Needed: financial protection for produce sellers in the Canadian market
Monday, November 3, 2014
Canadian growers have been seeking similar protection to their American counterparts for a decade and fear that the failure to provide it may provoke retaliation from south of the border
by SUSAN MANN
Canadian horticultural farmers are often caught between a rock and a hard place when they try to collect payment for their produce from companies with cash-flow problems, says Holland Marsh grower Jason Verkaik.
Buyers can sometimes stretch payments out over years and "if they (farmers) force the issue, the company goes bankrupt and farmers don't see a dime," he says. Both the threat of buyer bankruptcy and bankruptcies themselves put farmers in a precarious position because farmers have "no way to collect."
It has cost Bradford/Holland Marsh growers $30 million during the past 20 years due to companies that are slow in paying, don't pay at all or went bankrupt, says Verkaik, vice-chair of the Ontario Fruit and Vegetable Growers Association. He's also the president of Carron Farms Ltd., which grows carrots, garlic, yellow cooking and red onions, various colours of beets and some Asian vegetables on 300 acres. He sells his product both in Canada and through brokers in the United States.
Fred Webber, president and CEO of the Fruit and Vegetable Dispute Resolution Corporation, says the bankruptcy problem in the horticultural industry amounts to about $20 million a year in Canada. But when there is a bankruptcy with a major wholesaler or retailer, "the effect of that $20 million isn't spread across the entire industry." It solely affects a regional group of farmers and all the small businesses supporting them.
Established in 2000 under a section of the North American Free Trade Agreement and based in Ottawa, the dispute resolution corporation provides harmonized standards, procedures and services to members so they can avoid commercial disputes. Members come from Canada, the United States, Mexico, South America and elsewhere. There's a real need for financial protection for produce sellers in the Canadian marketplace, particularly since the unique characteristics of the sector make it vulnerable to payment disruptions, according to the Fresh Produce Alliance, which is made up of the dispute resolution corporation and several horticultural organizations.
Three-quarters of Canada's 10,000 fruit and vegetable producers are small businesses with average sales of less than $85,000 a year. The produce sales transactions they make are typically done by phone and contracts are finalized in minutes, the alliance says. Written confirmation of the contract's basic terms often follows when the shipment is in transit.
These conditions make it hard for sellers to complete credit checks, negotiate conditional sales agreements or take other traditional safeguards, the alliance says. The product is also highly perishable with a shelf life of just hours. That means farmers can't repossess shipments from bankrupt buyers and resell them to recover payments.
This is the current reality for Canadian horticultural growers. But American horticultural farmers have a different reality, one where they have financial protection under their Perishable Agricultural Commodities Act (PACA). Canadian growers have been trying to get similar legislated protection here for more than 10 years.
The Act protects individual growers and companies selling fresh produce in the United States from financial loss caused by slow, partial or non-paying buyers who break contracts, are insolvent or go bankrupt. (See PACA on page 18.) Canadian growers selling into the U.S. market can use PACA there if an American buyer defaults on payments. But American sellers shipping into the Canadian market don't have that same protection in Canada.
The alliance says Canada sells about 40 per cent of its fruit and vegetable production into the United States, amounting to about $1.5 billion in sales in 2012. That same year, Canada imported nearly $3.5 billion from the United States.
Greenhouse industry keen
One section of Canadian farming that's particularly keen to see American PACA-like protection in Canada is the Ontario greenhouse industry, which exports 70 per cent of its annual cucumber, tomato and pepper crop to the U.S. market. The total annual farm gate value of the Ontario crop is $800 million.
George Gilvesy, general manager of the Ontario Greenhouse Vegetable Growers, says Canadian growers have no financial protection in their own market and neither do American or international growers shipping into Canada.
Matt McInerney, executive vice president of the Western Growers Association based in Irvine, Calif., says that if Canada doesn't develop something American growers selling into Canada can use to get the same protections Canadian growers have in the United States under PACA, protection for Canadian sellers in American markets will be at risk. American grower groups will urge their government to review some of the tools in PACA that Canadians can now use and possibly cancel them. That would mean Canadian businesses would be treated like every other foreign company shipping into the United States.
Established in 1926, the Western Growers Association represents farmers, handlers and sellers of fresh fruits, vegetables and tree nuts. Members come from California and Arizona and supply about half of the U.S. fresh produce market.
Gilvesy says they consider the American threat to pull PACA protection for Canadian growers if Americans don't get similar tools in Canada to be "very real." The cancellation of PACA protection for Canadian growers in the American market "would be dramatic on our competitive position in the United States," he notes.
One piece of the financial protection puzzle in Canada to help growers with slow or partial-paying buyers is being addressed through federal government regulatory changes. They will make it mandatory for all fresh fruit and vegetable buyers and sellers to join the dispute resolution corporation.
Canadian government amendments to regulations under the Safe Food for Canadians Act will make the dispute resolution corporation the "sole authority to regulate cross-border produce trade," federal Agriculture Minister Gerry Ritz says by email.
According to Canadian Food Inspection Agency (CFIA) senior media relations officer Rachael Burdman, the regulation change means it will be mandatory for fresh fruit and vegetable buyers and sellers that trade interprovincially or internationally to join the corporation.
At the moment, membership in the corporation is voluntary and the corporation doesn't have any authority over companies or farmers that aren't members. For buyers currently declining to join the corporation, they must have a produce buyers' license from CFIA.
"Membership in a single dispute resolution body would provide a single, unified set of fair trading practices within the fresh fruit and vegetable industry," Burdman says.
Webber says the single licensing system for fresh produce will likely be in place by the summer of 2015. It will "create something very comparable to what's in the United States with regards to dispute resolution. It will be helpful to solvent companies who can and want to stay in business."
Bankruptcy still a problem
Under the changes, the dispute resolution corporation will be able to cancel the membership of a non-paying company or a business involved in a dispute that loses and doesn't want to pay, as it can do now. But as part of the changed system, without membership it will be illegal for that company to bring product in or out of Canada, he says.
A single Canadian licensing system will help farmers with companies still carrying on business, but financial protection for growers from bankrupt buyers is a different kettle of fish. For protection in bankruptcy situations, Canadian horticultural growers and their organizations have outlined what they want during Industry Canada's consultations on the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act held this summer.
Industry Canada says in its discussion paper that the Bankruptcy and Insolvency Act currently provides Canadian farmers, fishers and aquaculturalists with a super priority over all of the inventory of a bankrupt company for unpaid amounts related to farming, fishing or aquaculture products delivered within 15 days of a bankruptcy or appointment of a receiver. Industry Canada was looking for comments about expanding the super priority to benefit U.S.-based fresh produce farmers and extending the delivery period to 30 days from 15 because that's consistent with current marketplace practices.
Webber says the problem with this super priority for the fresh fruit and vegetable industry is there isn't any inventory to repossess. "The protection there doesn't work."
What the Canadian industry wants is the "deemed trust" mechanism U.S. growers have through PACA, whereby produce suppliers can collect debts owed to them ahead of other creditors from assets, including accounts receivable, cash and inventory, derived from fresh produce sales but not from non-produce-related assets.
McInerney says constitutional differences between the two countries likely mean that Canada can't identically replicate U.S. PACA legislation, but "the fundamental issue of creating a criterion that the assets of a produce debtor be segregated and be paid to only produce creditors is a good public policy for Canada."
In opposing enhanced unsecured creditor protection proposals, the Canadian Bankers Association media relations and communications director Maura Drew-Lytle says the association has a long-standing position of opposing super priorities regardless of what industry it is. That's because "it results in less credit being made available to businesses. Banks lend money to businesses on the understanding that, if that business were to enter into bankruptcy, creditors like banks are among the first groups paid back the money owed to them."
Banks getting their money back helps them manage their risk and makes them more willing to lend money to businesses that may be struggling to get back on their feet, she says. If other creditors, such as unpaid suppliers, are put ahead of banks in recovering funds owed to them, then the banks are less likely to recoup their money in bankruptcy situations. That increases the risk of non-payment and banks will be less willing to extend credit or may lend money at higher interest rates as a way of managing their risk.
Drew-Lytle says there is no way to estimate the dollar amount of reduced credit available or how much lower lending interest rates would be if there weren't super priorities, because banks make lending decisions on individual cases based on the financial situation of each application.
Boost from the top
Any potential changes to Canada's bankruptcy act wouldn't be implemented before next year. Industry Canada is planning to file its report this fall and that will be referred to a parliamentary committee for study and review, media relations officer Lauren Hebert says.
Gilvesy says American bankers also balked at the introduction of PACA amendments in 1984 in the United States, but "at the end of the day, the banks are all very happy with the outcomes of the PACA model. Having healthy industries to lend money to is a good thing."
Canadian farmers' efforts to get PACA-like legislation received a boost three years ago when Prime Minister Stephen Harper and U.S. President Barack Obama announced in February 2011 that the two countries would work on developing a Canadian produce sellers' protection system as part of wider efforts to better align the two countries' regulations. It was called the Regulatory Cooperation Council.
While industry representatives see the move to establish the single licensing system under the dispute resolution corporation as a step in the right direction, growers are panning some government ideas being considered, such as insurance schemes to mitigate bankruptcy losses. The U.S. PACA legislation doesn't contain any insurance system.
Lynden-area vegetable grower Ken Forth, Canadian Horticultural Council trade committee chair, says the federal agriculture department seems "bent on an insurance plan." But insurance doesn't address the fact that American growers and shippers don't have protection in Canada from non-paying, slow-paying or bankrupt buyers while Canadians farmers and shippers have that protection in the United States. "Right now I have a lot more security getting paid in the U.S. than I do getting paid in Canada," he says.
Patrick Girard, senior media relations officer with Agriculture and Agri-Food Canada, says that "insurance options for the agriculture sector are explored on an ongoing basis as they are a viable option for risk management for field crops as well as other agricultural commodities in certain provinces." The government is examining "all legislative and market-based risk mitigation tools" as it studies what's the best financial protection approach for the fresh produce sector.
In its submission to the bankruptcy act consultations, the Fresh Produce Alliance says the high insurance premiums required under the system will erode profit margins for fresh fruit and vegetable suppliers.
Insurance premiums for Canada's $5-billion fresh fruit and vegetable sector are projected to cost Canadian suppliers about $4.5 million a year and about $10.5 million a year plus sales tax and brokerage fees for American suppliers, the alliance's submission says. It will cost about $25 million to set the system up.
Forth says "farmers with a three or five per cent margin will have to start paying half of it out in insurance premiums. We can't do that."
McInerney says he considers the regulatory co-operation council process to be a failure because, after two and a half years of work, there's no transition plan or document from high-level Canadian officials supporting or advocating establishing PACA-like legislation in Canada. BF
Resolving commercial disputes in a timely manner
by SUSAN MANN
The Fruit and Vegetable Dispute Resolution Corporation is a non-profit, membership-based organization serving the produce trade.
Governed by a board of directors, it provides harmonized standards, procedures and services to its members to help them avoid commercial disputes, according the corporation's website.
In cases of differences of opinions, the corporation provides mediation and arbitration services to resolve disputes in a timely and cost-effective manner. It deals with all types of disputes, including produce condition, contracts and payment. The corporation also educates members about best practices to avoid disputes.
Membership in the corporation is voluntary, but anyone from Canada who is a member is exempt from having to get a mandatory federal license to operate as a produce buyer from the Canadian Food Inspection Agency, says Fred Webber, corporation president and CEO.
Currently, the corporation has 1,500 members, including 1,100 from Canada, 350 from the United States and the rest from Mexico, South America and elsewhere around the world.
The corporation handles less than 100 formal arbitrations annually, he says. It also handles a few hundred complaints a year where the corporation mediates and investigates, trying to "get to the bottom line to help (member companies) resolve it informally." But it handles thousands of phone requests annually from members seeking advice on what to do in certain situations. BF
PACA – a road map for the entire supply chain
by SUSAN MANN
The Perishable Agricultural Commodities Act (PACA) was first enacted in the United States in 1930 and amended in 1984 to create "a deemed trust," says Matt McInerney of the Western Growers Association.
The deemed trust protects the seller by ensuring the product and its dollar value don't become an asset of the buyer's estate until the buyer fully pays for the product, McInerney says.
"It's kind of a super priority," he says. "It provides a safety net for farmers (growing the crop) and then they need a self-help tool to get paid for that product that's shipped and delivered to a customer."
Administered by the U.S. Department of Agriculture's agricultural marketing service, PACA provides the entire supply chain from growers to end users (food service retailers) "a clear road map of rules, regulations and guidance" for how the supply chain handles its transactions and obligations to each member in the chain, he says.
Canada is the only foreign country able to use PACA legislation in the United States.
Jason Verkaik, president of Carron Farms Ltd. in the Holland Marsh, says that, under the American system, the buyer doesn't actually own the produce he or she has bought until the seller is paid, even though the buyer has sold the product and people have consumed it.
McInerney says that, in situations of bankruptcy or insolvency, PACA provides farmer sellers with the right to be paid ahead of other creditors, especially when there are assets available "and those assets were derived from the purchase of product (bankrupt buyers) made but didn't pay for."
Verkaik says that, under the American PACA system, the money from produce sales can't be used to pay other creditors, such as banks. The PACA system doesn't guarantee farmers will get all the money they're owed, but they'll probably get close to 70 to 80 per cent of it, he adds.
Even if this type of legislative protection were introduced in Canada, growers would still have to do their due diligence to ensure they're selling to reputable companies, he says.
In the case of slow-or non-paying buyers, Lynden-area vegetable grower Ken Forth says the PACA legislation protects growers by enabling them to go to court and get a judge to freeze a company's bank account "until he pays" if the grower hasn't received payment within 30 days of supplying the product. If the situation involves product quality, the buyer must provide inspection documentation proving the quality was inferior.
It's very powerful legislation. "It's the big stick, man. If you don't pay, you can't turn the lights on the next day, so you have to pay," he says, adding "that makes the system work."
Forth adds that launching such a system in Canada "won't cost the government a damn dime. They will just get the credit for making it happen and that's okay."
An added bonus is that less time would be needed to resolve situations of non-payment. With legislation like PACA in Canada, it would likely take one to two months to resolve them, compared to the 10 years or more it takes for a civil lawsuit to work its way through the courts. BF
Financial protection provided by commodity groups
by SUSAN MANN
Commodities use a wide range of tools to provide financial protection for farmers in cases where buyers default on payments. Here is a sampling of what some of them do.
Beef. This industry has the Beef Cattle Financial Protection Program, established through provincial legislation. It protects cattle sellers from payment defaults when cattle are sold to licensed dealers. Five cents for every head of cattle sold in Ontario goes into the Beef Cattle Financial Protection Fund, says LeaAnne Wuermli, communications manager with Beef Farmers of Ontario. As of March 31, 2013, the fund's total was $7.3 million. Farmers must follow reporting rules in situations where they haven't been paid in the time frames specified as part of the program. Farmers must also deal with licensed buyers to make a claim under the program. The provincial agriculture ministry has a list of licensed dealers. The ministry also licenses the dealers. The Livestock Financial Protection Board reviews all claims under the program and decides on payment details. The program has been in place for more than 25 years.
Chicken: Chicken Farmers of Ontario (CFO) regulations stipulate each processor must file a letter of credit with the board, which the board could access if there are payment defaults, according to Michael Edmonds, communications and government relations director. The letter of credit must be equal to or greater than 12 per cent of the dollar value of the processor's supply for the most recent crop quota period.
CFO regulations also say processors must pay farmers once they receive the chickens and CFO outlines exactly when that payment is due. In cases where processors don't pay farmers, CFO regulations would kick in and "we would enforce the regulations," he says. CFO also requires all processors as a condition of having their Class A processor license to provide confirmation from a recognized financial institution that they are able to provide the letter of credit.
Dairy. Dairy Farmers of Ontario (DFO) has an accounts receivable financial protection fund, which had $5.8 million in it as of Oct. 31, 2013. The fund provides protection if a processor fails to pay, says Graham Lloyd, DFO general counsel and communications director.
In this industry, DFO buys the milk from farmers and sells it to processors. That means DFO has the liability for any potential processor non-payment. DFO also uses a third-party auditor "to assist with verifying the financial stability of processors," he says. DFO and its accountants "believe the fund has sufficient reserve in it to protect DFO from non-payment for milk sold to processors."
Farmers don't pay a specific check-off into the fund, but some of their license fees were used by DFO to create the reserve, which earns interest. The interest money is plowed back into the fund.
Eggs. The Ontario Egg Financial Protection Plan is operated by Egg Farmers of Ontario (EFO). Qualified egg farmers can make a claim within 30 days of an egg grading station bankruptcy or station payment default. As part of issuing an egg grading station license, EFO ensures the stations are financially viable.
Farmers don't have to pay into the protection fund as "it's currently financed," says Bill Mitchell, public affairs director. The fund presently has $3.9 million and earns interest, which is put back into it. There haven't been any recorded claims to the fund. The provincial agriculture ministry used to administer the fund, but in 1999 it was taken over by EFO. Farmers can get 100 per cent of the money they're owed back provided claims against the fund don't exceed the total amount of available money.
If claims did exceed what's available, the egg board could still decide to top up the fund, he says.
Grains. Farmers in this industry have the Grain Financial Protection Program. It protects farmers selling grains and oilseeds to licensed dealers, along with farmers who store those crops at licensed elevators. If a licensed dealer or elevator fails to make payment or doesn't meet its storage obligations, farmers may submit a claim to the Grain Financial Protection Board to cover a portion of their loss. Agricorp has a list of licensed dealers and elevators on its website.
Barry Senft, CEO of Grain Farmers of Ontario, says the Grain Financial Protection Program fund is financed through a producer check-off when they sell their grain or oilseeds. For corn, one-tenth of one cent per tonne is earmarked for the fund, for soybeans 10 cents per tonne and for wheat five cents per tonne. There is slightly more than $13 million in total in the fund.
Pork. This industry doesn't have an industry-wide financial protection program for farmers. But individual farmers and marketers may have their own protection or assurances from buyers, says Ontario Pork communications and consumer marketing manager Mary Jane Quinn. In light of the Quality Meat Packers bankruptcy earlier this year, where unsecured farmer creditors are owed almost $9 million, the Ontario Pork board "is working with industry and government on ideas that can be utilized industry-wide," she says. BF