When recently passed Senate Bill 899 becomes effective in September, some current and future Michigan grain dealers may find themselves needing a surety bond before renewing or receiving their license from the Department of Agriculture and Rural Development.
What are Michigan grain dealers?
With a few exceptions, the Department considers anyone that receives, buys, exchanges, sells or stores farm produce to be a grain dealer who must be licensed to operate in the state of Michigan. The licensing process allows regulation of grain dealers and was created by the Grain Dealers Act of 1939 due to a large amount of bankruptcies by grain elevators, resulting in tremendous losses to farmers due to their inability to reclaim grain they had deposited with grain dealers.
Senate Bill 899 and Surety Bonds
In Josh Roesner’s legislative analysis, he concludes that the primary purpose of Senate Bill 899 is to revise how the handling of assets is done if someone should fail as a grain dealer. Herein, lies the importance of the surety bond, as it protects the public from financial harm as a result of the grain dealer’s inability to adhere to all applicable regulations established by the Act.
Although surety bonds have always been part of the licensing process, they are only necessary when Michigan grain dealers do not meet the minimum net asset requirements established by the Act. Previously, the Act required Michigan grain dealers to submit a bond if none of the following conditions were met:
- Grain dealer has allowable net assets of more than $1,000,000
- Grain dealer has $50,000 or more allowable net assets and they have handled 500,000 or fewer bushels of farm produce in the previous fiscal year
- Grain dealer has $50,000 or more allowable net assets that are equal to or greater than 10 cents multiplied by the number of bushels of produce in the previous fiscal year
The new legislation does not change change much with regards to the bond itself—the protections guaranteed by the bond remain the same—however, the minimum net asset requirements have been amended. For starters, the legislation removes the million dollar allowable net asset provision previously found in the Act. The significant changes enacted by Senate Bill 899 are that grain dealers must now have allowable net assets of at least $100,000, as opposed to $50,000, and the number of bushels of farm produce has increased from a maximum of 500,000 to a million.
Any individual who does not meet the minimum allowable net asset requirements may instead obtain a surety bond in an amount equal to the deficiency in order to get a license. For example, if a grain dealer only has $60,000 of the required $100,000 allowable net assets, they will be required to submit at least a $40,000 surety bond with their application.
What are the consequences of failing to provide a bond?
To understand the consequences of a grain dealer’s failure to obtain a surety bond, it is important to understand why the bond is required in the first place. As stated previously, the bond is in place to protect the public from financial harm caused by the grain dealer. If loss does occur, the surety company that issued the bond may pay out up to the full amount of the bond to cover losses. However, once the surety has paid and the claim has been taken care of, the surety will turn to the grain dealer to collect reimbursement for all money paid out in the claims process. Typically, the grain dealer will have signed what is called an indemnity agreement that guarantees the surety company will not suffer a financial loss prior to their bond being issued.
Because the bond is a risk mitigation tool, it is of the utmost importance for grain dealers to submit one if it is determined that they must do so. Otherwise, should the grain dealer fail to comply with the Act and cause financial harm to the state or its people, there is no recourse to undo the damage. Therefore, Michigan grain dealers who do not meet the financial requirements and do not submit a bond will be unable to receive a license and may face legal consequences if they choose to proceed as an unlicensed grain dealer.