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Devil may be in the contract details

A grain contract should work both ways to protect the buyer as well as the seller

It may seem like just a lot of fine print, but farmers are urged to read and understand the whole document before finalizing a contract when selling any commodity, says a manager with the Canadian Canola Growers Association (CCGA).*

Farmers need to know their rights, and they also need to understand any clauses that may be found beyond the first few paragraphs of the contract, says Janelle Whitley, manager, policy development with the CCGA in Winnipeg. It’s all about avoiding any upsetting surprises when it comes time to actually sell and deliver the crop, she says.

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“The terms of grain company contracts can vary considerably from one company to another,” says Whitley. “And when a farmer signs a contract they are agreeing to those terms and conditions. It becomes very difficult to back out once the contract is signed. So read the contract and know what you are signing.”

Whitley says surveys show that only about 17 per cent of farmers read the whole contract and about 50 per cent only read part of it. Here are a few key points she makes about developing and signing contracts.

Get it in writing

Verbal contacts have their place, but Whitley says farmers should ask that all terms and conditions of a sale agreement be in writing. “Verbal agreements can be risky,” she says, pointing out that a grain company is not bound by anything a sales representative may say out in the field. If the sales rep offers any special terms get them in writing to avoid a dispute later.

Get a whole contract

Whitley describes situations where growers might be offered a contract in two parts. A farmer might sign part of the contract that spells out terms and conditions and then receives a separate purchase contract for each sale transaction. Or she says it can be a situation where the two parts are not provided to the producer.

It is not uncommon for one part of a two-part contract to have a clause that says: ”This contract is subject to and incorporates the terms and conditions of the (crop year) purchase contract signed on (a given date). An additional copy of the Terms and Conditions will be made available upon request.”

By signing the purchase contract and special terms, the grower maybe agreeing to more general terms and conditions they aren’t aware of. “Make sure you have the entire contract to properly review,” says Whitley.

Right to second opinion

Farmers delivering their grain to an elevator have the right to a second opinion if they don’t agree with the grade and quality assessment offered by the grain buyer.

“And a discount on a quality issue can cost the producer money,” says Whitley. For example, if canola is worth $490 per tonne and the elevator discounts it for one per cent dockage, that equals $490 on a 100 tonne contract.

Whitley says the farmer has a right to see how the crop is being inspected and they should also be able to look behind the counter and see what type of sieve is being used to determine the quality of the sample.

And if the producer isn’t satisfied they can ask for a second opinion. The Canadian Grain Commission makes it very clear on it’s website: “If you (includes anyone delivering grain on your behalf) disagree with the licensed primary elevator’s assessment of your grain’s grade, dockage, moisture or protein, you have the right to ask that a sample be sent to us at the Canadian Grain Commission for a binding decision.” For more details on getting a second opinion visit the CGC website at http://www.grainscanada.gc.ca.

Know the delivery terms

Probably one of the biggest areas of complaint among producers are penalties and payments related to changes in delivery, says Whitley. “Especially in the past couple years when there were long delays in delivering grain due to transportation issues — it was very frustrating for farmers,” she says.

Again, she says it is important to read the contract and first make sure there is some clause covering late delivery or on-farm storage, and secondly, farmers need to make sure they understand the terms.

Here are a couple examples of the clauses that may be found in contracts:

Example 1: “If the company extends the delivery period, the company and the producer agree that the company will pay the producer a one-time lump sum penalty of $10 for the entire remaining undelivered portion of crop not accepted within the original delivery period.”

Example 2: “If the buyer does not call for any or all of the grain in the delivery period, the delivery period shall be extended for 60 days (The Extended Delivery Period). When the grain is delivered in the Extended Delivery Period… the buyer shall pay the seller, storage rates for the grain not delivered, together with interest calculated at the Interest Rate on the Price. The “storage rates” shall be the storage rates of the buyer calculated in accordance with the Canadian Grain Commission Licensed Primary Elevator Tariffs.”

Expect storage payment

It is a matter of law. As of August 1, 2014 all grain marketing contracts must contain a provision to compensate growers for grain that is not accepted within the defined delivery terms. So if you can’t deliver, you are entitled to be paid for storage.

Along with specifying the delivery period, a contract should state the producer is eligible for a penalty payment if the licensee does not accept the grain with the delivery period. The contract should also spell out the penalty to be paid either as a lump sum payment or daily rate.

A couple of exceptions to this provision include grain that is sold to a U.S. buyer or grain sold to a feedlot, however guidelines for licensing feedlots are under review.

Dealing with defaults and cancellations

Grain contracts should contain clauses to cover situations where the grower can’t deliver all or part of grain volume agreed to in the contract. This is called a “liquidated damage” clause.

Whitley says it is difficult to cancel a full contract as both parties have to agree. In most cases a producer might be short on his delivery amount or have a quality issue.

“Any default on the contract should be covered in the contract,” she says. “So producers need to understand the consequences. And a lot will depend on the relationship a producer has with that company.”

There should be language in the contract covering the issue and it is also important for the producer to talk to the grain company, explain the situation and hopefully they an arrive at a solution.

For more information on grain contracts, Whitley urges farmers to get a copy of a Canadian Canola Growers Association handbook called “A Practical Guide To Navigate Grain Contracts” and also visit the association website at ccga.ca.

*Note: An earlier version of this article identified the Canola Council of Canada rather than the Canadian Canola Growers Association. Grainews regrets the error.

About the author

Field Editor

Lee Hart

Lee Hart is editor of Cattleman’s Corner based in Calgary.

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