A provision of the latest coronavirus relief bill, which the U.S. House passed Friday, would improve livestock sellers’ ability to recover payment when livestock dealers default on their purchases.
The bill would establish a dealer statutory trust that would change livestock sellers’ priority in recovering livestock or the proceeds from the resale of livestock if a dealer defaults and files bankruptcy.
Under current law, the lender has a blanket lien and priority to the livestock or proceeds even though the seller has not been paid, Chelsea Good, vice president of government and industry affairs for the Livestock Marketing Association, said.
“It’s a horrible situation.” she said.
If a dealer statutory trust were in place, it would change that priority, she said.
“It gives sellers of livestock some recourse when there is a default,” she said.
The only recourse a livestock producer or auction market has now is to file a bond claim, but those dealer bonds only pay 5 cents to 15 cents on the dollar, she said.
“We don’t think that’s right,” she said.
Producers selling through an auction market are guaranteed payment because those markets are bonded and required to maintain a custodial account and pay sellers for their livestock whether or not the auction has been paid, she said.
In that case, the auction takes the hit. If a producer sells his own livestock, he takes the hit, she said.
“So the dealer trust is really important to livestock auctions and producers as well,” she said.
Dealer defaults happen six to 12 times a year, with a major default every five years, she said.
“It’s certainly a problem,” she said.
It can be a huge problem for auctions and producers who raised the livestock. It’s almost “unbelievable” they aren’t first in line to receive livestock or proceeds when a dealer defaults, she said.
A dealer trust “would have saved us a lot of money over the years,” said Joe Coggins, owner of Northern Livestock Video Auction and Public Auctions Yard out of Billings, Mont.
Most of the big hits his business has taken are from dealers who get too far ahead, can’t cover everything and file bankruptcy, he said.
One of the bigger hits was a $1.5 million default. When all was said and done, his business got about 4 cents on the dollar, he said.
“It doesn’t happen often, but when it happens it really leaves a mark,” he said.
A dealer trust would take out a lot of the risk. It puts producers and auction markets in front of the banks and brings a measure of fairness to those who guarantee payment, he said.
There is already a packer statutory trust, and it has worked well over the years, he said.
The 2018 Farm Bill directed USDA to conduct a feasibility study of a dealer trust. Results of the study, released in December, found it would be possible and improve seller recovery, Good said.
While the Senate will probably respond to the House bill with its own bill, a dealer trust is a nonpartisan issue that both bodies can agree on. It’s also in separate legislation reintroduced in the House and Senate this year, she said.