Ag Retail’s First Contract Confirmation Model

The grain industry is no stranger to price volatility; as a result the grain industry has a well-developed set of trade rules and arbitration through the National Grain & Feed Association; meanwhile, on ag retail side, such matters have been handled differently.

While many grain co-ops and country elevators sell ag inputs — feed, chemicals and fertilizer, they tend to look at their retail clients as customers and not as risk-bearing counterparties.

The reality of word-of-mouth contracts in ag retail painfully played out a few years ago when price volatility in fertilizer put some country elevators and co-ops on the wrong side of pricing. With verbal commitments from producers, ag retailers placed high-priced orders with their fertilizer suppliers; however, as the price collapsed, producers backed out of the prices they had originally agreed upon. With a failure to properly document agreements, these companies were left holding the bag.

“Originally, the group focused on the relationship between the retailer and the grower; as discussions went on, we realized the need was to have common terms and conditions throughout the distribution chain,” says Richard Gupton, ARA vice president of legislative policy and counsel. The result: A contract confirmation model for the ag retail sector.

“While it doesn’t completely address all risks, the contract provides a powerful, voluntary risk management tool and aids retailers in better positioning themselves for these types of sales in regard to accountability,” Gupton says.

FEED & GRAIN discussed the implications of this move toward thorough transaction documentation with attorneys Todd Langel and Jacob Bylund of the law firm at Faegre & Benson.

FEED & GRAIN: Unlike the grain business, why has contracting been overlooked within the ag retail sector?

Jacob Bylund: Grain transaction documentation is so developed because price volatility is characteristic to the grain business. Part of that is because of the way contracts are hedged — they are hedged on futures markets. Companies in the feed business should be using the same approach in the feed business as it uses in grain. If it sells anything on a forward basis, it should be documenting that transaction. Feed companies are missing an opportunity to include some of these standard terms and conditions — including disclaimer of warranties, limitation of damages and an arbitration provision. A lot of people think if you’re selling something on an immediate payment basis — say the farmer wants feed delivered and he pays within 30 days — then it’s less important to have a contact because you don’t have price volatility. They should be using them even in these situations.

[Ag retail] hadn’t been accounting for significant price volatility in the fertilizer business. The ARA contract grew out of this recognition in the ag retail industry.

F&G: When do issues of producer nonperformance usually occur?

Bylund: Generally, it’s not when prices go up; it’s when the price goes down that there’s a problem. If they have a contract when the price is going up, they’re going to try to lock into that lower rate; however, when you have farmers who booked at a high price and then the price goes down, they didn’t perform. This leaves the ag retailer sitting on the product, and forces them to sell it at a much lower price.

Todd Langel: The same thing happened with glyphosate a few years ago. Some of the retailers bought when the price of glyphosate was high and by the time the producer came around to ordering it or expecting delivery on it, the price was too high relative to the market. It works both ways.

F&G: Why is it important for ag retailers and distributors to document all transactions?

Bylund: In the grain context, most are accustomed to having a forward contract that has a detailed set of standard terms and conditions. If the producer forwards grain to a major grain dealer, they will expect to receive a contract conformation with a detailed set of terms and conditions. That’s just the industry norm because the grain business is developed that way. In the feed business, this isn’t as common.