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Assuring Payment to Livestock Producers

January, 2000

Donald L. Uchtmann

When a livestock producer ships livestockto a packer, marketing agency, or dealer, what assurance does theproducer have that the producer will receive payment for the livestockif the buyer should get into financial difficulty? The questionis not just academic. For example, hundreds of American livestockproducers suffered losses exceeding $20 million when American BeefPackers went bankrupt in 1975. But subsequent amendments to theFederal Packers and Stockyards Act, and other provisions of Illinoislaw primarily dealing with licensing and bonding of livestock buyers,now provide reasonable assurance of payment to livestock producers.The paragraphs which follow focus on the protections afforded byfederal law.
  • The Federal Packers and StockyardsAct (PSA), as amended, contains four provisions to help assurepayment. The first of these is bonding. The Secretaryof Agriculture is authorized to require reasonable bonds frommarketing agencies, dealers, and packers whose average annualpurchases exceed $500,000. The proceeds of the bond are availableto help compensate livestock producers who are not paid forthe livestock they have sold.

    The second provision relates to prompt payment. ThePSA also provides that dealers, market agencies, and packersmust issue a check for the full amount of the purchase pricebefore the close of the next business day following the purchaseof livestock. The prompt payment requirement can, however, bewaived by an express written agreement between the buyer andseller.

    The third provision is the creation of a statutory trust.The PSA also requires that livestock purchased by the packerfor cash, as well as meat inventory and proceeds from the saleof meat, be held in trust for the benefit of all unpaid cashsellers of livestock. Should the packer go bankrupt, the statutorytrust assures that the unpaid sellers of livestock will be paidfrom trust assets ahead of the bankrupt packerís lenders. Itshould be noted that the producers must give the Secretary ofAgriculture timely written notice if the packers final paymentbecomes delinquent or if the check bounces. If producers donítgive timely notice, the producers lose the protection of thestatutory trust. It should also be noted that the statutorytrust provisions only apply to packers with purchases exceeding$500,000.

    The fourth provision is reparation. The PSA establishesa special procedure for unpaid livestock sellers to a marketingagency or dealer. The procedure can start with a complaint fromthe unpaid seller to the Grain Inspection, Packers and StockyardsAdministration. The procedure can end with a reparation orderthat the unpaid seller is due a particular amount. The reparationorder may be enforced through the courts. In effect, this provisionshifts from the seller to the U.S. Department of Agriculturesome of the cost of investigating and proving that payment isowed.

    Although the bankruptcy of a packer or livestock dealer maybe unlikely, sellers of livestock can take some comfort is theprovisions of federal and state law that help assure that unpaidlivestock sellers will receive some payment.

    Click on TheFederal Packers and Stockyards Act to see the actual federallaw.

    Also, click hereto see additional information on this topic provided by theUSDA



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