WASA News & Views - August 2001

Producers and Contracts 2

Last month, we wrote about the concept of "merchant status" regarding producers and contracting in the state of Wisconsin. We received numerous calls on this subject and are glad we hit a topic that was bubbling under the surface for a lot of members. On the heels of that topic, the Commodity Futures Trading Commission (CFTC), the federal governmental body that regulates futures and options trading, came out with responses to industry questions regarding cancellation of cash grain contracts. The questions were posed by the National Grain & Feed Association (NGFA), of which WASA is an affiliate member. The CFTC responded with answers to the questions, but based their answers on several general principles, which guided their opinions. (It should also be pointed out the CFTC noted the answers to NGFA’s questions were to be used for "guidance" and are not intended to be binding for any future CFTC decisions.) Here are the Commission’s "guiding principles" as given to the NGFA. (Emphasis added by WASA.)

· Cancellation of existing forward contract.

Cancellation of forward contracts is permitted under the Commodity Exchange Act and CFTC regulations under certain circumstances. The Commission has explicitly addressed this issue on several occasions. The Commission in its Exemption for Certain Contracts Involving Energy Products and the Division of Economic Analysis in its Statement of Policy in Connection With the Unwinding of Certain Existing Contracts for the Delivery of Grain has said that a forward contract may be cancelled by a separately negotiated settlement which involves a cash payment. Such a cancellation agreement must be a separate, individually negotiated new agreement; there can be no obligation or arrangement to enter into such agreements; and the cancellation may not be provided for by the terms of the contracts as initially entered into.

· Does the inclusion of an administrative fee for contract cancellation create an option contract?

As with the cancellation of any forward contract, the cancellation agreement must be a separate, individually negotiated cancellation agreement. To the extent that the existence of an administrative fee gives the customer the right to cancel a contract simply by agreeing to pay the fee, such cancellations would not be permitted. Whether the fee would be considered an option premium, and the contract an option, however, would depend on the overall pricing structure of the contract and whether the existence of the fee effectively gives the contract holder the right to cancel the contract. Contracts giving the farmer the right to walk away from the delivery obligation without incurring further costs would be considered to be option contracts. Contracts that give a farmer the right to cancel by surrendering the fee and require the farmer to compensate the elevator for any economic loss on the contract would be considered to be futures-like.

· Rolling forward delivery obligations in a contract.

The rolling forward of a delivery obligation refers to the practice of specifying a new delivery date at some point in the future at which time the delivery price of the contract is adjusted to reflect the value of the commodity for delivery at a more distant, new date, as well as accounting for any gains or losses on the commodity at the time that the adjustment is made. Rolling a contract can be seen as a form of cancellation. Accordingly, it must be subject to a separate, individual negotiation and may not be provided for at the time the contract is entered into. Part of the negotiation would include determining a new price and delivery period.

If you have further questions, please contact the WASA office.

Balancing Your Books

We had thought we had heard every grain scam on record from rocks in the bottom of the hopper to watermelons in the trailer cab, but we recently heard a new one, and a simple one at that. With harvest approaching and long truck lines and hours facing you, this might be great time to review your procedures to make sure you have a tight ship.

Thankfully the following scheme didn’t happen in Wisconsin, but lessons can be learned just the same. The scheme involved six people, three of which worked for a grain company in the scale house. They would weigh the grain truck of a person who was not party to the scheme. Two duplicate scale tickets were then produced. One of the scale tickets was given to the innocent driver and the duplicate was then given to an associate involved in the scheme. Both tickets were then presented to the company for payment.

Since there would always be identical loaded and tare weights on two tickets, it’s amazing that no one in management caught onto the scheme. But, let it be pointed out the scheme went on for over two years. It also involved over 400 falsified scale tickets and was only uncovered because one of the principals in the scheme upset another employee, who subsequently went to the authorities. And it’s estimated they stole about $2.4 million with the scam.

How can you keep this from happening to you? Well, there are never any guarantees in life, but, to paraphrase, fortune does favor the pro-active. Here are a few simple steps that were recommended by grain accounting specialists at Clifton Gunderson:

No measures are foolproof against a dedicated scheme by perpetrators ‘on the inside,’ but taking some pretty simple precautions could have saved the victim of the described fraud, and hopefully, you some heartache and trouble.

OSHA 2001 Mandatory Survey

About 80,000 employers nationwide were fortunate enough last month to receive the Occupational Safety and Health Administration’s (OSHA) 2001 mandatory survey (OSHA Form 196) requesting injury and illness information for calendar year 2000. This is OSHA’s annual effort to gather data to improve ‘OSHA’s ability to identify and target its efforts on more hazardous workplaces.’ Form 196 is due back to OSHA within 30 days of receipt, even if you recorded no occupational injuries or illnesses at your worksite. Those who received the report can respond via the Internet or by mailing back the completed survey. If you don’t respond, you can expect an OSHA phone call or you could be subject to enforcement action. Employers are asked to provide information on average employment, hours worked and a summary of job-related injuries and illnesses that occurred on the worksite during 2000. If you did receive the survey and have any questions, please do not hesitate to call Bob Willder in the WASA office.

Agroterrorism Act of 2001

Three members of the US House of Representatives recently introduced legislation that will strengthen and broaden federal protections for farmers, researchers and their advocates who are victims of crimes committed by animal rights and environmental terrorists. The ‘Agroterrorism Act of 2001’ was introduced by Reps. George Nethercutt (R, WA), Randy "Duke" Cunningham (R, CA) and Saxby Chambliss (R, GA) just before the House adjourned for its August research. The new bill is an amalgam of previous independent legislative efforts by Nethercutt and Cunningham. Nethercutt had tried to attach similar language to the FY2001 ag appropriations package during committee action, but his amendments were deemed out of order. Cunningham has been drafting his version of farmer/researchers protections since early spring. The bill will strengthen penalties for convictions of "violence, property destruction, attempted homicide, blockades" and other vigilante tactics as well provide federal RICO conspiracy grounds of action on animal rights and environmental terrorism. For the first time, federal protections are extended beyond the farm gate, so that associations, foundations and other groups representing agriculture are protected under federal law.

Pack Your (Golf) Bags

The signup for the WASA Golf Outing is at a pace that we expect to break our attendance record for the "Southern" outing at Wilderness Woods in the Dells on September 6. We earlier broke the attendance record for the "Northern" outing, so it’s likely we’ll see a new record total number of golfers. Not too bad for either the Scholarship Fund or the outing sponsors.

If you are planning on attending Wilderness Woods and have not yet signed up, we urge you to do so pretty darn quick. We literally had to turn some golfers away at Stevens Point who tried to register at the last minute. So you had better start schmoozing your vendors now to make you a member of their foursome. If you wait, you may be left out of this great event, or at least be picking up your own tab.

Member Survey

After receiving several requests for information, we mailed out the first survey of in-state members that WASA has done in a long time earlier this month. The surveys are being returned now and they’re coming in a good clip. We appreciate everyone who has taken the few minutes to participate, but we want anyone who maybe hasn’t returned the survey to take the time and get it back to the Association. The information remains absolutely confidential and only aggregate averages will be released. Also the survey will only be released to members of the Association and only upon request.

The information that comes out of this survey will help you see how your operation and facility compare to others in Wisconsin. Again, thank you to everyone that has and will participate in the survey and we hope to have the information tabulated and available in late September.