Reprinted from GRAIN JOURNAL May/June 2020 Issue
by Jerry Perkins
The ripples from Hunter Hanson’s fraudulent $11.2 million grain-buying scam are still roiling the waters surrounding North Dakota’s grain and agricultural industries.
Hanson is serving eight years in a federal prison in Duluth, MN after pleading guilty to wire fraud and money laundering. More than 50 grain elevators, farmers, and agribusinesses are asking to be compensated $8.08 million for losses they claim they suffered from Hanson’s grain-buying spree in 2018 and 2019.
A hearing is scheduled to be held in North Dakota District Court in Rugby, June 16-18, on the recommendations of the North Dakota Public Service Commission (PSC) that Hanson’s financial victims be indemnified a total of $2.04 million, or about 19 cents for every dollar they claim to have lost.
Rep. Dennis Johnson
The Hanson case has set the political wheels in motion at North Dakota’s state capitol building in Bismarck, as legislators there wrestle with transferring the authority of who regulates North Dakota’s grain industry from the PSC to the North Dakota Department of Agriculture, which took effect July 1, 2019.
But the case has done more than put Hanson behind bars or change the statutes governing the grain trade in North Dakota. Hanson’s actions have destroyed a system of trust that farmers and grain buyers used to follow when they did business in North Dakota, according to Rep. Dennis Johnson, a North Dakota legislator and farmer who farms spring wheat, corn, and soybeans.
“I’m 70 years old,” Johnson tells Grain Journal in a telephone interview, “and it was a long time before you even had written contracts on rented land. You didn’t worry about it, but this has added to the recognition that you need every document signed and in hand. It’s so sad to see fifth-generation farms that have lost money. It’s just heart-breaking.”
Johnson is chairman of the legislature’s Interim Agriculture and Transportation Committee, which is studying the new regulatory framework that will oversee the state’s grain inspection system. The 17-member committee will make recommendations to the North Dakota legislature when it convenes next year for its biennial session.
Business Changes
The losses rung up by agribusinesses and farmers from Hanson’s crimes also have led to changes in the way many agribusiness companies will operate in the future.
Italgrani USA owns three grain elevators that have made a total of $2.7 million in claims to the North Dakota PSC for compensation for its losses. Jim Meyer, chief executive officer of Italgrani USA, tells Grain Journal that the company has tightened its internal controls to prevent similar losses to those suffered from Hanson’s dealings with the three elevators. “Internally, we have put a whole new set of procedures into place to deal with situations like this,” states Meyer. “We are now requiring more information to lessen the exposure we have to this kind of thing.”
Italgrani USA, which has its U.S. headquarters in St. Louis, MO, is the largest semolina and durum flour miller in North America and has elevators in McLean, Powers Lake, and Renville, ND. The claims by the three elevators made them, collectively, by far the largest claimants to the two victims’ compensation funds. However, because each of the three entities is registered separately as a corporation in the state of North Dakota, their claims are being treated separately by the PSC.
“Hanson took advantage of people’s trust, and so we need to protect ourselves,” Meyer says. “The entire event was a real eye-opener. The scale that he’s defrauded people is unprecedented. The impact on our company was substantial, but we are a big company and can stand the loss.” Not everyone who was a financial victim of Hanson is in the same boat, Meyer adds.
Meyer says Italgrani has had a good relationship with the PSC during the compensation claim process, but he hopes the changes being considered in North Dakota’s grain inspection system lead to better oversight in the future that will prevent losses like those suffered by Hanson’s victims.
New Grain Inspection Law
When the 66th Legislative Assembly of North Dakota transferred the authority of the Grain Licensing and Inspection program from the PSC to the Department of Agriculture effective July 1, 2019, it ended a 127-year-old system that had regulated North Dakota’s grain trade since North Dakota became a state in 1889.
Rep. Johnson says the Interim Agriculture and Transportation Committee that is studying changes to North Dakota’s grain inspection law was scheduled to meet in April, but the meeting was canceled because of the threat posed by COVID-19. Another committee meeting is possible in July, Johnson adds, but that might have to be canceled, too, if people don’t feel comfortable meeting then. It could be September before the full committee can convene. A final committee report on suggested changes to the grain inspection law needs to be submitted to the legislature by November, so the changes can be considered when the 2021 session convenes in January.
Doug Goehring
Legislation is needed to give the Agriculture Department all of the tools it needs to have an efficient and effective oversight of the industry, Johnson says. “Agriculture is an important part of our state. We want to provide the Agriculture Department with whatever tools it needs to make it continue as a vibrant industry in our state.”
Moving oversight of the grain industry from the PSC to the North Dakota Agriculture Department had been discussed before the activities of Hunter Hanson surfaced in 2018, according to Johnson. Of the 38 states that have laws regulating their grain industry, he notes, 35 (including North Dakota since July 1, 2019) regulate their grain industries through their departments of agriculture. Only South Dakota, New Mexico, and Nebraska have grain industry regulators that are not part of their agriculture departments.
Proposals for the new law that have been made by North Dakota Agriculture Commissioner Doug Goehring are on the right track, Johnson notes. Johnson particularly likes the fact that the proposals include setting higher bonding requirements that are based on the value of the crops handled and not on the volume.
He also likes the ag department’s proposal to check regularly on grain dealers’ financial solvency to make sure they have the financial wherewithal to pay for the grain they buy.
Grain Marketing Changes
Doug Goehring, who has been North Dakota Agriculture Commissioner since 2009, tells Grain Journal in a telephone interview that North Dakota’s grain regulations need to change the culture of how grain is marketed in the state. “We’re trying to reduce the risk in the system by having a robust inspection program that minimizes impact and mitigates risk,” Goehring states. “We want a program that, ultimately, has integrity and trust.”
A third-generation farmer, Goehring operates a 2,600-acre, no-till farm with his son, Dustin, near Menoken in south central North Dakota, where they raise corn, soybeans, spring wheat, sunflowers, and barley.
Goehring said he has looked at the grain regulating systems in 13 other states and has tried to capture some of the things those states are doing right to deliver better protection and oversight of the North Dakota grain industry for farmers, the public, and grain-related businesses.
“Agriculture is still the largest industry in the state,” Goehring notes. “Like so many other things, if you are going to build a better system, you need to have a good relationship with the regulated industry. If we are doing our jobs and have a good inspection program in place, we shouldn’t have any problems. It’ll take a few years to get this right.”
Goehring says the transition from the PSC to the department of agriculture “has gone fairly well.” By utilizing new software and adding a few extra features, he states, the time needed to conduct an inspection has been cut almost in half, because data now can be transferred directly from an elevator to the agriculture department’s offices. “That means we don’t have to have an on-site inspection,” he explains, “and we can put another set of eyes on the data so we can work through the balance and inventories. We can look at daily position reports and look at accounts receivable and payable. If you aren’t looking at those, you can miss patterns of who the elevator is doing business with.”
Goehring says that proper oversight will include doing background checks and accessing credit reports of those people and businesses who are applying for grain licenses. “I’m a farmer myself,” he states. “I want to make sure people who are doing business with me as a farmer have the ability to pay their bills and are ethical. We want to create a good regulatory framework for people who want to do business in the state.”
The department of ag has developed financial criteria to gauge a company’s net worth and match that with the company’s working capital. “What we are trying to do is develop standards that give us the ability to regulate businesses so they have a good balance sheet. We can work with businesses that have some issues on their balance sheet and we can work with them so the farmers get paid and their business transactions are transparent and above board.”
Business and Credit Checks
There are some things that are out-of-date in the current law that Goehring wants to change, including what he regards as an antiquated designation of license types. He is suggesting that the legislature designate three types of licenses:
• Facility-based.
• Specialty grain or processor.
• Roving grain buyer.
Annual licensing fees will be based on the value of the commodities handled, not volume, Goehring says, with a $400 fee for a value of less than $1 million, an $800 fee for more than $1million, and a $1,200 fee for more than $10 million in commodities handled.
Goehring also want to create efficiencies by streamlining what he considers to be antiquated provisions concerning bonds and bond types and to cut the time that buyers can wait before paying for commodities from 45 days to 20 days.
Another proposal is to set up a bond fund that collects up to $3 million a year from assessments paid by businesses to compensate for losses after an insolvent grain buyer’s inventory and custodial accounts have been tapped.
Another area of abuse that needs to be reformed is the discrimination that sometimes has occurred concerning warehouse receipts for grain storage, Goehring notes. “We found a lot of abuse with warehouse receipts, discrimination I should say,” he says. “I’m requesting that the legislature require that grain warehouses issue a warehouse receipt for grain in storage. We have found situations where warehouse receipts have been issued to friends, neighbors family members, and if the grain warehouse was insolvent, then the warehouse receipt holders are protected, and the banks come in and sweep up everything else. That means other farmers with grain in storage without warehouse receipts were stuck with pennies on the dollar, when you try to recover proceeds and you are stuck with a bond.”
Stu Letcher
Establishing custodial accounts for the grain industry similar to the accounts currently being used for livestock also is being recommended by Goehring. “We are looking at a 20% custodial account for deferred grain purchases or some similar percentage,” he adds. “There is still a little heartburn when grain facilities are deferring payments to farmers into the next year.” The problem, he says, is that some facilities are using the deferred-price grain as capital even though they don’t own it.
So far, Goehring says, reaction to the proposed changes has been positive, although there has been some confusion and misinterpretations about what has been proposed.
Grain Dealers’ Reaction
Stu Letcher, executive vice president of the North Dakota Grain Dealers Association, said he and several members of the association met with Goehring and other members of the Ag Department in Bismarck on May 13 to discuss the proposed regulations.
“We would like to see some of their proposals tweaked,” Letcher tells Grain Journal in a telephone interview after the meeting, which lasted two hours.
“We think that, if we can work something out with the Agriculture Department, that it will make the process easier when proposals are made to the Interim Agriculture and Transportation Committee,” Letcher says. “Once the agriculture department has a chance to look at what we have proposed, they will be able to come back to us with some questions. We want to make sure that what is done doesn’t have any unintended consequences.”
This concludes the three-part series telling the story of the Hunter Hanson grain fraud case.
Mikkel Pates
