Insight Idaho Decision Extinguishes Priority for Ag Commodity Producers/Dealers in Livestock

In a recent Idaho Supreme Court decision Farmers Nat’l Bank v. Green River Dairy, LLC et. al., No. 40101 (Idaho Jan. 24, 2014), the court considered whether an agricultural commodity lien on an agricultural product extends to the livestock that consume the liened agricultural product. In this case, Farmers National Bank had provided multiple operational loans over a number of years to the dairy in order to sustain its operations and had taken a security interest in the dairy’s cows to secure repayment. A number of agriculture commodity producers and dealers had provided agricultural products to the dairy and possessed a security interest in the agricultural products (feed) consumed by the dairy cows. Under chapter 45 of Idaho law, “agricultural product” includes all varieties of feeds and agriculture commodities in whatever form, but does not explicitly include livestock.

The court sought to interpret the statutory language dealing with agricultural commodity liens in I.C. § 45-1802 which provides:

“An agricultural commodity producer or an agricultural commodity dealer, who sells, or delivers under contract or bailment, an agricultural product has a lien on the agricultural product or the proceeds of the sale of the agricultural product as provided in section 45-1804. The lien created in this chapter may attach regardless of whether the purchaser uses the agricultural product purchased to increase the value of his livestock or whether he uses the agricultural product purchased to maintain the value, health or status of his livestock….”

This type of lien, upon attachment, has priority in the agricultural product over a lien or security interest created in favor of a creditor who did not supply the agricultural product, during the statutory period (180 days if no UCC financing statement is  filed or one year if a UCC financing statement is filed with the Idaho Secretary of State). I.C. §45-1805; see also I.C. §45-1803.

The lower court in ruling in favor of the agricultural commodity producers and dealers held that commodity liens created pursuant to I.C. §45-1802 on agricultural products did extend to livestock that consumed the liened agricultural products. The majority of the Idaho Supreme Court in overturning the lower court’s ruling focused on the first of the two sentences in the statute and determined that the statute was clear and that “had the Legislature wished to include livestock in the definition of ‘agricultural product’ it easily could have.” Therefore, the lien only extends to an “agricultural product” or the “proceeds of the sale of the agricultural product,” and the agricultural commodity lien is effectively extinguished in the agricultural products upon consumption of the feed by livestock.

What the Decision Mean in Practice

For Agricultural Lenders

Lenders may see livestock operations accelerate the timing of draw requests on their operational loans due to a shift in the payment terms by agricultural commodity producers and dealers of agricultural products consumed by livestock. However, the decision makes clear the order of priority in the livestock subject to a security interest and minimizes this risk factor in the overall agriculture lending process.

For Livestock Operations

Livestock operations may experience shorter payment or pay on delivery terms to result from agricultural commodity producers and dealers. Shorter payment terms for “agricultural products” may be the work around for agriculture commodity producers and dealers in order to assure payment for the agricultural products purchased by livestock operations.

For more information regarding this decision or help in navigating agricultural lien law, please contact a member of our banking group , or call 208.344.6000.