National Cattlemen’s Beef Association looks at changing payments in cattle sales
February 12, 2012
NASHVILLE, TN (DTN) – A livestock market and an order buyer will begin using a debit card to complete their cattle sales later this spring, a move orchestrated by an National Cattlemen’s Beef Association’s (NCBA’s) working group formed after Eastern Livestock Company sent $130 million of bad checks to cattlemen nationwide.
A shifting understanding of what constitutes prompt payment marked the Livestock Marketing Council’s meetings at NCBA’s convention last week. Beyond the debit-card efforts and conversations of cell-phone check imaging, a directive was issued to have NCBA work with meatpackers to find a way to speed up the delivery of payments.
The Grain Inspection, Packers and Stockyards Act (GIPSA) states that mailing a check the day following a purchase counts as prompt payment, but the time before the money is transferred between accounts – the float – can take up to 10 days. And with U.S. Postal Service plans to cut Saturday delivery and close some offices in primarily rural areas, payments made by mail will become even slower.
Debit-card payments will nearly eliminate the float, which significantly reduces the possibility a seller will be left holding a worthless check, said Tom Jensen, senior vice president of First National Bank in Omaha.
“It’s a way to use technology to be able to clear and to take some of the risk out. It isn’t just Eastern. If you look at the last 20 years, there have been a number of times when the order-buying business has had substantial hits both to lenders and to customers. Eastern was the third one that we’ve seen over the last 20 years, but it seems like each time the dollars get greater and greater,” he said.
The biggest challenge posed by debit cards is to order buyers, who rely on the float, Jensen said. “So they would need a larger line of credit or more capital, and a number of them are very thinly capitalized in the first place.”
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Sixty percent of the cattle sold in the U.S. go through livestock markets, so debit cards present a possible alternative to paper checks for a majority of cattle sellers and buyers.
An alternative for private sales, the committee’s chairman Paul Coleman said, is digital check imaging available through Chase Bank and some others. The seller would take a picture of the buyer’s check through a smart phone application and could wait for the check to clear before letting the truck hauling the cattle leave the ranch. That’s a slower process, Coleman said, but one that could work. Wire transfers are another option for private transactions.
Last year, the fresh pain of Eastern Livestock’s check kiting scheme, which left more than 700 cattlemen holding $130 million of bad checks, inspired the committee to form the working group. The group is creating educational materials, which includes advice like knowing your buyer and putting contracts in writing, in addition to exploring alternatives to cash payments.
The working group also proposed reframing the conversation about GIPSA.
“Instead of assailing GIPSA for not being in front of the Eastern implosion, our recommendation to the leadership of NCBA is basically stated here: What could NCBA and our members have done to help GIPSA be in front of the Eastern Livestock Company bankruptcy?” Coleman said. “Again instead of shaking our fingers, being proactive in how we think. We could have done a better part in saying ‘things smell a little funny here.'”
That stance raised the ire of former NCBA president John Queen, owner of Southeast Livestock Exchange, who argued that NCBA needs to hold GIPSA accountable for its apparent lack of audits. GIPSA did complete an audit of Eastern Livestock in early 2010 after a few reports of slow payments and ordered the company to increase its bond, which it failed to do. But compared to the average order buyer or livestock market, GIPSA’s audit trail of Eastern Livestock is fairly thin. Queen also said it is part of GIPSA’s role to make sure cattlemen know about companies’ history of slow payments, which it also failed to do.
“I get audited every year because I’m easy, I’m close, I’m small. Why was the largest broker in this business not audited yearly or maybe more? Sure it’s not a lot of a loss to some people, but it’s a hell of a loss to small people like me,” Queen said.
“Ditto. Ditto. Ditto,” Coleman replied. As the conversation progressed, Queen proposed and the committee passed a directive to NCBA staff to formally request that Congress and the Office of the Inspector General investigate the comparative lack of audits.
Eastern Livestock’s creditors forced the firm into bankruptcy last December, and legal complaints against the firm allege it cycled checks through the firm’s account, the accounts of Eastern’s former owner Tommy Gibson and the accounts of other Eastern employees as part of the check kite. The complaints also allege that Eastern increased its accounts receivable by as much as $2.5 billion through fictitious cattle sales in an attempt to raise its line of credit with Fifth Third Bank.
Claims on the brokerage’s bond exceeded its amount – $875,000, which is not nearly enough to cover the loss. The bankruptcy trustee has spent the last year untangling Eastern’s accounts and collecting payments on outstanding contracts. The voluntary collection has slowed down and now the trustee is focusing on suing people to recover what’s owed to Eastern. The latest estimate is that creditors will receive 25 cents per dollar they’re owed from Eastern’s bankruptcy, Coleman said.
Gibson and several employees also face state criminal charges in Kentucky, where they’ve been indicted on 172 counts of theft by deception and engaging in organized criminal activity. A pretrial conference, where attorneys debate what evidence can be introduced in trial, is scheduled for later this month. Gibson also faces a federal charge of mail fraud and more charges could be forthcoming.