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Ten things to know about grain contracts

Cheryl Mayer explains 10 steps to better understanding and profiting from your grain contracts

In a 2013 study, Jared Carlberg, a professor at the University of Manitoba, found that only 17 per cent of farmers read their entire grain contracts.

This matters. How can we know whether or not we’re getting a good deal if we don’t know the details in the documents we’re signing?

At a session at CropSphere in Saskatoon in January, the Canadian Canola Growers Association’s director of policy development, Cheryl Mayer, gave a presentation about understanding contracts.

To make sure they knew exactly what farmers are dealing with, Mayer and other CCGA staff collected copies of actual contracts from major grain buyers across the Prairies. Her presentation was a summary of what they found when they read these sample contracts, and how farmers can be better prepared to do business with grain buyers.

1. Read the whole thing
Mayer stressed that it’s important for farmers to read the whole contract. This is going to take a while — there will be a lot of fine print and legal jargon.

Here’s why it’s important: there is no one standard grain contract. The terms and conditions at the end of each contract vary substantially from buyer to buyer. “It’s the small print that we’re talking about here,” Mayer said. “There’s some common elements, but the way they say things is very different.”

Another reason to read your contracts regularly and be familiar with the terms they include is that the contract terms can change without notice, and it’s quite possible that no one at the company will tell you. “If you’re reading them from year to year, you’re going to notice,” Mayer said. Knowing about the changes will give you a chance to ask your buyer about the changes. “They are not going to point it out to you.”

A final good reason to read the whole thing is that usually, when you sign your name, you’re signing a statement that says you’ve read and understood the contract. If there’s something in there that you don’t understand, Mayer said, “it’s not a negative thing to have to ask questions.”

Don’t forget: once you’ve signed a contract, the conditions are legally binding.

2. Get it in writing
“It’s really risky to have a verbal commitment,” Mayer said, even though she knows that many farmers often do business that way.

If there is something that you and your grain buyer have agreed to, “what you can do is ask that that is written into your contract.” There is often a “special remarks” section or other blank space in a contract where this can be done.

If you have a specific verbal agreement with you buyer that’s not written into the contract, and something goes wrong, the head office does not usually have to uphold that agreement. Typically, the contract will include language saying that the entire agreement is laid out in the contract. (Something like, “This contract includes the entire agreement between the parties…”)

3. Get the whole thing
Many companies do business using two-part contracts. The front part will usually contain the key sale points, like the date, the price, the amount and the delivery location. The “terms and conditions” section usually includes the other details.

Sometimes, the grain company will only fax you the front section. Mayer has seen examples where the “terms and conditions” section of the contract is only available at farmers’ request.

Ideally, you should keep the entire contract in your files. “If you do need to access those terms and conditions, you probably don’t want to go into the elevator later when you’re having a problem,” Mayer said.

4. Learn about grading
Although you sign a contract to deliver a specific grade, some contracts have a clause that lays out what will happen if you deliver grain that is below the quality specified in the contract. Sometimes, this “schedule of discounts” is not included in the contract.

Mayer suggested that you also may want to specify what will happen if you deliver grain that is a higher quality than you’ve specified in the contract.

Mayer also suggested that farmers get familiar with the Canadian Grain Commission’s grading guide. “Having a sense of how your grain is graded can be really beneficial, because you should be observing your grain being graded. That is your right.”

If you are in a situation where you don’t agree with your buyer about the grade, under the Canada Grain Act, “you can request that a sample be sent to the Canadian Grain Commission for a grade and docking decision.” The CGC’s decision will be binding.

For now, this right to a CGC binding grade is only available when you deal with a primary elevators. “So, for canola producers, this means it’s not available at process or crush plants,” Mayer said. If it’s passed by the federal government, Bill C-48 would extend this right to farmers delivering to process elevators, crush plants, container loading sites and grain dealers.

5. Be clear about the delivery terms
After reviewing several grain contracts, “the one thing that we did notice is that the delivery terms vary widely,” Mayer said.

Mayer found that some contracts allow grain companies to change the delivery location. While some of the sample contracts she read included a clause that would require the buyer to give 24 hours notice and provide the grower with compensation for delivering to a different location, not all contracts were as helpful. One contract allowed the company to “change the delivery location from the delivery location set out in the contract, by notice to the customer…”

6. Understand the delivery period
Since August 1, 2014, as required in the Fair Rail for Grain Farmers Act, grain companies are required to include a clause laying out compensation rights for farmers when grain is not called in before the end of the delivery period.

“Everyone should be aware of this and should be checking their contracts for these clauses,” Mayer said.

However, the delivery period may be longer than you think it is. Most companies’ contracts include a clause extending the delivery contract beyond the delivery month. This is usually called the “extended delivery period.” Mayer has seen contracts allowing for an extended delivery period of anywhere from 30 to 180 days.

Generally, grain companies have written the compensation provision so that it doesn’t apply until the end of the extended delivery period. For example, if you had contracted to deliver your grain by the end of November, and the company has a 90-day extended delivery period, compensation for late delivery wouldn’t apply until after the end of February.

“The provision the government has provided for is really broad,” Mayer said. She’s seen several different clauses included to cover this requirement. One example called for a payment to the farmer of $2/Mt/month after the end of the extended delivery period. In that case, the contract specified a 180-day extended delivery period. So, with a 100 tonnes contracted, a farmer holding this contract would receive an extra payment of $200 if the grain was called in four months after the end of the delivery month.

Another contract Mayer reviewed allowed for $0.05/Mt/day plus interest, after the end of the extended delivery period.

One sample contract Mayer cited required the grain company to pay the farmer a one-time lump sum payment of $10 if the grain was not called in before the end of the extended delivery period. “That’s not overly generous,” Mayer said, “but they have fulfilled the provision that is required.”

Mayer suggests reading this clause carefully, and negotiating with your buyer if something is important to you. For example, if you’re paying interest on inputs bought from that same company, you might try to get them to insert a clause saying that you won’t have to pay interest on your inputs if the company hasn’t called in the grain for delivery by a certain date.

7. Understand the default risk
Most contracts include clauses outlining “liquidated damages” — how damages will be calculated if you default on your contract. These clauses vary widely from company to company. “Typically it’s an administration fee plus the difference in the price at that time,” Mayer said.

If you find yourself short on a contract, “it’s important that you talk to your grain buyer right away,” Mayer said. In fact, some contracts specify that you must notify the company as soon as possible.

There’s another benefit to getting in early: if you’ve had a production problem, chances are that some of your neighbours have too. “You’re going to want to the first or second one in there talking to your grain buyer about what the solutions might be, as opposed to the 50th one.”

8. Be aware of set-offs
Set-offs are common in grain contracts. In these clauses, you’re agreeing that the company can assign money from your grain sale to take money that you owe to the seller, or to an affiliated business. For example, companies may take money from your grain sale to pay for your crop inputs.

9. Read about the Acts of God
“These contracts typically do contain Act of God clauses, but they’re not there in favour of the farmer. They’re there in favour of the buyer,” Mayer said.

Generally, these contracts excuse the buyer from their contractual obligations. “It’s extremely rare,” she said, for these Act of God clauses to be extended to problems at the farmers’ end. If the Act of God is intended to protect farmers, it may be offered at a premium, or there may be other requirements. Read carefully.

10. Hope for transparency
According to Jared Carlberg, only 12 per cent of farmers agreed that their rights are protected when using contracts. “We hope to see that statistic change over time,” Mayer said.

The CCGA would like to see more transparency in grain contracts. “It would be great to see companies have their terms and conditions on their websites.”

There was one company that did this last year, she said, “But they don’t anymore.”

About the author

Editor

Leeann Minogue is the editor of Grainews.

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