Wis. Stat. § 126.81 (1) (a) allows Department to promulgate rules to interpret and implement Wis. Stat. ch. 126. Wis. Stat. § 126.88 (2) (a) directs the Department to promulgate a rule modifying assessments when the fund balance or a portion of the fund balance falls below the minimum amounts or rises above the maximum amounts required under Wis. Stats. § 126.88 (1) (a) through (e).
Related Statutes and Rules
Wis. Stat. § 15.137 (1) defines the membership of the Council, who advise the Department on the Fund and other producer security matters.
Plain Language Analysis
The Fund, established by Wis. Stat. § 25.463, is a public trust administered by the Department. Milk contractors, grain dealers, grain warehouse keepers, and vegetable contractors (collectively known as contractors) must purchase a license to obtain milk, grain, and vegetables, respectively, from producers, and most contractors are required to contribute to the Fund annually. Funds are used to settle claims by producers in the event that a contractor defaults on a payment. Funds from each industry are accounted for separately and then deposited into the overall fund. Wis. Stat. Chapter 126 establishes detailed fund assessment requirements, except that it requires the Department to establish milk contractor fund assessments by rule. Wis. Stat. ch. 126.88 (1) sets minimum and maximum fund balances for each industry, as well as a minimum and maximum balance requirement for the overall fund.
Generally, assessment rates are calculated using a complex formula that is based on the contractor’s current ratio and debt-to-equity ratio. The assessment rate is higher for contractors with weaker financial positions. The assessment rate for contractors that are not required to file a financial statement is a fixed rate based on the number of years the contractor contributed to the Fund. The Department calculates the annual assessment at the beginning of each license year.
Under current law, license fees must be paid to obtain a license. Whereas assessment rates are partially based on the amount of risk a given licensee poses, license fees are based simply on the overall purchases (or storage capacity) of the licensee.
In 2014, a default by Allens Inc. caused the Fund to pay vegetable producers more than $6 million. The resultant impact of this default is that the Fund balance attributed to vegetable contractors fell well below the minimum statutory threshold of $800,000. The following year, a $1 million default in the milk industry further drew down the Fund balance. As a result, the Department and the Council identified the need to evaluate the entire agricultural producer security program. An actuarial study was conducted to, in part, examine the overall sustainability of the Fund and analyze the equitability of assessments contributed by each industry relative to anticipated losses. The Department adopted a number of interim emergency rules as stopgap measures while it awaited the results of an actuarial study to consider possible permanent rule changes. In December 2015, the Department received the study and began working with the Council to develop recommendations for permanent changes to the agricultural producer security program.
Proposed policies. The Department is statutorily required to initiate rulemaking to modify vegetable contractor assessments as a result of its portion of the Fund balance being below its statutory threshold. Conversely, without a significant increase, the vegetable contractor portion of the Fund balance will remain negative for the foreseeable future.
Wis. Stat. Chapter 126 establishes a maximum balance for grain dealers. As of May 31, 2017, the grain dealer balance has reached the statutory maximum balance of $6 million and the Department is required to initiate rulemaking to reduce grain dealer assessments.1 1After the final draft of this rule was approved by the DATCP Board, 2017 Wisconsin Act 155 combined the Fund statutory thresholds for grain dealers and grain warehouse keepers to a $1.2 million minimum and a $7 million maximum. The Department intends to preserve the individual grain dealer threshold of $6 million to qualify for an assessment reduction.
Additionally, the actuarial study indicated that, while the overall Fund was sustainable long-term, adjustments may be needed to assessments or individual Fund balance thresholds to provide more equity across all industry segments.
Policy Alternatives. The Department must take some action to meet its statutory obligation with regard to the Fund balance attributable to vegetable contractors and grain dealers. A permanent solution must be reached or the Fund will not be able to meet its statutory obligation of default protection as dictated by Wis. Stat. Chapter 126.
While awaiting the results of the actuarial study, the Department issued emergency rules for all three affected industries. The final one will lapse in February 2018. Due to the length of an administrative rule process, the Department may yet seek emergency rules in the interim.2
2After the final draft of this rule was approved, the Department adopted an emergency rule that mirrors this permanent rule. That rule expires in January 2020.
This proposed rule does all of the following:
- Creates an automatic reduction in the Fund assessments paid by grain dealers when the grain dealer portion of the Fund exceeds the statutory maximum.
- Reduces assessments paid by milk contractors by 20 percent by adding a multiplier.
- Increases the Fund assessment paid by vegetable contractors.
- Restores the Fund to meet its statutory obligation.
Summary of, and Comparison with, Existing or Proposed Federal Statutes and Regulations
ATCP 99 - Grain
The United States Warehouse Act is a voluntary regulatory program administered by Farm Service Agency (FSA), a unit within USDA. Under the Act, warehouse keepers who obtain a warehouse license must comply with several FSA regulations. Generally, the warehouse keeper must maintain enough grain in inventory to cover 100% of depositor obligations at all times. Further, FSA licensed warehouse keepers must submit financial statements, submit to inspections by USDA auditors, and post surety bonds. In the event a warehouse defaults, FSA can convert the bonds to cash and disperse the proceeds to depositors. The federal grain warehouse license is officially a voluntary program; in practice, it is not completely voluntary. Every state that has significant grain production (including Wisconsin) has some type of state grain warehousing law. These laws require grain warehouse keepers to obtain a license but allow them to choose either a state license or a federal license. Those that choose a federal license are exempt from the state licensing program.
ATCP 100 - Milk
No federal programs currently exist that offer milk producer security from contractor payment defaults.
ATCP 101 - Vegetable
The Perishable Agricultural Commodities Act (PACA) is a federal program that provides some protections for vegetables. This program consists of a priority lien against vegetable-related assets and is applicable to fresh vegetables based on a complex set of variables and circumstances. Wisconsin’s vegetable security program applies only to processing vegetables. Wisconsin’s program uses an indemnity fund, rather than a priority lien-type program.
There may be some limited overlap between the Wisconsin and federal programs, but that overlap is justified because the scope of federal coverage is not entirely clear. Overlap was reduced by Wisconsin legislation, which permits certain potato buyers covered under the federal program to opt out of most of the state program.
Comparison with Rules in Adjacent States
ATCP 99 - Grain
Like all states with a significant grain industry, Minnesota, Michigan, Illinois, Indiana, and Iowa all require persons who buy grain from producers to obtain a grain dealer license, and all persons who store grain for others are required to obtain either a state or federal grain warehouse license. Licensees must file financial statements with the state, and the warehouses must maintain 100% of depositor-owned grain in inventory at all times.
Minnesota requires grain dealers and grain warehouse keepers to post bonds with the state. Indiana, Illinois, and Iowa all have a state indemnity fund that is made up of grain dealer and warehouse assessments. Michigan (like Wisconsin) has a combination of bonds and indemnity fund contributions.
ATCP 100 - Milk
Minnesota requires any wholesale dealer or food processor who contracts with other Minnesota dealers or farmers of milk, cream, or products made from milk or cream, to be licensed as a Wholesale Produce Dealer. Dealers are required to obtain a surety bond and required to maintain trust assets so that assets are freely available to satisfy outstanding obligations. There is no exemption to this requirement.
Michigan requires producer security for all manufacturing and Grade A dairy plants that are a first receiving point for raw milk that will be processed at that facility. Security can be in one or more of several forms including bond, letter of credit, certificate of deposit, or pre-payment. There is no exemption to this requirement.
Illinois, Indiana, and Iowa do not require dairy producer security.
ATCP 101 - Vegetable
Minnesota requires any wholesale dealer or food processor who contracts with other Minnesota dealers for fresh fruits or vegetables to be licensed as a Wholesale Produce Dealer. Dealers are required to obtain a surety bond and required to maintain trust assets so that assets are freely available to satisfy outstanding obligations.
Illinois, Iowa, Michigan, and Indiana lack similar programs.
Summary of Factual Data and Analytical Methodologies
As a result of a large default, the Department and the Council identified the need to evaluate the entire agricultural producer security program. An actuarial study was conducted to, in part, examine the overall sustainability of the Fund and analyze the equitability of assessments contributed by each industry relative to anticipated losses. The Department adopted a number of interim emergency rules as a stopgap measure while it awaited the results of an actuarial study to consider possible permanent rule changes. In December 2015, the Department received the study of the Fund and began working with the Council to develop recommendations for permanent changes in the agricultural producer security program. These proposed rule changes reflect that joint effort. The Council approved the proposal to send a hearing draft to the DATCP Board at its May 2017 meeting.
Producer Security Fund; Assessment Revenues
The following table shows projected assessment revenues for FY 2019-20 (with and without this rule):