Stain discount costly in several ways

Both the Houston-based U.S. Rice Producers Association (USRPA) and the U.S. Rice Producers Group of the USA Rice Federation sent letters of protest and met with USDA Farm Service Agency officials to ask them to rescind its announcement of a 75-cent discount on rice with light stain.

According to a press release issued June 20, USDA’s Farm Service Agency will impose the discount on rice that contains five lightly stained or stained kernels in a 500-gram sample. The discount would be applied to rough rice being forfeited to the government in lieu of repayment of a CCC loan.

“FSA believes it is trying to protect the taxpayer from forfeited rice which has a market value lower than the amount originally loaned,” said Dwight Roberts, president and CEO of the Rice Producers Association.

“And while we applaud their goal, we believe FSA has inadvertently caused many producers potential harm, not just those who might decide to forfeit their collateral next year rather than repay a 2002/03 crop year loan.”

In discussions in recent weeks, USDA officials have said they want to resolve the issue, he said.

In a letter to FSA Administrator James Little, Roberts said the USRPA believes the new discount fails to accomplish its intended goal, while generating “painful unintended consequences.”

Rice producers are not contesting that rice with blemishes should be discounted, he said. They argue that the USDA decision amounts to the government establishing what has been a market function in the past.

“Unfortunately, the Department has effectively fixed the minimum discount for light stain at 75 cents,” he said. “The market might have, at various times, taken 15 cents or 40 cents or refused to take the rice at any price. Now, regardless of crop or demand conditions, the minimum discount is likely to be $0.75, if only because USDA says so.”

Both the U.S. Rice Producers Group and the Rice Millers Association have also sent letters to Agriculture Secretary Ann Veneman, expressing opposition to the 75-cent discount. Their response was developed in separate meetings in Dallas.

They asked that the Agriculture Department delay implementation of the new discount for the 2002 rice crop and work with the industry to develop an equitable discount and a protocol for the application of such a discount.

Roberts says that the USRPA, which represents rice farmers in Arkansas, California, Mississippi, Missouri and Texas, believes that the interference of the new discount in the operation of the commercial market is unnecessary and inadvisable.

“The first unintended consequence is that mills and driers will henceforth be given a strong financial incentive to claim that all of their receipts have light stain, and take the 75-cent discount,” Roberts said. “The Department’s assertion that the new discount will not be part of the loan calculation will in all likelihood be disproved, as warehousemen will react to this incentive by protecting themselves against future claims.

“They will do so by making every effort to find and note light stain at time of delivery. All over the rice belt, farmers, especially those who are not members of cooperatives, will see their cash receipts threatened by 20 percent reductions relative to the current value of rough rice.”

He said a 500-gram sample of the current most popular long grain variety, “Cocodrie," would contain about 28,000 individual rice kernels. A total of six kernels out of this 500-gram sample will amount to 0.02 percent.

“The classification of six of these kernels as ‘slightly off color’ will be subjective and subject to dispute,” Roberts noted. “The Federal Grain Inspection Service (FGIS) does not have sufficient staff to even begin handling all of the appeals that will likely result from this policy.”

If a producer stores his or her rice on-farm, pledges that rice against a loan calculated only by class and state, and then defaults on the loan, the Commodity Credit Corp. is not protected if the farmer eventually makes physical delivery of rice that can be discounted so heavily that its value falls short of the original loan, USRPA says.

“A discount for “light stain”, applied at delivery to the federally licensed warehouse, only further worsens this problem and further encourages that warehouseman to find light stain,” says Roberts.

“Otherwise, may we expect that Kansas City will soon instruct that all loans on all farm-stored rice be reduced by 75 cents per hundredweight to protect from poor post-harvest handling?”

Nor is the Department protected on loan defaults from licensed storage, he said. Since light stain is not a grading factor, warehouses have in the past not noted the defect on their warehouse receipts. If delivery happened to be made, a re-inspection for light stain would force the warehouseman to either absorb the 75-cent discount or try to get it back from the farmer.

“All this will do is further enrich the legal profession and bankrupt rice storage facilities across the Belt,” says Roberts.

If, meanwhile, the Commodity Credit Corp. instructs licensed warehouses to add light stain to their warehouse receipts, then the new discount has become a de facto part of the loan calculation, he said, and many farmers will receive lower rice loans as a result.

“In our opinion, the Department would have been better advised to begin the process of formally changing the rice Grade Standards, Roberts said. “Since light stain is ‘officially’ recognized by FGIS, and inspections and appeals for light stain are already common, it makes little sense not to revise the official standards to reflect commercial reality. This would avoid the inconsistencies of discounting for a specification, which does not determine the official grade of the rice.”

With the 2002 rice harvest set to begin in Louisiana and Texas, rice leaders believe USDA must act quickly to prevent the new discount from being applied to rice going into storage.

USRPA is also asking that USDA begin work on establishing new standards for heat damage in rice and invite industry comment on the new proposals and standards. “Only by changing the standards can the new discount operate in a fair and commercially reasonable manner,” said Roberts.

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