State fund would help Minnesota grain elevators, which are closing at an alarming rate for farmers

The case in Karlstad, Minn., was nearly picture-perfect as far as grain elevator closures go.

When the local elevator defaulted on payments in 2019, the decades-old facility still held enough grain to be sold off and largely cover the losses of two dozen or so farmers in and around Kittson County who were waiting for a check.

"That's probably the highest payout we've had," said Nick Milanowski, program manager with the Minnesota Department of Agriculture's Fruit, Vegetable and Grain Unit, about the 2019 grain closure. "We were able to liquidate the grain and sell those proceeds."

State agriculture officials needed to go to court to get the payments. But the case illustrated the risky free-for-all that can ensue when a grain elevator — once the staple of small towns across Minnesota — collapses financially.

Often farmers will sell their fall's harvest of corn or soybeans to a grain elevator as a cash sale. The elevator gets the commodities. The farmer's bank account sees a check.

But regularly, a farmer will defer payment — perhaps until after Jan. 1 for tax purposes. Or the farmer will simply store grain at an elevator for a small fee until ready to sell to a hot market. Agriculture industry officials say that latter category carries added risk, one that is increasingly not academic.

Since Milanowski began with MDA in 2015, he says an elevator has closed every 18 months in Minnesota. The highest profile was in 2018 in Ashby, where the elevator manager eventually was sentenced to years in prison for embezzling more than $5 million to finance, among other luxuries, international hunting trips.

Last year, organic, non-GMO food and food company Pipeline Foods, headquartered in Fridley, filed for chapter 11 protection in federal bankruptcy court. The company's elevator held a $500,000 bond, a pittance for unsecured creditors, including many farmers who'd had tens of thousands of dollars in grain stored with Pipeline.

In October, an Iowa company, Global Processing Inc., also filed for Chapter 11 bankruptcy protection. Farmers who had sold to Global Processing's elevator in Hope, Minn., have been invited to file claims with the Agriculture Department to get in line. But the company's bond, which Minnesota requires grain buyers to hold, is only worth $50,000.

Not every case attracts sensational headlines. Sometimes an elevator closes because — as bigger farmers increasingly sell directly to vendors — the manager opts to retire. In the Karlstad case, court records reveal the manager had a medical incident that prevented him from successfully running the business.

In May 2019, Shakopee-based Prime Security Bank — which loaned more than $400,000 to the licensed grain buyer of wheat, oats and corn in the state's far, northwestern corner — pursued the Karlstad elevator in court, after the elevator stopped making payments on the loan.

That summer, according to court records, the bank took possession of the grain and sold it for more than $420,000. But counsel for the Minnesota Department of Agriculture eventually intervened, demanding those funds go to farmers who sold grain to the elevator, not the bank.

On Dec. 30, 2020, after more than a year of proceedings, U.S. District Court Judge Tamara Yon ruled the state had "exclusive jurisdiction" over distributing funds to un-paid farmers.

Milanowski said the state needed to "lean on the bond" of $70,000 to help pay off the farmers. But it was, more or less, a happier ending for farmers than what usually happens.

Far more often, he said, farmers are left holding the bag.

"It's a failed system," said Jim Falk, of Falk's Seed Farm in Murdock, Minn. "Everyone knows it's a failed system."

Falk serves on an advisory committee organized by the agriculture department to help develop an indemnity fund, which would overhaul the current system by which claims are paid out via a state-required bond.

Groups such as the Minnesota Farmers Union have asked for just such a rainy-day fund generated by a small service fee on grain sales — paid by elevator operators — that could help make farmers whole when the elevators go bust.

"We're one of the least protected states," Falk said. "Our bonding requirements are really low."

Last legislative session, the Minnesota Grain and Feed Association — a trade group for elevators — opposed a bill that would have created an indemnity fund. Roughly a dozen states already established such funds.

Laura Lemke, executive director of the association, wrote in a letter last March to Rep. Mike Sundin, chair of the House Agriculture Finance and Policy Committee, that while supporters say an indemnity fund is desperately needed for farmers, it would "saddle both industry and producers with a tax on all grain sales at a time when we are experiencing record inflation and ridiculously high input costs for seed, fertilizer, ag chemicals and fuel."

Furthermore, Lemke said the fund would remove risk from a farmer's marketing decision and would, counterproductively, incentivize high-risk behavior.

"If a producer chooses to make risky or ill-advised marketing decisions and it backfires, is it fair for everyone who paid into the fund to make sure that producer is made whole?" wrote Lemke in an email response to questions from the Star Tribune. "I don't think so."

Still, not every elevator operator agrees with the industry's biggest voices.

In Vermillion, Minn., just on the edge of the seven-county metro region, Greg Ries stood in his office with a Terry Redlin painting on the wall and his dog, Harley, greeting farmers as they came to sell grain — some before heading south for the winter.

Ries said his elevator, on the town's main street, is a throwback to an older era before growing consolidation in the agriculture industry rendered elevators like his superfluous for some bigger farmers.

Ries' business undergoes audits and state regulatory visits. And, he noted, running a grain elevator is a business with inherent risk. But he's open to an indemnity fund, so long as the indemnity fund would get rid of the bonding he is required to hold under state law.

"I'm willing to give a little bit of money to that pot to shore up the indemnity fund," Ries said. "I'm looking to find balance."

For detractors, such a fund smacks of a luxury investors in other industries lack. But supporters say the nature of farming, when farmers could sell an entire season's crop to a single entity that goes belly-up, is different.

They point to the Pipeline Foods bankruptcy. The Agriculture Department reports that unsecured creditors received less than 2% of their claims. But farmers in Iowa — which has a grain indemnity fund — were able to file for up to 90% of their losses, up to $300,000.

It just mattered what side of the state line they farmed on.

"These are like the town banks," Milanowski said. "Farmers keep their money there. It's where they meet their neighbors."

But they also can be the site of financial ruin when the wind blows the wrong way.