Millions lost in grain elevator failure prompts talk of financial safety net

No one has stepped forward to buy the defunct Pierce Grain Elevator leaving storage and sales facilities empty in three northeast Nebraska communities. With more than $9 million in unpaid claims to farmers, there is renewed talk about what Nebraska could and should be doing to protect communities when grain operations fail.

Regulators from the Nebraska Public Service Commission (PSC) revoked the operations license to operate in March after it became clear the owner, Brian Bargstadt, no longer had the funds to pay off the expenses. The elevator had defaulted on a pair of loans from Citizens State Bank and ran out of money.

How badly did the closure hit the community? “It’s going to be tough,” according to Pierce County commissioner Jim Maas. “I think you’ve got some pretty upset people.”

Late in July, at a series of three trustee auctions, the bank attempted to sell off properties in Pierce, Foster and Randolph. No buyer placed a bid at the auctions so the elevator’s holdings remain with the bank. Steve Woolley, attorney for Citizens, says the bank “is actively seeking potential buyers and has had a number of inquiries.” It is hoped the elevator could be back “in operation in time to serve the community and area farmers” for this fall’s harvest.

The storage bins were emptied of grain by the PSC not long after the license was revoked. Now all three locations stand empty and silent.

Farmers who did business with the Pierce operation filed claims for $9.7 million, according to the PSC. Selling the corn and soybeans seized after the closure will only raise about half of that amount.

The owners also held $880,000 in bonds, purchased to cover claims in the event the business closed.

John Fecht, director of the Grain and Warehouse Division of the PSC, expects those farmers who document they were storing grain at the Pierce facilities will get most of their money back. Those who had their grain sold by Bargstadt may only get 10 cents out of every dollar from the sale proceeds they anticipated. Those claims exceed $4 million.

“The bond isn’t very adequate for all this grain when you’re dealing with that many dollars,” Maas said. “It was not adequate.”

There are a number of people who agree, but there are competing interests among agri-business interests about who should put up the money for that protection.

Nebraska state law requires anyone who stores or ships grain be licensed and purchase a corporate surety bond. The bond must cover at least $25,000 in potential losses. The maximum bond would cover $500,000. Elevators are also required to have insurance against loss of grain.

John Meuret, an elevator operator and board member with the Nebraska Grain and Feed Association, says the bonds are intended to protect customers. “It basically says in the event of a default that bond will be split up between the people who had a shortfall.”

In the Pierce failure the total value of the bonds held by the owners for their three locations, $880,000, falls far short of matching losses faced by its customers. The cost of requiring a higher bond, as some farmers advocate, would be the responsibility of the elevator owners.

“If its $5 million, you would have to have a $5 million bond to get everybody cleaned up,” Meuret said. “That becomes expensive and really cost prohibitive for the elevator to do.”

In 2011, staff with the PSC recommended increasing the amount required bonded protection. A statement issued by the Grain and Feed Association at the time said the association “vigorously opposed” the increases.

A proposal for a farmer-funded insurance program does get the support of the grain elevators.

“The indemnity fund is actually money taken out of a corn check from the producer and put in a separate fund,” Meuret explained. In states that have a similar program, elevator customers could be protected from loses up to $25 million.

“That money is just there in case of a shortfall like this, but it all goes back to the farmer in the event of a default,” Meuret said.

These funds are in place in Iowa, where they are called indemnity funds, and in Illinois where it’s called crop insurance. Unlike the farmer-funded proposal forwarded by Nebraska elevator operators, both states rely on grain sellers and storage facilities to pay for the protection.

That approach has not had the support of major farm organizations like the Nebraska Farm Bureau.

“In Nebraska every time that has come up there has not been a whole lot of support for trying to do something like that,” said Jay Rempe, the Farm Bureau’s lobbyist. He said farmers ask why growers rather than the companies which manage the elevators should pay into a fund that farmers don’t need unless the elevator makes a mistake.

“An elevator, knowing that they have a back-up, might engage in more risky behavior in the marketplace than they ordinarily would because there is this fund that they know would back them up,” Rempe said.

Both elevator operators and growers are asking if it isn’t time to review the role of the Public Service Commission in watching for potential problems.

Rempe says the Farm Bureau would like to “make sure the Public Service Commission has the resources, inspectors and the expertise to look at some of these financial statements and just to be sure they stay on top of and understand some of the things that are occurring out there.”

There have been no allegations the PSC overlooked anything in the last two major elevator failures in Nebraska. An examination of the Pierce Elevator’s condition in July 2013 showed “no issues” according to Fecht. “Pierce was all right at the time.”

In the lawsuit filed by Citizens Bank, its loan officers claim they started having concerns about the elevators debt later that year.

“I’m not sure Public Service can do more,” Meuret said. He acknowledges the complexity and volume of grain transactions have increased, even while state inspections have remained constant. Nonetheless, he believes the PSC “has done a good job.”

“I’m not sure we have grown the Public Service as fast as prices have gone up,” he added.

In 2008 the Alvo, Nebraska elevator filed for bankruptcy protection, leaving behind $3 million in unfulfilled grain trades for eastern Nebraska farmers.

One thing both farmers and elevator operators agree on is the need for producers to keep closer tabs on their business partners.

“Know who you are doing business with,” Meuret advised. “If the farmer understands the elevator's business I think it helps everyone in the industry.”

An extreme case like the failure of the elevator in Pierce should make everyone in the grain business cautious. A lot of people knew and trusted the owner, Brian Bargstadt.

“Unfortunately sometimes there is a comfort level there that maybe is misplaced and these kinds of things happen,” Rempe said. “It just kind of reminds people (they) just need to do some more due diligence on this.”

Rempe would like to see more of the elevators state-mandated records available online for all to see. No debate about future policy changes comes as much help to Pierce County.

“Some of these people aren’t going to retrieve very (much) from the way it sounds,” said county commissioner Maas. “It’s going to be tough.”

The courts are the last resort for some to get their money back. One former customer of the Pierce Elevator has already filed a civil suit for unspecified damages. Roger and Debra Woslager claim the elevator’s owner was diverting funds from the sale of their grain to pay off the contracts made with others in earlier transactions.

“Pierce Elevator was using new deliveries to pay old obligations,” said the complaint filed in Pierce District Court.

The auction of the elevator’s property came about after the owners defaulted on their loans from Citizens Bank.

On the day of the auction the small lobby inside the Pierce County Courthouse filled with about 40 area farmers anxious to hear if there would be any buyers. Some have tens of thousands of dollars in unpaid contacts with the failed business. None wanted to talk with an out-of-town stranger about their individual circumstances.

“Nobody likes it,” said Meuret. “Unfortunately we see one of these every two or three years. It drives the industry crazy. It’s a black eye.”

Watching from inside the doorway of the Clerk of the Courts office, county commissioner Maas said the ripple effect of the failure would be felt by every farm-related business in the area.

“It’s too bad that the laws aren’t made to protect people from something like this,” Maas said.

No one came forward that day to buy what was left over of a business that had served the county for nearly 70 years.