Read the fine print: caution needed in grain contracts

Hey there, time traveller!
This article was published 29/07/2023 (810 days ago), so information in it may no longer be current.

There are plenty of ways things can go awry in grain marketing.

Just ask the Saskatchewan farmer who found out this month that he owes $82,000 after he apparently agreed to a grain delivery contract with a texted “thumbs up” emoji and then failed to deliver on the contract.

The farmer argued his ‘thumbs up’ was simply acknowledging receipt of a message, not agreement with the contract terms.

The buyer’s position was that the emoji constituted acceptance of a contract to deliver flax for just under $670 per tonne in the fall. When the farmer didn’t bring in the flax, the company eventually sued for breach of contract.

The court sided with the grain company, based on evidence that the farmer and the buyer had done transactions by text in the past. The case is under appeal.

This happened in 2021, the year a major drought cut production and sent crop prices soaring through the summer. When it was all over, wheat production was off 38.5 per cent, canola by 35.4 per cent and flaxseed by 40 per cent.

While $670 per tonne was the going price at the time the flax contract was texted to the farmer, prices had skyrocketed to more than $1,600 per tonne a few months later when the contract was due.

That summer, many farmers were caught holding forward-pricing contracts that they couldn’t fill because of production shortfalls or didn’t want to fill because prices had risen so significantly since they made the deal. If they didn’t deliver, they had to find alternative supplies or to buy out of the contract at higher market prices and with penalties. In some cases, they were able to roll their contracts forward into the following year and hope for a better crop.

Farmers complained the companies were being ruthless and unfair. However, it’s hard to imagine farmers wouldn’t have held companies to their contract if the tables were turned and prices had fallen.

Grain buyers base their sales on the supplies they have contracted, so they were left scrambling to fill their commitments too.

It’s not surprising they weren’t amenable to renegotiating or just letting things slide.

What is surprising is that so many farmers had not read the fine print and that they treated such a big part of their business, often worth hundreds of thousands to their bottom line, so casually.

Farmers and grain buyers alike felt a bit scorched after the 2021 contracting experience. This year’s drought, while not as severe as in 2021, could create production shortfalls and more price volatility again. But it’s unlikely history will be repeated.

“I think farmers are just very cautious after that experience,” says Bruce Burnett, the director of weather and market analysis for MarketsFarm, a division of Glacier FarmMedia.

However, he noted forward pricing isn’t just about the price.

Farmers are still encouraged to forward-price at least a portion of their unharvested crop, so they can better-manage inventory and cash flow. How much they pre-sell depends on how much cash flow they need to make their payments, their on-farm storage capacity, and how badly they need to lock in access to the delivery system.

It’s a risk-management strategy, but it’s not without risk.

Grain companies use contracting to ensure they can supply their customers and to help manage the export delivery logistics, which in Canada are constrained at the best of times. The grain needs to be drawn into the pipeline at a steady pace. It can’t all be moved at once.

Wade Sobkowich, executive director of the Western Grain Elevators Association, said many companies reviewed their contracts after 2021. In some cases, they’ve added “act of God,” clauses that limit farmers’ exposure if there is a production shortfall.

However, standardizing the contracts, as requested by some farm groups, would be seen by others as anti-competitive, he said.

The bottom line? “The whole contracting system doesn’t work if the parties in the contract can’t or don’t live up to their side of their commitments,” he said.

Farmers need to be sure they understand the terms before they sign or give it the thumbs up.

Laura Rance is vice-president of content for Glacier FarmMedia. She can be reached at lrance@farmmedia.com