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This document was prepared by the staff of the Parliamentary Research Branch to provide Canadian Parliamentarians with plain language background and analysis of proposed government legislation. Legislative summaries are not government documents. They have no official legal status and do not constitute legal advice or opinion. Please note, the Legislative Summary describes the bill as of the date shown at the beginning of the document. For the latest published version of the bill, please consult the parliamentary internet site at www.parl.gc.ca.

LS-312E

BILL C-26:  AN ACT TO AMEND THE
CANADA GRAIN ACT AND THE AGRICULTURE AND
AGRI-FOOD ADMINISTRATION MONETARY
PENALTIES ACT AND TO REPEAL THE
GRAIN FUTURES ACT

Prepared by Daniel Shaw
Economics Division

30 January 1998
Revised 1 May 1998

TABLE OF CONTENTS

BACKGROUND

DESCRIPTION AND ANALYSIS

   A.   The Special Crops Producer Insurance Plan and Dealer Licensing Regime

      1.  Definitions
      2.   Special Crops Dealers' Licences and Security Exemption
      3.   Special Crops Insurance Plan and its Administration
      4.   Special Crops Dealer Obligations
      5.   Connecting the Act to the AAAMPA
      6.   Other Matters

   B.   Enforcement of the Canada Grain Act

   C.  The Grain Futures Act

COMMENTARY

BILL C-26: AN ACT TO AMEND THE CANADA GRAIN ACT AND
THE AGRICULTURE AND AGRI-FOOD ADMINISTRATION
MONETARY PENALTIES ACT AND TO REPEAL
THE GRAIN FUTURES ACT

BACKGROUND

On 4 December 1997, the Honourable Lyle Vanclief, Minister of Agriculture and Agri-Food, and also the Minister responsible for the Canada Grain Commission (CGC), tabled Bill C-26 in the House of Commons. Bill C-26 would amend the Canada Grain Act to facilitate the licensing of special crops dealers; the government expects this would enhance the competitiveness of the special crops industry in western Canada and lead to its expansion. The bill would also incorporate the Canada Grain Act within the Agriculture and Agri-Food Administrative Monetary Penalties Act (AAAMPA), thereby allowing the CGC to impose fines for most violations of the Canada Grain Act. Finally, the bill would repeal the Grain Futures Act in order to facilitate the development of non-grain contracts organized on the Winnipeg Commodity Exchange (WCE).

For the most part, the legislation proposes to change the Canada Grain Act so as to permit the separation of licensing and security provision for special crops dealers. To date, it has been argued that the inability to separate these two activities has been the primary impediment to the development of an insurance plan for the special crops industry of western Canada. By forcing such a separation in law and by putting the administration of a voluntary insurance plan under the CGC, Bill C-26 would remove the onus on special crop dealers to post costly security against the possibility of their default in payment to special crops producers. The Canadian Export Development Corporation (CEDC) would be the insurer. The Government of Canada, therefore, heralds Bill C-26 as a rural economic development initiative for western Canada which would combine affordable licensing of dealers with insurance for special crops producers.

Bill C-26 would also incorporate the Canada Grain Act within the Agriculture and Agri-Food Administrative Monetary Penalties Act to allow the CGC to impose monetary penalties or fines for most violations of the Canada Grain Act and its regulations. Present enforcement mechanisms in the Act are limited in scope, most being too harsh and costly to impose. For example, criminal prosecution or suspension of a licence is the only enforcement tool available for some minor infractions. The Agriculture and Agri-Food Administrative Monetary Penalties Act, which already incorporates the enforcement of the Canada Agricultural Products Act, the Feeds Act, the Fertilizers Act, the Health of Animals Act, the Meat Inspection Act, the Pest Control Products Act, the Plant Protection Act and the Seeds Act, offers an established system for enforcing the Canada Grain Act that would encourage compliance with established standards of quality.

Finally, Bill C-26 would repeal the 59-year-old Grain Futures Act, clearing the way for the Manitoba Securities Commission (MSC) to assume responsibility for regulating the WCE. In the interest of eliminating costly duplication and overlap, this devolution of regulatory responsibility would, with the agreement of the western provincial governments, also allow the Exchange to expand its scope beyond non-grain commodities to include hogs. The Government of Manitoba has already enacted a Commodity Futures Act giving the MSC the mandate to regulate grain futures trading. The subsequent transfer of necessary material and human resources would be carried out under a plan to be developed by the CGC and MSC.

DESCRIPTION AND ANALYSIS

   A. The Special Crops Producer Insurance Plan and Dealer Licensing Regime

      1. Definitions

Clause 1(1) would amend the definitions of a "cash purchase ticket," "grain receipt," "licence" and "licensee" to include the new term "special crops dealer." The first two terms refer to documents that are, respectively, evidence of a purchase from a producer and the producer’s entitlement to payment from a primary elevator, process elevator, or grain or special crops dealer. A "licence," as issued by the CGC, gives a holder "the licensee" the right to carry on a business as a grain or special crops dealer. Clause 1(2) clarifies definitions of "grain," and, in the French version of the Act, of "produit céréalier."

The basic definitions needed to implement the bill are given in clause 1(3). A "special crop" is defined as any grain designated by regulation. Initially, the special crops are defined as: beans, buckwheat, corn, fababeans, lentils, mustard seed, peas, safflower seed, soybeans, sunflower seed and triticale. A "special crops dealer" is defined as an operator of an elevator or a grain dealer who deals in or handles only special crop grain.

      2. Special Crops Dealers’ Licences and Security Exemption

Clause 2 would establish a new class of licence, as a "special crops dealer’s licence," to be required by special crops dealers in order to carry on such business (clause 3). Clause 4 would exempt special crops dealers from the requirement to post security to cover payment obligations to special crops producers; however, dealers would have to post such security if they also dealt in grains that were not classified as special crops. Clause 5 [sections 46(1) and (2)] would require special crops dealers to be approved by the insurer providing payment insurance to special crops producers in order to qualify for a licence. Clause 5 would amend section 46(3) to permit the CGC to refuse a licence to any applicant who had within the last 12 months been convicted of an offence under the Act or who was, or had been found to be, in violation of the Act, while connecting the Act to the Agriculture and Agri-Food Administrative Monetary Penalties Act.

Only the CGC would have the authority to realize the security given for the protection of producers by the licensees (clause 6(1)). Clause 6(2) would establish the criteria whereby producers could make a claim against the security (basically for failure to meet contractual payment or delivery obligations), while establishing that this security would not cover special crops. Clause 6(3) clarifies that a cash purchase ticket would be a bill of exchange.

      3. Special Crops Insurance Plan and its Administration

Clause 7 would introduce two entirely new sections to the Act. Proposed section 49.01 would set the rules governing the insurance plan, while proposed section 49.02 would establish an advisory committee to provide counsel to the Minister on the special crops insurance plan.

Clause 7 [s.49.01(1) and (2)] defines the "agent" as the CGC, which would be the administrator of the special crops insurance plan. Standard protection would be provided to safeguard the CGC from liability in the event that a licensee failed to pay a producer holding a cash purchase ticket or grain receipt (clause 8).

Clause 7 [s.49.01(3) through (5)] deals with the levy. Clause 7 [s.49.01(3)] would require all special crops producers, whether they participated in the insurance plan or not, to pay a levy for crops sold to licensed dealers. Clause 7 [s.49.01(4)] would require the licensee to collect the levy and remit it to the agent. Clause 7 [s.49.01(5)] would authorize the application of the levy to pay premiums to the insurer, cover the administrative expenses of the special crops insurance plan and pay for expenses incurred by the Special Crops Advisory Committee.

The criteria whereby a producer could make a claim against the special crops insurance are set out in clause 7 [s.49.01(6)]; most notably, the producer would be required to give notice in writing to the agent within a prescribed period from the date of the failure to pay. Clause 7 [s.49.01(7)] provides that, for the purposes of insurance coverage, if a cash purchase ticket or cheque issued by a licensee to a producer as payment for special crops was subsequently dishonoured, the licensee would be deemed to have failed to pay as of the date of the document was given to the producer. Clause 7 [s.49.01(8)] would provide a means whereby a producer could withdraw from the insurance plan.

Clause 7 [s.49.02(1) through (4)] would create a Special Crops Advisory Committee, set out its functions, provide for the make-up of its membership, and establish remuneration and reimbursement of expenses to be paid out of the levy. The Committee could have a maximum of nine members, each with a term of three years; a majority of the members would have to be special crops producers who were not special crops dealers, grain dealers or operators of an elevator. The Committee would have a mandate to make recommendations to the Minister regarding the designation of special crops, the selection of agent or insurer, and any other matters concerning special crops. The Minister would have to fix the amount whereby members would be reimbursed for any reasonable travel and living expenses they incurred in the course of discharging their duties.

Clause 24 would provide the CGC with the authority to make regulations, with the approval of the Governor in Council, designating any grain except wheat, oats, barley, rye, canola and flax as a special crop, fixing the amount of levy to be paid by producers and establishing procedures necessary to administer the special crops insurance plan.  These exceptions to the plan are already covered under posted-bond plans.

      4. Special Crops Dealer Obligations

Clauses 11 through 17 refer to the obligations of any special crops dealers who were also grain dealers or elevator operators. The obligations established in clauses 11 through 15 concern the operation and maintenance of their facilities and equipment in order to ensure accuracy and efficiency in receiving and discharging grains and grain products and screenings; weighing, sampling, inspection, grading, drying, and cleaning; ensuring that grain was in good condition upon reception and would not be likely to deteriorate in storage, and permitting the seller to verify the weight of the shipment.

Clauses 16 and 17 would ensure that special crops dealers had the same obligations as grain dealers for the purchase of western grain, for reporting business records to the CGC, and for the inspection of their premises.

      5. Connecting the Act to the AAAMPA

Clauses 18 through 23 would connect the Canada Grain Act to the Agriculture and Agri-Food Administrative Monetary Penalties Act with respect to seizure of assets, reporting of violations, detention of documents and records, restrictions on operations, suspension of licence, revocation of licence and offences and punishment.

Clause 18 would ensure that an inspector could, on reasonable grounds, seize any documents or records and report any violation; seize any grain or grain products or screenings in an elevator that were infested or contaminated; and seize inaccurate or malfunctioning equipment. Clause 19 would ensure that the CGC could, upon receipt of a report of violation committed by a grain or special crops dealer: order the licensee to re-weigh; prohibit the receipt into or the removal from an elevator of any grain, grain products, or screenings; and suspend the licence. Clause 20 would permit the CGC to commence proceedings within 30 days, barring an extension, regarding a prohibition or suspension of a licensee.

Clauses 21 and 22 would grant the CGC authority to revoke a licence if the licensee had failed to comply with any requirement of an order, was convicted of an offence under the Act, or had committed a violation. Clause 23 provides for a fine not exceeding $50,000 or a prison term not exceeding six months for any offence on summary conviction or a fine not exceeding $250,000 or a prison term not exceeding two years for an indictable offence.

      6. Other Matters

Clause 9 would repeal obsolete provisions dealing with the regulation of elevator charges. Clause 10 would amend the heading to include special crops dealers.

   B. Enforcement of the Canada Grain Act

Clauses 26 and 27 would make consequential amendments to the Agriculture and Agri-Food Administrative Monetary Penalties Act to include the Canada Grain Act. Clause 28 would amend the Agriculture and Agri-Food Administrative Monetary Penalties Act conditionally upon the coming into force of those amendments to the Canada Grain Act or to the Farm Debt Mediation Act.

   C. The Grain Futures Act

Clause 29 would repeal the Grain Futures Act to make way for the Manitoba Securities Commission to assume responsibility for regulating the Winnipeg Commodity Exchange under its newly enacted Commodity Futures Act.

In promulgating Bill C-26, the Government of Canada is seeking to provide an affordable insurance plan for special crops producers in western Canada, a goal that has eluded it so far. The federal government claims that this experimental program would be a unique, innovative rural economic development initiative which, if successful, might serve as a model for redesigning existing producer-funded insurance schemes for standard crops produced in western Canada. The bill would also combine two administrative objectives in an attempt to bring more efficiency to the marketing of grain commodities in western Canada.

Industry critics have always been quick to point out that the security required from special crops dealers in order to cover their payment obligations to producers has forced small companies to venture into the special crops industry on an unlicensed basis, in contrast to their larger, licensed counterparts. As a result, in the case of their insolvency, the risk of payment default is shifted to special crops producers. It is further believed that the lack of affordable insurance for these risks, which forces producers to self-insure, has held back farmers from entering special crops markets in a substantial way. Industry officials claim that there is a sort of "chicken and egg" problem: the industry cannot grow properly and provide stable supplies of special crops because it has no default insurance plan, while no private company will consider providing default insurance because industry volumes are too low. Bill C-26 is meant to address this situation.

While dealer insolvency and defaults in payment are rare even for licensed dealers, they could be devastating to the special crops producer. Clearly, an affordable insurance scheme would provide great benefit and stability to the industry. To comprehend why such private-sector plans have not been forthcoming one must first understand how they operate.

In standard licensing regimes designed to guarantee payment in case of dealer default, like those for standard crops such as wheat, barley and canola, licensed dealers must post security with the CGC. This security plays two economic functions. First, it provides a relatively liquid asset that can be used to repay, in whole or in part, the money owed to producers. Second, it is a valuable asset that guides the licensed dealer to act in a financially prudent manner; a dealer who was in substantial arrears in his payments to producers and was anywhere near insolvent would lose title to the asset. This potential to suffer a significant capital loss provides the dealer with an added incentive (over and above the usual personal disgrace associated with business failure and failure to pay debts) to conduct business while incurring only reasonable risks. Further, given the apparently increased social acceptance of corporate and personal bankruptcies in the stagnant economy of the 1990s, the absence of such posted security and the potential for capital loss could increasingly lead the dealer to drift towards more risky business propositions with increased likelihood of default.

It is usually the dealer and the insured producer who foot the bill for this security. The licensed dealer posts the necessary security to guarantee payment for purchases received from grain producers and, therefore, bears its associated costs (either in the form of the interest foregone or a bondsman’s fee), and bears the administrative burden of the licensing regime. These costs, however, are largely passed on to the grain producer in the form of a lower purchase price with any cost that remains being borne by the dealer. In the end, the relative economic strengths of those engaged in these transactions would determine everyone’s share of these costs.

In contrast, under Bill C-26, the CGC would create a class of licence for special crops dealers, who could be elevator operators or grain dealers, provided they demonstrated financial viability. The insurer would also advise the CGC on the suitability of licence applicants. Licensees would not need to post security to cover payment obligations to special crops producers. Only those producers who sold to a licensed dealer and were members of the insurance plan would be eligible for compensation (of up to 90% of their receivable) if a company with which they dealt failed to pay them or went bankrupt. The 10% deductible, of course, would ensure that grain producers continued to be selective in their choice of licensed dealers.

Unless notified to the contrary in writing at the beginning of the season, all special crops producers would be deemed to be members of the plan. In either event, all producers would pay a levy of 38¢ per $100 sale (composed of an insurance premium of 20¢ and a CGC administrative charge of 18¢) to the licensed dealer, who, in turn, would pass it on to the CGC. The CGC will further pass on the insurance premium component to the CEDC. This proposed levy is based on the expectation that 125 dealers would participate in the licensing regime (based on a survey of 32 special crops dealers) and CEDC calculations incorporating historical data for failure rates of the larger licensed grain dealers. These rates, which are believed to be actuarially sound and not expected to involve a government subsidy, would be modified over time according to actual experience.

Those producers who chose not to participate in the plan would be refunded for all levies upon their filing and providing the relevant records at the end of the season. Consequently, their burden would simply be the risks and costs associated with payment default by the dealer, the opportunity cost associated with the implicit loan provided to the CGC between the time the levy was paid and its reimbursement at the end of the season, and the incidental administrative costs of keeping and providing records for reimbursement of levies paid.

The Government of Canada would, therefore, be able to offer affordable voluntary insurance, where the private sector has, for two principal reasons, not been able to do so. First, the government would be taking advantage of its special status to alter customary law on negative-option recruitment and receive mandatory contributions by non-participatory producers (with reimbursement that did not include its "opportunity cost" - i.e., foregone interest) to lower CGC administration costs. Secondly, the CGC would be replacing the security payment with administrative supervision of licensees. This supervision would include the monitoring of annual financial statements, monthly sales and contract reports, and credit limits on a periodic basis. Consequently, the government claims that, because it would sever the normal business practice of posting security from the licensing regime, Bill C-26 would constitute a unique rural economic development initiative.

History suggests that the incentive-based system of a security payment made by licensed dealers is the least costly way to ensure the fewest defaults. The private sector has tried the coercive system of administrative oversight in the past in other contexts, where they have proved to be not very effective; and they have entailed costly monitoring on the part of the administrator and costly compliance on the part of dealers ¾ resulting in costs that are passed on to the insured. Without evidence that CGC and CEDC officials possess any superior knowledge in practising "due diligent" oversight, one can predict that the proposed levy underestimates the true economic costs of the insurance. The industry’s default rate can be expected to rise more in the context of an insurance plan than in a posted security system; inevitably, some dealers, knowing full well that producers were insured from payment default and that no capital loss would be suffered, would try to maximise their profits by assuming greater business and financial risk.

The CEDC has not shown that its levy would be protected against this type of expected "moral hazardous" behaviour. Moreover, an advisory committee dominated by special crops producers is unlikely to recommend that subsequent CEDC insurance premiums should rise by more than the rate of inflation. The Minister would possibly then be guided into providing a subsidy in perpetuity in order to avoid the failure of the government-provided insurance plan; there is simply no evidence that producers, if insurance premiums eventually came to reflect their true economic costs, would be better off than under the status quo.