More Can Be Done To Protect Depositors at Federally Examined Grain Warehouses

CED-81-112: Published: Jun 19, 1981. Publicly Released: Jun 19, 1981.

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The Department of Agriculture (USDA) administers a voluntary licensing and examination program under the Warehouse Act. In addition, USDA sets requirements for and examines contract warehouses storing commodities owned by the Commodity Credit Corporation (CCC) or pledged to CCC as loan collateral. GAO reviewed the USDA grain warehouse examination programs. To avoid duplication of other ongoing studies, GAO limited the examination to the magnitude of the bankruptcy problem to date, the number of warehouses in financial difficulty, ways the current Federal programs could be strengthened, and issues that should be considered in evaluating certain possible program and legislative changes.

GAO found that about 2 percent of the Nation's approximately 10,000 grain warehouses went bankrupt over the past 7 years. Financial formulas for predicting bankruptcies in certain industries have been developed and tested successfully. The GAO self-developed criteria, although not designed to measure future bankruptcies, indicated that a significant number of grain warehouses may be in financial difficulty; an estimated 300 warehouses subject to Federal examination. While this estimate does not mean 300 bankruptcies are likely in the near future, it is a cause for concern in light of the much lower rate of bankruptcies to date. Federal warehouse examinations are designed to protect depositors primarily by ensuring that a warehouse has enough grain of the proper quality to meet all storage obligations. The two weaknesses that hamper efforts to accurately determine these obligations are: (1) the practice of not issuing warehouse receipts for all storage grain; and (2) the lack of control over printing and distribution of warehouse receipts in certain States. Since many States do not control the printing and distribution of receipts, examiners cannot be sure that they have accounted for all receipts when examining nonfederally licensed CCC contract warehouses in those States. USDA requires operators to submit certain financial data at least annually but does not require certified statements.

Recommendations for Executive Action

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Secretary of Agriculture should direct the Administrator of the Agricultural Marketing Service to require that it value fixed assets according to generally accepted accounting principles--cost less accumulated depreciation on depreciable assets. Warehouse operators should then be required to follow generally accepted accounting principles in filling out financial data forms submitted to the Agricultural Marketing Service.

    Agency Affected: Department of Agriculture

  2. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Secretary of Agriculture should direct the Administrator of the Agricultural Marketing Service to require that grain storage obligations reflected on warehouse customer account records be verified with a statistical sample of depositors as part of normal subsequent examination procedures employed at federally licensed and CCC contract grain warehouses.

    Agency Affected: Department of Agriculture

  3. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Secretary of Agriculture should direct the Administrator of the Agricultural Stabilization and Conservation Service to ensure that all Commodity Credit Corporation contract grain warehouses use warehouse receipts that can be accounted for during Federal warehouse examinations. Ways of doing this include: (1) encouraging States with insufficient controls over the printing and distribution of warehouse receipts to upgrade their requirements; and (2) requiring adequate controls as a prerequisite for obtaining a storage contract.

    Agency Affected: Department of Agriculture

  4. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Secretary of Agriculture should direct the Administrators of the Agricultural Marketing Service and the Agricultural Stabilization and Conservation Service to require that all federally licensed and the Commodity Credit Corporation contract grain warehouses give depositors warehouse receipts for all storage grain as soon as is practicable after delivery is completed.

    Agency Affected: Department of Agriculture

  5. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Secretary of Agriculture should direct the Administrator of the Agricultural Marketing Service to require that it provide warehouse operators with specific written instructions on how to complete required financial forms.

    Agency Affected: Department of Agriculture

  6. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Secretary of Agriculture should direct the Administrator of the Agricultural Marketing Service to develop and implement a predictive formula for grain warehouse bankruptcies. This formula would be useful in determining the magnitude of the potential bankruptcy problem and in establishing priorities and frequencies for Federal examinations. It should be developed before USDA decides what actions to take on threatened insolvencies.

    Agency Affected: Department of Agriculture

  7. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Secretary of Agriculture should direct the Administrator of the Agricultural Marketing Service to require federally examined warehouses to submit the financial data necessary to compute commonly used ratios indicative of financial health. The Administrator should then require Agricultural Marketing Service personnel to compute and determine the trend of these ratios as part of their routine financial reviews.

    Agency Affected: Department of Agriculture

 

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