asked to return to the basics. WDATCP will then debate questions such as:

• Is there a better way to protect producers other than the state administered indemnity fund?

• Since producers are the ones who benefit from the coverage, should producers directly pay (at least a portion) the cost of providing the coverage?

• Is the shared-risk concept that ties the grain, milk and vegetable industries together viable and efficient?

• Are the formulas for calculating producer security assessments fair and reasonable?

Assuming Wisconsin will opt for some program to protect producers from market risk, WCMA and other producer and processor organizations in the state recommend the following changes to the state producer security program:

• Eliminate statutory language that continues to require WDATCP to find back-up bonds for the program.

• Reduce the cost burden of this program by reducing assessment payments to zero after a processor has paid in for five consecutive years.

• Offer processors the option of purchasing individual bonds rather than paying assessments.

• Segregate the fund into three pools to reflect the dollars paid in by dairy, grain and vegetable processors.

• Cap dollar levels in each of the three segregated fund pools and limit payments to producers to the dollars available.

• Clarify how processors will be re-assessed in the event of a default and reduction in a fund pool.

• Accept from processors the financial statement prepared by the processor in the course of ordinary business.

• Eliminate regulatory salaries devoted to review of financial statements.

• Allow producers that process their own milk into dairy products (without losing title to the milk or dairy products) to opt out of the program and avoid securing themselves.

While reducing risk for dairy producers may remain a strategic goal for Wisconsin, the state must recognize the need to remain competitive with other state dairy industries. Most states have no security program or programs that have operated at less cost and less regulatory burden to industry. It’s time to reduce the cost and complexity of Wisconsin’s program.

CMN

The views expressed by CMN’s guest columnists are their own opinions and do not necessarily reflect those of Cheese Market News®.