Vol. 147, No. 40 — October 5, 2013

Regulations Amending the Canada Grain Regulations

Statutory authority

Canada Grain Act

Sponsoring agency

Canadian Grain Commission

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Background

The Jobs and Growth Act, 2012 (the Act), assented to by Parliament on December 14, 2012, contains sections with amendments specific to the Canada Grain Act (CGA). The amendments to the CGA provide the Canadian Grain Commission (CGC) with the authority to prescribe the security required of its licensees by way of insurance, and to adopt an insurance-based producer payment protection model in its Licensing Program. The advantage of adopting this model is reduced costs to the grain sector in addition to a streamlined Licensing Program and reduced licensing fees. Upon the amended CGA coming into force, amendments are required to the Canada Grain Regulations (CGR) in order for them to align with the new legislation.

Issues and objectives

The amendments to the CGA establish that security to be obtained and maintained by licensees will be prescribed by regulations. The CGC is now proposing to implement producer payment protection for licensee liabilities to producers holding authorized documents for eligible grain deliveries, moving from an individual security-based model to an aggregate group insurance-based model.

The objectives of these proposed Regulations are to

  • reduce costs to the grain industry and the CGC;
  • reduce the administrative burden of licensees and the CGC;
  • establish that an eligible holder must be a producer. This removes the requirement for security in relation to terminal elevators because they do not incur producer liabilities;
  • apply consistent periods for payment and delivery obligations for all authorized document holders;
  • encourage producers to take steps to minimize the risk of not being paid by creating a 5% deductible and reforming their eligibility period to 45 days from the date of delivery; and
  • create a more predictable and transparent producer payment protection model.

Description

The CGC licenses and regulates elevators and grain dealers in accordance with the CGA. In order to purchase grain (see footnote 1) from western Canadian producers, a company must be licensed. Currently, licensed elevators and grain dealers are required to post security to cover their outstanding liabilities to producers in the event of a company default in its payment obligations to producers. Licensees are required to report grain quality data and grain handling information to the CGC, which are used by producers and the grain industry to facilitate business decisions and trade. The licensing requirement also ensures that producers can exercise their right to be paid on the basis of the Inspector’s Grade and Dockage as determined by a CGC inspector rather than by the grain handler.

The Licensing Program monitors licensees and responds to inquiries and complaints from producers regarding its licensees. Such inquiries and complaints primarily concern disagreements between producers and licensees, grading disputes, nonpayment and slow payment to producers, are inquiries related to shrinkage and tariff deductions, and are complaints regarding the proper issuance of documents.

The current producer payment protection model in the Licensing Program requires licensees to tender security by way of bond, letter of credit, letter of guarantee, cash deposit, trust account, or payables insurance on an individual basis based on the licensee’s potential obligations to grain producers. Depending on the size of the company, this could be as low as $25,000 or as much as several hundred million dollars. The CGC assesses the amount of security required based on the licensee’s monthly outstanding liabilities to producers. This information is obtained from a Monthly Report of Licensee’s Liabilities to Producers form, which is submitted by licensees to the CGC on the 15th of every month as a condition of licensing. Security is used to compensate producers when a licensee fails or refuses to meet its payment or delivery obligations to producers. This model has been operating for several decades with limited changes.

The individual licensee-specific limitations of security in the current model allow for security shortfalls, which producers say is unacceptable. A security shortfall occurs when the total amount of producer liabilities may exceed the total amount of security posted for an individual licensee in a monthly reporting period. Such shortfalls create costs to licensees and risk to producers. Between 2009 and 2012, the Licensing Program identified 819 security shortfalls, with an average of 204 security shortfalls a year. The value of these shortfalls varies from a minor amount to a significant amount, but on average the shortfall percentage represents 34% of the security tendered. In each of these instances, producers were exposed to the risk of not receiving full compensation for their eligible deliveries. In some of these instances, the CGC required that a licensee tender additional security, which creates additional costs. In 2012, the CGC identified 214 shortfalls, and required additional security to be tendered by licensees for 66 of these shortfalls. When a licensee is required to tender additional security, the process of seeking, obtaining, and posting additional security adds an administrative cost. The CGC also incurs a compliance cost associated with monitoring this process and enforcing the additional security requirement, a cost which is passed on to licensees through a licensing fee.

The risk of shortfalls in the current program is twofold. The first risk is the lack of information in the time gap between the period where licensees have reported their previous month’s liabilities to the CGC and the amount of producer purchases being made in the current month. For example, a licensee is required to submit a report on June 15 detailing their outstanding producer liabilities for the period from May 1 to May 31. At this time, the CGC is lacking information from the period from June 1 to June 15. The CGC will not receive information about producer purchases made on June 1 until July 15, which represents a 45-day information delay. During this time, the CGC is lacking information to make a decision regarding the adequacy of the security on hand for any given licensee. It is possible that during this time, a licensee may make a business decision to increase their producer purchases, or a licensee experiencing financial difficulties may begin to increase their producer purchases as a means of increasing inventory to leverage their financial strength. In each of these cases, a licensee is not obligated to report their increased volumes of producer purchases to the CGC until the next reporting period on July 15. The CGC is not necessarily immediately informed when a licensee increases their producer purchases and that their security-level requirements should be increased.

The second risk is licensee reporting of an increase in producer purchases on the Monthly Report of Licensee’s Liabilities to Producers form, without an immediate increase in security level. Once the CGC is aware of a security shortfall, the CGC may require a licensee to tender additional security. The process for a licensee obtaining this security is controlled by a third-party financial institution, not the CGC, and each has its own approval process, which may vary. It is not unusual for there to be some delays in this process. Because of this, the security amount tendered by a licensee may be less than the amount required to cover their obligations to producers, and producers can be at risk of receiving less than full compensation for eligible deliveries. The process for the CGC to follow up on security shortfalls creates additional program costs through compliance activities, which are ultimately passed on to licensees through licensing fees. Licensees also incur additional administrative costs associated with the process of seeking, obtaining, and posting additional security to cover their increased producer purchase volumes.

When the CGC requests that a licensee tender additional security to cover a shortfall and that licensee is in the process of renewing their annual licence(s), the CGC may issue a short-term licence, generally on a monthly basis, until the matter is resolved. This creates an additional administrative burden to the CGC and the licensee, where some of the tasks associated with the licence renewal process are repeated multiple times on a monthly basis, rather than once annually. There may also be additional monitoring needed, and in some cases the CGC may require additional reporting, such as an interim Monthly Report of Licensee’s Liabilities to Producers form to monitor liabilities more closely between standard reporting periods. In other cases, the CGC may require a licensee to submit an audited Monthly Report of Licensee’s Liabilities to Producers form, which adds an additional cost to the licensee because an external auditor must be hired to validate the report.

While the current model has been relatively successful, it is expensive for both licensees and the CGC to administer. The current model is based on a costly reporting structure and results in a high volume of work duplication. A high volume of security shortfalls can occur, and there are no efficiencies of shared cost and shared risk.

The following is a brief description of the proposed Regulations:

Decreased reporting

The requirement for licensed grain dealers, primary elevators, and process elevators to provide a monthly report of outstanding obligations for the payment of money or the delivery of grain to holders of elevator receipts, grain receipts, and cash purchase tickets and the security amount in place to meet those obligations at the end of the preceding month would be removed. This report is known as the Monthly Report of Licensee’s Liabilities to Producers form.

Insurance policy

Licensees will obtain security in the form of an endorsement to an insurance policy. Security may be realized or enforced in respect of a grain receipt, elevator receipt, or cash purchase ticket only if the holder of the receipt or ticket gives notice in writing to the CGC of a failure or refusal to pay or to deliver grain, within 30 days of the failure or refusal.

A producer must provide a completed claim in a form provided by the Commission within 30 days of the form being requested by the Commission. The prescribed maximum percentage value of a grain receipt, elevator receipt, or cash purchase ticket in relation to which security may be realized or enforced is changed to 95%.

Consistent eligibility period

Consistent periods for payment and delivery obligations for all authorized document holders, beginning at the date of delivery for all authorized documents, would be applied. It would be established that only producers can be eligible holders. The prescribed period for payment and delivery obligations would be reduced to 45 days from the date of delivery.

Consultation

The CGC held Web-based consultations on its entire complement of user fees in December 2010, March 2011, and November 2012, in accordance with the requirements of the User Fees Act. Consultation documents were posted to the CGC’s Web site and to Service Canada’s Consulting With Canadians Web site. In addition, the CGC held 10 face-to-face consultation sessions in Montréal, Guelph, Winnipeg, Regina, Saskatoon, Edmonton, and Calgary in January 2011. Each of these consultations sought input from CGC stakeholders and Canadians on the fees and service standards in support of all CGC programs and services, including the Licensing Program, which administers producer payment protection. The user fees consultation process was completed in February 2012 with 48 formal written submissions received from external stakeholders. One of the major feedback themes was that the CGA should be modernized, and that CGC services be streamlined — with unnecessary services eliminated prior to updating user fees. Stakeholders indicated that the licensing fee was too high, and that the program should be streamlined. The amendments to the CGA identified in the Jobs and Growth Act, 2012 included changes to provisions related to security and the ability to move to an insurance-based producer payment protection model as part of the Licensing Program that will reduce costs to the industry. These Regulations provide the streamlined Licensing Program that reduced the licensing fee as identified in the CGC’s user fees consultations.

The CGC held a stakeholder engagement in February 2012 regarding potential CGA amendments. Stakeholders were asked to submit feedback on seven key areas, including the Licensing Program and producer payment protection. Feedback from the grain industry regarding an insurance-based security model was overall supportive. Producers also supported this model because it would reduce costs to licensees, which they strongly contend are ultimately passed down to them, and would also minimize the ongoing risk to producers of security shortfalls.

In December 2012, the CGC sent a letter to all licensees and producer groups to advise them of proposed changes to the Licensing Program and the producer payment protection model. The amendments to the CGR are expected to be uncontroversial and will be appreciated by interested stakeholders as they reduce unnecessary costs and reporting requirements. As a result, public interest, stakeholder opposition, and potential controversy on the regulatory proposal itself is expected to be low.

“One-for-One” Rule

The “One-for-One” Rule applies, and this proposal is considered an “OUT” under the Rule with an overall net decrease of $888,437 in administrative costs to all licensed grain dealers, primary elevators, and process elevators. The average annualized decrease per business is $13,578.

The stakeholder group affected by the removal of the reporting obligation to provide a Monthly Report of Licensee’s Liabilities to Producers form consists of licensed grain dealers, primary elevators, and process elevators. This group represents 133 licensees. (see footnote 2)

The assumptions used in calculating the administrative costs associated with the Monthly Report of Licensee’s Liabilities to Producers form are as follows:

  • The Monthly Report of Licensee’s Liabilities to Producers form is prepared by an accountant each month.
  • All licensees spend an average of 28 hours after initial licensing to learn and understand their reporting requirements. This includes consulting with CGC auditors to understand the data required and how it may be extracted from internal accounting systems and banking systems to ensure accurate reporting.
  • Licensees consult with legal counsel to confirm their reporting obligations under the CGA and CGR. Their legal counsel requires an average of four hours of research and work to provide an opinion.
  • Small licensees spend on average 21 hours a month preparing the Monthly Report of Licensee’s Liabilities to Producers form.
  • Medium and large licensees spend on average 13 hours a month preparing the Monthly Report of Licensee’s Liabilities to Producers form.
  • When a licensee is required to submit an audited Monthly Report of Licensee’s Liabilities to Producers form, the cost of this audit is on average $3,600. This assumes a cost of $150/hr with 24 hours of work.

Small business lens

The small business lens does not apply to this proposal because it decreases the compliance and administrative costs of small businesses.

Rationale

The proposed Regulations reduce the cost of annual licensing user fees by $2,671 per licence. The current program is operating at a cost of $5,983 per licence, but only recovering $1,200 per licence from licensees. Historically, Canadians have funded the $4,783 per licence shortfall. These proposed Regulations, in conjunction with the CGC’s proposed changes to the fee schedule of the Regulations, reduce these costs to $3,312 per licence, and align the source of funds entirely with the licensees who receive the licence.

By implementing an aggregate insurance-based producer payment protection model, the CGC will reduce the risk of licensee security shortfalls, with a streamlined and more efficient administrative structure. In 2012, the current program identified a total of 214 shortfalls. When the proposed model is applied to the 2012 reports, the number of shortfalls is reduced to 23. These 23 licensees are among the least risky from a financial perspective, with the highest compliance rate in the Licensing Program, and are consequentially among the least likely to fail. In the proposed model, the CGC will require less administration in its Licensing Program, which will reduce the cost of licensing fees. Licensees will also no longer be required to submit the Monthly Report of Licensee’s Liabilities to Producers form, which will reduce their reporting costs.

The proposed model will take advantage of the aggregated experience (through a master policy agreement) to reduce the overall cost of producer payment protection coverage to the entire grain industry. All licensees will be part of the same policy with the same coverage limit, and will pay premiums based on their producer purchase volumes and failure risk. The risk of ongoing security shortfalls will be reduced. Producers will continue to make claims to realize on security for a specific licensee when that licensee fails to meet its payment or delivery obligations to producers.

Over the past 32 years, (see footnote 3) the program has paid an average of approximately $723,000 (inflation adjusted) in annual losses from failures to pay producers, with the highest amount ever paid in a single year of $6,750,000 (inflation adjusted), in 1981. During this time, some years experienced no failures, while other years experienced up to three failures. Over the past 32 years, 40% of the time a year would not see a failure occur, while 60% of the time a year would experience at least one failure.

Because historical data may underestimate the actual loss probability, an external actuary reviewed the data and developed a potential loss model based on 50 000 random scenarios of potential claims, based on all licensee producer liabilities in the 2011/2012 crop year. The actuary’s findings indicated an annual loss estimate of $3.6 million a year. That estimated annual average, although significantly higher than the historical average, includes the probability of failure from large licensees, that has not happened over the history of the program, but is nevertheless plausible. Furthermore, that estimated annual loss was unlimited and without a deductible. An assumption of 95% coverage subject to an annual aggregate limit of $100 million would further reduce the annual loss estimate to $2.6 million.

The total amount of security tendered by licensees in the current model varies according to producer purchase volumes, but recently the total has been upwards of $1 billion. Considering the low annual average loss estimate and even lower actual historical loss figures, licensees would benefit from aggregating their loss exposure. This will reduce the total cost of capital associated with securing nearly $1 billion in potential losses on an individual basis to a lower amount because the aggregate limit would be a fraction of that level under a single insurance policy. Through this approach, overall premium costs will be reduced, and some licensees will experience further benefits by recovering the lost opportunity costs associated with pledging assets to support some forms of security and accessing working capital that was previously restricted.

In the current model, producers are unaware of how much security an individual licensee has tendered with the CGC when making their business decisions. In the proposed model, producers will know that their aggregate deliveries are covered up to an annual set limit. This limit will create a more predictable and transparent security structure with respect to payments that producers will receive. If there is a coverage limit that is less than total outstanding licensee liabilities, there is a risk that producers may receive prorated claims in the event of a catastrophic industry loss. Historically, only small- to medium-sized licensees have defaulted on their payment or delivery obligations to producers under the current program. The risk of one or more of the largest licensees defaulting on their payment or delivery obligations to producers cannot be eliminated, but it is considered to be remote. Because of this, the aggregate insurance model provides stronger, more predictable producer payment protection, but the risk of prorated payments cannot be completely eliminated.

The current security model accounts for moral hazard because a licensee’s security may not be sufficient to cover all payment obligations. Because of this risk, producers are more cautious in making their business decisions. With the new model, producers will know the aggregate coverage limit under the master policy agreement. The majority of licensees deal in volumes well under this limit, particularly companies with the highest failure risk. When considering the risk of selling to a licensee that does not transact a volume of business near the identified coverage limit, a producer might decide to consider a riskier transaction. Because of this, the CGC is proposing to reduce coverage from a maximum of 100% to a maximum of 95%. This 5% deductible will assign a portion of the risk to producers. The purpose of this change is to transfer the concept of moral hazard found in the current model in each business transaction to the aggregate structure of the proposed new model.

In the proposed model, all authorized document holders will have the same eligibility periods for licensee payment and delivery obligations. This is in contrast to the current model in which holders of cash purchase tickets (or other bills of exchange) apply the lesser of 90 days from the date of delivery or 30 days from the date of issuance, whereas holders of receipts apply 90 days from the date of delivery only. In the proposed model, eligibility will be applied consistently for all authorized document holders based on the date of delivery. This includes producers who are holders of elevator receipts, grain receipts, cash purchase tickets and other bills of exchange. This change clarifies and simplifies eligibility periods for producers. Licensees will no longer be reporting their producer liabilities, and the CGC will no longer be establishing security levels for individual licensees. Because of this, the 30-day prescribed period for payment and delivery obligations for a cash purchase ticket (or other bill of exchange) is no longer required. This simplifies the CGC’s audit process in a claim situation, and reduces the amount of time required to determine eligibility. The prescribed period for payment and delivery obligations is reduced to 45 days from the date of delivery for all authorized documents. Because this decreases the loss potential, the cost of the model is further reduced. In addition, producers are encouraged to take steps to reduce their risk and conduct due diligence in their business transactions.

The proposed model eliminates the outdated requirement for the terminal elevator licence class to tender security as a condition of licensing because these facilities no longer incur producer liabilities. In the past, producers could ship their grain directly to terminal elevators without prior authorization or a handling agreement. Once the Crow Rate was eliminated, this practice was no longer economically desirable for producers. Since that time, terminal elevators have implemented the requirement for handling agreements and terminal elevator authorization before a delivery will be accepted. Handling agreements are made between grain companies. Producers may still make shipments with producer cars, but these now require a confirmed sale to a licensee before they will be accepted by a terminal elevator. As a result, the modern grain handling environment does not involve producers selling grain directly to a terminal elevator.

To summarize, the benefits of the proposed Regulations are

  • Reduced licensing fees;
  • Reduced security shortfalls, which decreases the administrative burden of both the CGC and licensees;
  • Decreased risk to producers of receiving prorated claims;
  • Reduced reporting burden associated with producing a Monthly Report of Licensee’s Liabilities to Producers;
  • Reduced aggregate premium costs;
  • Recovered lost opportunity costs and increased access to working capital for some licensees;
  • More predictable and transparent security structure;
  • Consistent eligibility periods for all holders of authorized documents;
  • Added incentives for producers to take steps to reduce their risk and conduct due diligence in their business transactions; and
  • Streamlined Licensing Program with cost savings passed on to stakeholders.

Implementation, enforcement, and service standards

The regulatory amendments are targeted to come into force on December 1, 2013, and will coincide with the coming into force of the CGA amendments.

The CGC has provided information to its stakeholders subsequent to the Jobs and Growth Act, 2012 receiving assent. The CGC will continue to provide communication regarding all aspects of the CGA amendments and the corresponding CGR amendments. In order to ensure a smooth operational and administrative transition, the CGC will be informing grain producers, grain producer organizations, grain industry associations, and CGC licensees of the changes to the CGA and the corresponding changes the CGR through news releases and letters or notices to target audiences.

The proposed regulatory amendments do not impact the CGC’s role or mandate and do not require any new mechanisms to ensure compliance and enforcement. The CGC will continue to ensure compliance with the new requirements using its existing enforcement and compliance tools.

Contact

Amanda Houssin
Policy Analyst
Canadian Grain Commission
303 Main Street
Winnipeg, Manitoba
R3C 3G8
Telephone: 204-984-2857
Fax: 204-983-4654
Email: Amanda.Houssin@grainscanada.gc.ca

PROPOSED REGULATORY TEXT

Notice is given that the Canadian Grain Commission, pursuant to subsection 116(1) (see footnote a) and paragraph 117(a) (see footnote b) of the Canada Grain Act (see footnote c), proposes, with the approval of the Governor in Council, to make the annexed Regulations Amending the Canada Grain Regulations.

Interested persons may make representations with respect to the proposed Regulations within 30 days after the date of publication of this notice. All such representations must cite the Canada Gazette, Part Ⅰ, and the date of publication of this notice, and be addressed to Amanda Houssin, Policy Analyst, Canadian Grain Commission, 601–303 Main Street, Winnipeg, Manitoba R3C 3G8 (tel.: 204-984-2857; fax: 204-983-4654).

Ottawa, September 27, 2013

JURICA ČAPKUN
Assistant Clerk of the Privy Council

REGULATIONS AMENDING THE CANADA GRAIN REGULATIONS

AMENDMENTS

1. Section 17 of the Canada Grain Regulations (see footnote 4) and the heading before it are replaced by the following:

16.1 For the purpose of subsection 45.1(1) of the Act, a licensee shall obtain security in the form of a credit insurance policy.

ELEVATOR RECEIPT OR GRAIN RECEIPT

17. (1) A producer who is the holder of an elevator receipt or grain receipt in respect of grain has 45 days from the day on which that grain is delivered to demand that a licensee meet their payment or delivery obligations.

(2) The producer may realize on or enforce security that is obtained by the licensee if, within 30 days after the day on which the producer makes a demand to the licensee to meet their obligations, the producer gives written notice to the Commission of their intention to realize on or enforce the security.

(3) After receiving the notice, the Commission shall provide the producer with a claim form.

(4) The producer shall return the completed and signed claim form to the Commission within 30 days after the day on which the producer receives it.

CASH PURCHASE TICKET

17.1 (1) A producer who receives a cash purchase ticket from a licensee may realize on or enforce security that is obtained by the licensee if, within 45 days after the day on which the licensee fails to meet their payment obligations as established in subsection 49(3) of the Act, the producer gives written notice to the Commission of their intention to realize on or enforce the security.

(2) After receiving the notice, the Commission shall provide the producer with a claim form.

(3) The producer shall return the completed and signed claim form to the Commission within 30 days after the day on which the producer receives it.

17.2 (1) A producer who receives an elevator receipt or a grain receipt from a licensee and who exchanges it for a cash purchase ticket may realize on or enforce security that is obtained by the licensee if, within 75 days after the day on which the grain – in respect of which the elevator receipt or the grain receipt is issued – is delivered, the producer gives written notice to the Commission of their intention to realize on or enforce the security.

(2) After receiving the notice, the Commission shall provide the producer with a claim form.

(3) The producer shall return the completed and signed claim form to the Commission within 30 days after the day on which the producer receives it.

2. Section 19 of the Regulations is replaced by the following:

19. For the purposes of subsection 49(2) of the Act, the prescribed percentage that may be realized or enforced against the security is 95%.

3. Subsection 21(3) of the Regulations is replaced by the following:

(3) Each applicant for a licence shall submit to the Commission, at least 10 days before the commencement date of the licence period, the licence fee set out in Schedule 1 and the security prescribed under section 16.1.

4. Section 23 of the Regulations and the heading before it are repealed.

COMING INTO FORCE

5. These Regulations come into force on December 1, 2013, but if they are registered after that day, they come into force on the day on which they are registered.

[40-1-o]

  • Footnote 1
    Grain refers to any seed designated by the CGR as a grain for the purposes of the Canada Grain Act.
  • Footnote 2
    Licensed companies as at March 1, 2013.
  • Footnote 3
    This includes failures that have been finalized and paid by March 1, 2013.
  • Footnote a
    S.C. 2012, c. 31, ss. 388 and 402
  • Footnote b
    S.C. 1994, c. 45, s. 34
  • Footnote c
    R.S., c. G-10
  • Footnote 4
    C.R.C., c. 889; SOR/2000-213