Insurance to protect auction markets, consignors
October 7, 2015
On October 1, the Livestock Marketing Association (LMA) launched a new membership service called Payment Assurity Services (PAYS), which will help protect both local livestock auction markets and the cattle sellers who consign stock to these barns.
"The program was developed at the request of LMA membership in response to one of the largest dealer defaults in history (2010) that left many LMA member markets holding millions of dollars in bad checks," said Jennifer Aiman, LMA Insurance Agency vice president. "In addition, their concerns about a buyer's ability to pay as cattle prices began to increase and bond amounts not sufficient to cover losses also contributed to the development of the program.
Aiman explained that premiums for the insurance policy are determined through an underwriting process, choice of policy limits and deductibles.
"PAYS is an insurance product and an LMA member-only service for auction markets," said Aiman. "To be eligible, a market must be a member of the LMA and may choose to participate in the PAYS program. The greatest benefit to the participant is that the policy protects the market from a buyer default like receiving an NSF check or an open invoice."
“We haven’t signed up yet, but we plan on it, and I’m looking forward to the added protection PAYS offers. If something goes wrong, it impacts everyone from the feedlot to the auction barn, so this insurance policy will help negate the problems that would occur on the rare times a buyer defaults on a check.” Larry Schnell, co-owner of the Stockmen’s Livestock Exchange of Dickinson, North Dakota
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Although a rarity, a buyer default impacts the seller and the auction market. PAYS will offer a level of protection that has piqued the interest of many local auction markets in the area, including the Stockmen's Livestock Exchange of Dickinson, North Dakota, co-owned by Larry Schnell. Schnell sits on the LMA board of directors and was part of a focus group that worked to develop PAYS.
"The focus group was a great place to swap ideas and come up with something that would offer some protection for both auction markets and consignors," said Schnell. "What a lot of folks don't understand is auction markets deal in very large sums of money, and we are required to pay the consignor within 24 hours of the sale. However, the buyer has three days to pay the auction barn. Sometimes it can take a full week for a check to get to us, so every time we have to write a check, it puts the auction barn at risk, particularly since banking practices no longer offer immediate credit for these transactions."
Schnell said that for checks that don't clear, PAYS offers protection. However, the auction barns are responsible for making sure they are paid from the week prior before allowing a buyer to purchase more cattle the following week.
"The big thing for auction markets will be collecting the dollars from buyers," said Schnell. "With the program, we will have to have the money collected before the next sale. If we don't have a check for the cattle on the day before the next week's sale, the buyer would have to wire the money to us. We will have to be a little tougher on the buyers in this aspect, but it allows us to have an added level of protection that will make it worth it. A default payment rarely happens, but it can happen, so I know a lot of auction markets will be interested in being protected for these situations."
Livestock auction markets who sign up between now and the end of 2015 will enjoy the benefits of PAYS starting Jan. 1, 2016.
"We haven't signed up yet, but we plan on it, and I'm looking forward to the added protection PAYS offers," said Schnell. "If something goes wrong, it impacts everyone from the feedlot to the auction barn, so this insurance policy will help negate the problems that would occur on the rare times a buyer defaults on a check."
While PAYS doesn't mitigate risk for buyers, it does protect sellers by protecting the market's assets against a buyer default.
"One tool that is part of the criteria of the policy includes a Buyer Registration Consent Form (BRCF) that a buyer will be required to complete in order to determine if the buyer is qualified to purchase at the participant's market," said Aiman. "Another benefit or need the program fulfills is that it will help the market secure financing through its bank. If the bank knows the market has a mechanism in place to mitigate its risk, the bank is more likely to provide financing. It also creates best practices by vetting out a market's buyers through the BRCF process."
Markets are able to sign up now by calling the LMA at 800-821-2048 or the market's Region Executive Officer for an application.
"The LMA has had a great response and the membership is excited about this opportunity," said Aiman.
The Livestock Marketing Association, headquartered in Kansas City, Missouri, is North America's largest membership organization dedicated to supporting, representing and communicating with and for the entire livestock marketing sector. LMA has more than 800 member businesses across the U.S. and Canada. For more information, visit http://www.LMAWeb.com.