Indiana Seed Weblog

Over the past four years, Indiana has experienced unprecedented growth in the biofuels industry.  Accompanying this growth, we have seen changes in the nature of grain contracts. Farmers are taking advantage of profit margins by locking in long-term contracts.  However, there are inherent risks associated with such contracts.  These risks are as widely divergent as the contract forms are themselves. 

In the wake of a recent ethanol plant bankruptcy, the Indiana Grain Buyers and Warehouse Licensing Agency (IGBWLA) has received many questions regarding our role in grain contracts.  Aside from limited notice requirements, IGBWLA does not have authority over open contracts.  However, the agency is responsible for ensuring payment on producer obligations arising from delivered grain.

For example, if there is a dispute about payment for producer obligations, our agency will work with the farmer and licensee to resolve the issue.  Most importantly, if there is a grain elevator or ethanol plant failure, our agency is responsible for ensuring farmers are paid for grain that has been delivered.  Claims for delivered grain that cannot be satisfied by IGBWLA are presented to the Indiana Grain Indemnity Corporation.  Both entities are charged with reducing farmers’ risks with regard to payment for delivered grain, but do not have authority over terms of private party contracts for future delivery. 

It is important to note that not all ethanol plants are licensed by our agency.  Only six of our state’s eleven ethanol plants hold a Grain Buyers’ license.  Plants that source grain directly from farmers are required to be licensed.  If a plant is licensed with our agency, they are audited regularly to ensure they meet all of our financial requirements.  Some of these requirements include maintaining a 1:1 current ratio, minimum positive net worth and 80 percent of the unpaid balance of grain payables in unencumbered assets. 

When entering into a long-term contract, it is important to verify with whom you are contracting. We encourage you to ask, “Is the long-term contract with the ethanol plant or is it with the company that sources grain for the plant?”  If your contract is with the ethanol plant, are they licensed with IGBWLA?  Make sure to look at both the contract and scale tickets to verify this information.  There are also several organizations, such as Purdue University and the Indiana Grain and Feed Association, which provide information on the risks associated with long-term contracts. 

In these unprecedented times of volatile commodity prices, it is critical to carefully consider the risks associated with long-term contracts.  If you would like more information on resources available to assist with these complex business decisions, please do not hesitate to contact Jerome Hawkins, IGBWLA grain buyer and warehouse audit supervisor at jehawkins@isda.in.gov or (317) 232-1356.