February, 1995

Fruits of Thought

Imagine There's No PACA

Though the Perishable Agriculture Commodities Act seems like a fixture of the industry, it has become clear that many large supermarket chains would like the Act repealed. And the supermarkets may get their way when a proposal to eliminate PACA is debated in Congress during the current session.

This raises the question of what, exactly, the produce industry would be like without PACA. I have some real life experience that might point the way. As a produce exporter and importer, I traded with people all over the world. Not only weren’t these people covered by PACA, but, in fact, applying any law against these folks was difficult. You could say we had the worst of all worlds: Our non-U.S. suppliers and customers were not covered by PACA, but we were.

Still, business got done, and I think there are lessons that can be applied to what the industry would be like without PACA. To see the picture clearly, we have to analyze PACA in its parts.

1) Rules of the Trade: An advantage of PACA is that it defines the rules that govern the produce industry. When is a contract made? When can one reject a load? What is the procedure when you have a problem?

Yet, though PACA makes all this easier, it has to be said that international traders manage to establish customs of the trade. Domestically, of course, most industries establish trade customs that are recognized in court. In produce, private organizations could fill the gap. After all, The Produce Reporter Company polled the industry and wrote Trade Customs and Terms back in 1904, long before PACA was passed.

2) Enforcement: Here you have a big change over current PACA procedures. In disputes in a post-PACA environment or when someone violates a contract or the customs of the trade, the injured party will have to go to court. No more formal and informal complaints.

Usually this means a lawyer. So one of the big changes is that getting redress when wronged will be much more expensive. Of course, this is not completely true. When I was buying for export, our company was a Blue Book trading member. And I tried hard to buy produce from other trading members. We didn’t want to get involved with PACA actions, and trading members allow the Blue Book to arbitrate complaints.

In a PACA-less world, we can assume that some might choose a voluntary dispute resolution board. Just as few Wall Street firms will open an account with you if you won’t sign an agreement to arbitrate any disputes, companies might refuse to trade with you unless you agree to let the Blue Book or another organization arbitrate disputes.

3) Penalty: One penalty that likely would not be available is the banning from the produce industry. A court could award damages and impound assets but, just as a bankrupt store owner can still open a new store, a bankrupt produce buyer could still open a new wholesale facility.

It is hard to know if this is good or bad. It is certainly true that the prospect of losing a PACA license could keep a produce operator on the up and up, and encourage him to bail out his firm with personal assets.

On the other hand, many who don’t pay aren’t evil people. They may just have been unlucky or perhaps sold to a party that didn’t pay them. License revocation has always been a blunt instrument, and nobody compels a company to sell to someone who has gone bankrupt before.

4) The Trust: Although retailers have been getting the attention for wanting to kill PACA, if the issue comes to the floor, I think truckers will be the biggest advocate of killing the Act. Why? Because the PACA Trust is a program to prefer sellers of produce over others, including truckers.

The Trust only is relevant if there is not enough money to pay all creditors. And, in these circumstances, the Trust favors produce vendors.

Without the PACA Trust, U.S. bankruptcy law would apply. If a receiver owes $5,000 to a shipper and $5,000 to a trucker, but has only $5,000 in assets, both the shipper and the trucker would each get $2,500. Under the Trust, the shipper gets paid in full while the trucker gets zilch. A big change for the produce vendor… and the trucker.

5) Structural Changes: One of the problems in evaluating the effect of not having PACA is that people change their practices and, indeed, the structure of the industry will change as a result of legal changes.

For example, it is often pointed out that there are few buyers and many sellers. As such, if PACA is lost, the buyers will be in a strong position to impose terms, including extended credit terms, on sellers.

But a world without PACA would change in other ways, too. For example, I’ve worked with several people trying to set up produce wholesaling operations. In the end, the ventures weren’t realized in large part because the PACA Trust made the banks nervous about financing their accounts receivable. Without the Trust, there might be more buyers.

In another case, the owners of a produce company that was already deeply insolvent and in Chapter 11 were going to sell all the equity to an experienced produce hand who was going to try to save the company. But the PACA regulations meant that the new owner would be at fault for not paying the debt and so endanger his own PACA license, even though he was blameless. Perhaps in a PACA-less world more bankruptcies could be turned around, increasing the number of buyers.

And, of course, growers would change too. If competition required providing more credit, we could expect more co-ops and more marketing affiliations. As such, restructuring might result in fewer sellers.

6) Credit: We can expect some further loosening of credit terms. With the PACA Trust, terms cannot exceed 30 days without losing Trust protection. This requirement creates powerful incentives not to exceed the 30-day limit. If you do, you are making yourself secondary to all produce creditors who refuse to extend further credit.

Whether this is good or not depends on your perspective. Buyers might argue that credit is another way for a supplier to compete. Shippers might argue that the industry will be financially healthier if competition is restricted to only price and service.

This much is clear: PACA was written to help farmers. If it goes, business will be done on terms less favorable to farmers.  pb