Forward and Production Contracts: Seller Beware
We’ve cautioned readers in the past to tread carefully when entering into grain purchase contracts because of the grain market’s entrance into the big business world. We continue that theme this week by addressing a couple issues that farmers should be aware of with regard to forward and production contracts; the “Act of God” clause and special considerations of production contracts.
The purpose of an Act of God provision is generally to excuse a party from its obligations under the contract when its inability to perform is due to circumstances out of its control; e.g. a hailstorm that destroys a farmer’s sunflower crop and leaves him with little to nothing to deliver to the elevator. Some common problems with these clauses arise for the farmer when the clause isn’t included in the contract, when it is drafted to provide the sole benefit to the buyer, or when the contract places strict requirements on the farmer in order to trigger the protection of the Act of God clause.
Often, the biggest problem with Act of God clauses is that they are not included in grain purchase contracts or only excuse the buyer from performance. It is not uncommon for adverse weather to obliterate a good crop or significantly reduce the projected yield of a crop covered by a forward or production contract, leaving the farmer unable to satisfy the contract. In the absence of an Act of God clause, a buyer can require the farmer to deliver grain or be liable for the cost the buyer incurs in buying other grain to cover the amount the farmer fails to deliver, regardless of the inability of the farmer to comply with his contract. Although some farmers may be willing to risk it, often farmers are unaware of or unwilling to demand a fair Act of God clause. It is important to protect yourself from these situations and ensure that a fair Act of God clause is included in your contract.
The second common problem with Act of God clauses is the stringent notice requirements placed on the farmer. Many clauses require, for example, that the farmer give the buyer written notice of his inability to deliver the grain within 10 days of the occurrence. If the farmer fails to give proper notice, he won’t be protected by the clause and will still be required to deliver.
Production contracts also pose some special concerns. Although production contracts may provide a valuable source of stable income by setting a price for the purchase of the crop in advance of its planting and harvest, the farmer may limit his potential for profit based on market conditions. For example, some production contracts specify delivery of a certain amount of production, but also obligate the farmer to deliver any additional production. This eliminates any opportunity to take advantage of a good market. These contracts can also include strict farming practice requirements and allow the buyer to reject the grain if the practices are not followed. Some production contracts also contain specific notice and reporting requirements for the farmer, such as legal descriptions and number of acres planted, planting dates, verification of seed purchase, and final yield reports.
Read and understand your grain contracts and your obligations under the contracts. The terms are often on the reverse side of the page showing the amount of grain contracted for, the price, and the delivery times. Therefore, they are often overlooked. It is important that you know the terms prior to signing the contract. Remember, you often will be able to negotiate better terms.
(Posted by Derrick Braaten)