Are You Protected?

Transactions at a bonded market are safe ensures livestock market experts

When a Kentucky Circuit Court sentenced Thomas “Tommy” Gibson and another former Eastern Livestock officer in June to 10 years in prison, it was just the latest chapter in a strange story that became public in Nov. 2010, when checks written by the New Albany, Ind.-based livestock dealer founded by Gibson started bouncing.  More than 700 ranchers were left holding about $130 million in bad checks, and Gibson and his former Chief Operating Officer, Steve McDonald, pleaded guilty to one count of running an organized crime syndicate and 172 counts of theft by deception. They admitted that for two years, they had been falsely inflating the company’s bank accounts to create the illusion of solvency.
Jim Baker told Ozarks Farm & Neighbor that he was not surprised at the breadth of the Eastern case. “I fined them when I was in Washington for not paying promptly,” said Baker, a Conway, Ark., rancher and banker who was head of USDA’s Grain Inspection, Packers and Stockyards Administration (GIPSA) during the Clinton administration. “They were so huge in size that we knew if something happened to Tommy Gibson or Eastern, they would put a lot of people in a financial bind.”
However, Baker said he was surprised at the size of the default; Eastern had gotten a lot larger since he was at GIPSA. “They tried to dominate the whole sales side of it, and in doing that they got so large they didn’t have the capital behind them,” he explained. “The bond was not nearly big enough…(Gibson) probably couldn’t afford a bond as big as what he was operating, anyway.” Baker fears the collapse will put some livestock markets in the southeast and elsewhere out of business.
Baker also formerly operated Lewis Livestock Auction at Conway, Ark., and said he always sells his cattle at a bonded livestock market. “When you get that check you want to find somebody that’s in a position to honor it,” he said. “We’ve seen times when people put markets in a position to where they really have trouble staying open, because they can’t get their money. You wake up one morning and there’s $350,000 going out; you don’t have anything to come with, and you’re the one that’s made all the checks good,” he said. “You’ve got to be in a financial position, if you run that market, to have enough capital foundation to offset your sale.”
But where the livestock seller is concerned, a transaction at a bonded market is safe, explained Nancy Robinson, vice president of government and industry affairs for the Kansas City-based Livestock Marketing Association. “Markets are regulated by the Grain Inspection, Packers and Stockyards Administration, and by regulation they have to have a custodial account or trust account where the proceeds go into that account,” Robinson told OFN. “That transaction has to be rectified in the custodial account within seven days of the sale.” In the case of Eastern Livestock, LMA member markets made good on all of the defaulted transactions at their own expense.
There are additional steps taken within the regulated industry to ensure the soundness of transactions.  Robinson said LMA’s Board of Trade reviews the finances of buyers to make sure they can cover their purchases. GIPSA, in turn, conducts periodic audits of custodial accounts. Those safeguards are not in place for private treaty transactions unless they go through a registered order buyer or dealer, which also have to be registered and bonded under the Packers and Stockyards Act. The law also requires the stockyard to reimburse the buyer when livestock are discovered to be stolen or under lien.  Most stockyards carry insurance to cover both circumstances.
Not that there isn’t room for improvement.  “I think we’ve always faced a lot of problems when there have been these kinds of defaults, whether it’s on the scale of an Eastern or something lesser,” Robinson said.  “Even in terms of the prompt pay requirements and how money moves through banks today electronically, a delay in payment is just sufficient enough to not be able to be sure that the buyer will make whole in the sale of those cattle.”
But Robinson said buying and selling through auctions still carries multiple benefits. ”We’re always out there promoting the fact that they’re selling by competitive bid to multiple buyers. Those markets feel a real responsibility to their consignors to make sure that made whole in the event of a default from a buyer through the market,” she said.
And Jim Baker added while there’s considerable risk to owning a stockyard, “It’s the best place for price discovery in America today, and I hope the ones that got hit by Eastern can survive, overcome it and come back. There’s always somebody looking to try to make a fast buck or the big dollar, or riding and rolling and saying that they’ve going to come back. You’ve got to have your guard up.”