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 a customers and not as a risk-baring 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.
Consequently, this wake-up call forced the industry to recognize the need to move away from the hand-shake-type business relationship. The Agricultural Retailers Association (ARA) took the reins in addressing this need and set up a task force of stakeholders focusing on these issues.
“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 regards 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 non-performance 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 Round-Up a few years ago. Some of the retailers bought when the price of Round-Up 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.
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.
There’s a hesitancy to use standard terms and conditions like this because they feel a producer might go to the competition because they don’t have the same terms and conditions. Now, however, there will be an increased use of contacts. The farmer is used to it in grain, now they’ll see it when they go to buy chemicals and fertilizer; it will become increasingly common.
Langel: In the feed business, it’s more common that you get an invoice or letter of receipt that maybe has a disclaimer and scale ticket attached to it, but typically there is no formal contracting unless there’s a formalized credit agreement.
F&G: What are the differences between an ag retail contract and a grain contract?
Bylund: In a grain contract the product itself is standardized — e.g. reference #2 corn or reference a moisture percentage — and they have standardized grain trading rules. On the ag retail side — where they’re selling a fertilizer or pesticide — it’s not uncommon to have a compliant made about the product’s performance.
Langel: Complaints ranging from salt content in feed to application problems with pesticides or product contamination where the producer will argue that something was contaminated with Round-Up and damaged the crop because the crop wasn’t round-up ready. When you get a product claim in the application context you have a lot of issues and allegations that the product wasn’t applied at the correct rate, parts of the field was missed. When you are selling ag inputs, you want to include a disclaimer of implied warranties and a clause for limitation of damages. If you look at the ARA template contract, both of those provisions are included.
F&G: If you were going to offer up a to-do checklist, what would be on it?
Bylund: If I were a country elevator manager, I would revisit what my company had in place with all of its contracts. I would refocus on grain contracts and make sure they were still adequate, but I wouldn’t stop there. You should also be thinking about the other inputs you sell and take a look at what contact you have in place on that side of the business. And I think what they may find on that side of their business, if they ask their sales force about the contracts they use, they’re going to be handed an invoice or a purchase order or a delivery ticket.
Langel: While oral contracts are enforceable, I think a lot of those docs are evidence that a contract exists but you still have to prove the contract exists and it’s a lot easier if you have an actual contract confirmation — a physical document — that is signed by both parties. It’s better to have it spelled out.
Bylund: If co-ops are interested in implementing this, they should bring this up to their board and sell it as a positive. While with most of the people we do business with this isn’t necessary, but let’s manage this risk anyway and have a better process in place.
For more information on the Agricultural Retailers Association’s efforts, visit www.aradc.org.
