WESTERN PRODUCER — Grain production contracts can be an effective way to manage price risk on the farm, but they can also result in costly and disappointing surprises, especially if contract terms aren’t fully understood.
According to a 2013 poll conducted by the University of Manitoba, only 17 percent of farmers read their grain contracts from start to finish.
Janelle Whitley, manager of policy development at the Canadian Canola Growers Association (CCGA), said despite being nearly 10 years old, the findings of the 2013 poll probably still apply today.
“I think it probably is still relevant,” Whitley said during a Feb. 24 webinar on grain contracts.
“I think most of us understand that we should read them… but I think we’re still probably not taking the time… to read them in their entirety.”
The CCGA has been studying grain contracts since 2014 following a resolution at the association’s annual general meeting.
Each year, the association analyzes contracts from major line companies in Canada.
That work resulted in the creation of a document entitled the Practical Guide to Navigate Grain Contracts, which can be viewed online at bit.ly/3t9iPo8.
Whitley said there are some contract terms that can result in disagreements.
However, most of the common concerns raised by growers are covered in the contracts’ fine print.
The quality and quantity of grain contracted are key components of every grain contract.
During the Feb. 24 web event, Whitley reminded growers that the grain buyer is typically only required to buy the quality and quantity of grain specified in the contract.
At their own discretion, and with the seller’s consent, grain buyers can buy quantities and qualities of grain other than what is specified in a contract.
But growers should examine their contracts closely, before signing, to ensure they are fully aware of the legal terms they are agreeing to.
For example, contracts typically contain discount schedules that stipulate how much less the grain company will pay if contracted grain quality parameters aren’t met.
To avoid quality disputes, Whitley encouraged growers to submit grain samples to the Canadian Grain Commission’s Harvest Sample Program, which offers grade determinations on all regulated grains.
In recent years, a growing number of production contracts have also applied additional quality factors that aren’t considered official grading factors.
For example, many wheat contracts now specify that wheat must meet a minimal threshold for falling number, which is not an official grading factor.
Similarly, many canola production contracts require that deliveries meet or exceed a minimum oil content threshold.
Other non-grading factors, such as the presence of unwanted biotech traits or the presence of maximum residue limits that exceed specified thresholds, can lead to delivery disputes, she added.
Another useful resource for growers is the Keep It Clean program, which outlines non-grading issues that could affect market acceptance of contracted grain.
For more information on the Keep It Clean program, visit keepitclean.ca.
Delivery dates are a common concern.
Whitley said contracts always specify a delivery window in which grain is to be delivered. What’s less known is that most contracts contain provisions that will allow the buyer to change the delivery date and, in some cases, the delivery location.
Since 2014, all time bound marketing contracts must contain a provision providing for growers to be compensated for costs associated with delivery extensions, she added.
Typical delivery windows contained in most contracts can be anywhere from 60 to 180 days long. Compensation for an extension of the deliver window can be offered in the form of per tonne storage fees or monetary extension penalties.
“There is significant variability between company contracts and delivery methods so it is important to compare different contract terms,” Whitley said.
“Every single contract that we’ve looked at … have all allowed for the delivery window to be extended.”
In a normal year, production or delivery shortfalls are not a common concern. Typically, most disputes that arise are related to quality disputes or delivery issues.
In 2021, however, widespread drought across the West left many buyers and sellers with a shortfall.
“It was really a unique year and I think everyone found themselves scrambling to manage it.”
Delivery shortages can and often do result in contract default penalties.
Growers should read their contracts carefully before signing to ensure they have a complete understanding of how contract default penalties will be calculated and applied.
Many contracts contain a liquidated damages formula that specifies how non-delivery penalties will be applied. Some contracts apply administrative penalties and others charge replacement costs based on the difference between contracted grain values and cash replacement values.
In all cases, growers who anticipate an inability to fulfill their contract obligations should inform the buyer as soon as possible.
Some contracts contain clauses that deal specifically with notification requirements that ensure buyers are informed of potential shortfalls in a timely manner.
“If you do think you’re going to be short, have that conversation with your grain buyer and have it as soon as possible,” Whitley advised.
“Once you notify your buyer, they have an obligation to mitigate damages.”
“Based on our analysis, the terms and conditions (of contracts) do vary substantially by buyer and by commodity and can change from year to year,” Whitley concluded.
“So, we also really recommend that you review these on a regular basis because terms can change (from year to year) without notice.”
In the past, most contracts have not contained act of God clauses that protect growers against default penalties.
In 2022, however, some line companies are offering act of God clauses on basis contracts for the first 10 to 20 bushels of contracted production, although certain conditions may apply.
The CCGA’s advice? Read your entire contract from start to finish, ask questions if necessary and understand your obligations before you sign on the dotted line.
