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

Gao ID: CED-81-112 June 19, 1981

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.

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