Grain, Risk and the Personal Property Securities Act

When a grower delivers grain to a buyer there is often a period of time between when they part with the physical possession of the grain, and when they receive payment from the buyer. The time between the grower parting with possession of the grain (by delivering it to the buyer) and the receipt of payment from the buyer is the period of time when the grower is most at risk because they no longer have control over the asset they have sold and they do not have a secured interest in the grain.

In 2009 the Personal Property Securities Act introduced a special type of security interest over the grain delivered by growers to a buyer. This interest is described as an “agricultural security interest”.

The potential insolvency of a buyer is a key risk for growers. In most transactions involving grain, the grower will deliver possession of the grain to the buyer without receiving immediate payment for their crop. The grower will usually wait for a period of time between the delivery and the payment being received by them.

Is a grower a secured creditor of the buyer?

In the event of insolvency of a buyer will an “agricultural security interest” assist a grower, without them having to do anything? No, the mere transfer of possession of grain to a buyer does not make a grower a secured creditor automatically. There is a statutory requirement that must be complied with before a grower is considered a “secured creditor”. A security interest may be registered with the Personal Property Securities Register (PPSR) in relation to the grain that the grower will deliver to the buyer.

By registering this interest the grower becomes a secured creditor of the buyer, so in the event of the insolvency of the buyer, the grower will be paid ahead of any unsecured creditors. The registration should be made as a Purchase Money Security Interest (PMSI).

What is PMSI?

A PMSI is a particular type of security interest that can be registered of the PPSR. It is a security interest in a product that secures the assistance provided by the secured party (the seller) to the grantor (the buyer) to enable their purchase or acquisition of rights in the collateral (Section 14 (1), PPS Act).

A PMSI will arise where a person has advanced personal property (in this case the grain) and all or part of the purchase price remains outstanding to the seller. When grain is delivered to a silo it usually becomes unidentifiable as part of a larger mass when it is commingled with other grain. This commingling means that it is not commercially practical to retrieve a grower’s specific delivery. If a PMSI is registered, then the title in the grain is transferred to the buyer only after the buyer pays the grower in accordance with the contract that relates to the delivered grain.

Recovery under a PMSI

The ability to recover under a PMSI depends on whether the contract with the buyer provides that the grower retains title until payment, or not. Many grain buyers’ contracts provide that title passes on delivery and not on payment, in which a PMSI will not assist. Commercially, if a grower is dealing with a large organisation and the contract provides that title passes on delivery the risk of loss is small. Where growers are dealing with buyers of uncertain economic strength, the need to ensure that the contract allows for a retention of title by the grower until payment is made is especially important. A grower should consider coupling this with a standing PPSA registration.

What if you have an ongoing supply relationship with a particular buyer? It is common in commercial practice for a grower to make repeated supplies of grain to the same buyer. These supplies are often made on the same terms. It is not necessary for a grower to register a security interest over each delivery of grain. A grower will only need to make a single registration in relation to the buyer because a single registration is valid for one or more security interests.

Take Away

PPSR registration may help growers mitigate against possible loss, which could be suffered in the event of the insolvency of a buyer. If you would like to know more about PMSI registrations on the PPSR or the PPSA, please contact You Legal for a confidential discussion.

* This blog is for general guidance only.  Legal advice should be sought before taking action in relation to any specific issues.