The Limits of FDIC Insurance and Iowa’s Grain Indemnity Fund

Where’s Your Wealth Stored and How Safe Is It?

Banks and grain elevators are the pillars of many rural communities. It can seem like they’ve always been there and will always be there. Some grain farmers might have more money in grain at the elevator than they do in the bank.

Regardless, the failure of either of those institutions could devastate a family farmer. The protections available to wealth stored in banks and grain elevators vary, and few farmers have experience with either.

Silicon Valley Bank Closure and FDIC Insurance

The Federal Deposit Insurance Corporation, or FDIC, closed Silicon Valley Bank (SVB) in March 2023. While this closure may have been a passing headline for many Iowa farmers, it had significant implications for people with deposits there. Many of SVB’s customers had deposits that greatly exceeded the FDIC’s $250,000 deposit insurance limit. There were concerns that these depositors’ losses might cause knock-on effects throughout the financial system, disrupting or devastating businesses’ finances.

To address this, the FDIC announced it would insure all of SVB’s deposits, even those above the $250,000 limit. To replenish the FDIC’s deposit insurance fund after this and other recent bank failures, the FDIC has announced a special assessment on banks, with larger banks paying more.

Even though the FDIC bailed SVB’s uninsured depositors, there’s no guarantee it will do so again. Recent bank failures like SVB, First Republic Bank, and Signature Bank, and concerns about future insurance, have increased interest in managing deposit risk. Many Iowa banks help their customers manage this risk by titling accounts in different names to maximize FDIC insurance coverage. These banks help their customers understand their options, make informed decisions, define their strategies, and mitigate their risks.

Global Processing, Inc. Bankruptcy and the Iowa Grain Indemnity Fund

Global Processing, Inc. filed bankruptcy in October 2022 and surrendered its grain dealer licenses. While this may have been a passing headline for most of the country, it had significant implications for farmers in Iowa, Illinois, Nebraska, and Minnesota who had sold soybeans to it.

Unlike how the FDIC insures banks, there is no nationwide insurance scheme to protect unpaid farmers who sold grain to failed elevators. Instead, in 1986 Iowa created its grain indemnity fund to help protect farmers who lose money from grain dealer failures. Farmers who sold to Global Processing submitted $3.6 million in indemnity claims; however, this fund comes with some significant limitations:

1. 90% coverage and $300,000 payout cap. With $6/bu corn and 225 bu/A yields it would only take about 250 acres of corn to hit this limit. With $13/bu soybeans and 60 bu/A yields, 425 acres of beans would hit it.
2. Coverage only for cash sales and open storage contracts. Many farmers market their grain using various types of grain contracts. However, the indemnity fund covers neither future delivery contracts nor any credit-sale contract (deferred payment, deferred pricing, basis, minimum price).
3. Geographic limit. Some Iowa farmers delivered beans to Global Processing’s facility in southern Minnesota. Iowa’s grain indemnity fund didn’t cover those deliveries, and Minnesota lacks similar protections.
4. Time limitation. Iowa’s grain indemnity fund only covers grain delivered to the dealer within six months before the grain dealer failed. This was the main reason for claim rejections in the Global Processing case. This is a problem for farmers who defer taking grain income to manage income tax liability.

The indemnity fund rejected $1.5 million in Global Processing claims. One farmer submitted $800,000 in claims, but only received $60,000. Farmers who took losses are not completely out of luck, but like uninsured depositors of a failed bank, they must wait for the elevator’s assets to be liquidated before they can recover on their remaining claims. Usually those recoveries are 50% or less.

The indemnity fund paid farmers $2.1 million for Global Processing claims. This depleted the indemnity fund, like bank payouts depleted the FDIC’s deposit insurance fund. The indemnity fund statute, though, doesn’t allow for the cost of replenishing this fund to be weighted toward the bigger dealers or producers.

Funding for the indemnity program comes from assessments on grain dealers. These assessments are levied when the fund drops below a prescribed level, and no assessments have been levied since 1989. The fund now has only ~$250,000 — far below that threshold — so next year, dealers will pay a 0.014¢/bu fee on all purchased grain (this cannot be passed on to sellers), a 0.025¢/bu fee on purchased grain (this may be passed on to sellers), and a warehouse operator fee. These fees aren’t enormous, but they apply across the board, from large grain dealers to small, and even though elevators cannot directly pass the 0.014¢ fee on to sellers (and might not choose to directly pass on the 0.025¢ fee), ultimately farmers or elevator owners will bear these increased operating costs.

The Iowa Capital Dispatch has reported the fee is being reinstated on September 1 this year and that the fund has a balance of approximately $380,000. You can read more details of this news story here: https://iowacapitaldispatch.com/2023/08/30/state-grain-fees-will-resume-this-week-to-replenish-indemnity-fund/

Takeaways for Farmers to Protect their Wealth

While no financial loss is convenient, significant losses can greatly impact a farmer’s lifestyle, whether they are from a failed bank or a failed grain elevator. Here are some key points farmers should consider to protect their wealth:

• Run your farm like the business it is.
• Review the financial trends of publicly traded companies with which you work.
• Ensure prompt payment for grain deliveries (Iowa law requires payment within 30 days) and contact the Iowa Department of Agriculture if issues arise.
• Know the limits of your FDIC insurance and grain indemnity fund protections.
• If you need to store wealth that exceeds insurance or indemnity limits, consider maximizing coverage by spreading the wealth among multiple institutions or putting it in multiple names (spouse, company, etc.).
• Utilize prepaid expenses and other strategies to manage income tax issues rather than leaving grain or grain checks at the elevator.
• Be aware of the risks your stored wealth faces, and make informed decisions accordingly.

At Ag & Business Legal Strategies, we want our clients to be honest with themselves and have a solid business plan. Our attorneys and financial strategist will help you create and execute that business plan, and, if necessary, assist you with the legal, tax, and practical aspects of debt restructuring or bankruptcy.

Don’t wait for the problems to become insurmountable. Connect with someone you can trust today, not tomorrow. Contact us here!

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