Committee backs bill to create statutory trust for milk producers' payments

Chairman Mark Peck said the committee opened a hearing on House Bill 2254, which would require milk processors to hold payments in trust for milk producers until full payment is received.

The bill would create a statutory trust over proceeds of milk sales and allow a producer to require a processor to establish an escrow account if timely payment is not made. Under the proposal, a processor would not be required to hold payments in trust or escrow unless a milk producer gives written notice within specified deadlines; the bill also excludes transactions between cooperative associations acting as marketing agents and their members. The measure would make processors who fail to pay liable for the purchase price, interest and reasonable attorney fees. The reviser said the bill "would take effect on July 1" and that it passed the House on a 123-0 vote.

Nut graf: Supporters told the committee the bill is intended to protect dairy producers who sell milk on cash terms from losses if a processor defaults or becomes bankrupt. Kansas Livestock Association counsel Aaron Popelka said the measure is modeled on protections that exist in other livestock sectors and in statutes in neighboring states, and that it is designed to avoid imposing capital requirements on processors until a default occurs.

Aaron Popelka, vice president for legal and government affairs at the Kansas Livestock Association, described the statute as "a statutory trust" and said it is similar to trust protections used in the beef industry under federal law. Popelka said the bill is aimed at cash sellers — producers who receive payment without extended credit — and that proceeds from transformed products (for example, cheese or yogurt) or money received from their sale would be treated as held for the producer if the trust attaches.

Popelka gave the hearing a concrete example: he said the proposal responded to a default by Kansas Dairy Ingredients near Huguen that he said cost producers "in the neighborhood of $5,000,000." He emphasized that the bill includes producer obligations: a producer must give written notice to the processor by the thirtieth business day after a final payment date if full payment has not been received; if a payment instrument is dishonored, notice must be given within fifteen business days after notice of the dishonor.

Senator Titus asked whether a state agency would oversee trust monies or intervene to ensure accounting; the reviser and Popelka both replied that the statute is intended as a self-help remedy and does not create a role for a state agency. Popelka said the design keeps capital requirements low and allows the producer to assert the statutory trust in court in the event of bankruptcy or default.

Senators asked follow-up questions about the prevalence of cash sales and the number of processors operating in Kansas. Popelka estimated a majority of producer-processor transactions are cash sales and said the drafters worked with processors and banks to limit burdens; he declined to name every processor but mentioned a Dairy Farmers of America (DFA) plant in Garden City and another larger processor based in Texas as participants in discussions.

The committee received written proponent testimony from Janet Bailey, CEO of Kansas Dairy, and Brian Hemmon. After closing the hearing, Senator Rob Francisco moved to recommend House Bill 2254 favorably and place it on the consent calendar; the motion was seconded by Senator Shane and adopted by voice vote.

Ending: The bill as presented would take effect July 1 (year not specified in the hearing). The committee did not record a roll-call tally for the committee action; the House passage tally of 123-0 was noted by the reviser during the hearing.