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KNOWING THE RULES MAKES ALL THE DIFFERENCE

I don’t know about many of you, but in my opinion, the hardest part of farming is being successful at marketing each year’s crop. Being wrong by selling too early, or too late, is something all of us as farmers should have learned to deal with. Let’s face it, none of us have crystal balls, so we do the best job we can. Some years we do a better job marketing, and other years we don’t. However, unless we miss major moves in the market, the monetary ramifications are usually not severe.

But, what happens when your marketing does have severe ramifications? For example, what happens if you forward contract and a 1988 style drought comes along? Surprise! Or, a tornado or hail wipes out your crop? In other words, what rules will govern your rights and responsibilities when forward contracting grain sales?

To begin, grain contracts are generally subject to commercial law that is the same across all states. The Uniform Commercial Code (UCC) has been developed and, with some modifications, enacted by every state. Article 2 of the UCC generally will cover forward grain contracts.

The Making of a Contract

Typically, a farmer calls the elevator and places a forward sale. No written contract is entered into, so the farmer has no idea of the terms and conditions of the contract. The elevator then generally sends a letter of confirmation or a form contract to the farmer. The UCC protects the farmer by providing that these unwritten contracts are only enforceable if a writing and confirmation is sent to the farmer in a reasonable time. Once the farmer receives the writing the farmer has ten (10) days to provide written notice of the objection to the elevator of the terms of the contract. If no objection is made, then the contract language stands.

Contract Terms:

As with many legal contracts, grain contracts will contain a vast amount of language that is not easily understood by many farmers. However, it is important that a farmer read the contract so as to try and understand how different circumstances will be handled. For example, under the UCC, a seller is excused from timely delivery if performance is not possible due to unexpected circumstances. However, farmers are generally not excused for drought, floods, etc. Court cases have found that the farmer will be excused only if the contract called for the crop to be grown on a certain farm. Sometimes, contracts will include a “Force Majeure” clause,  that essentially frees a party from liability or obligation when an extraordinary event or circumstance beyond the control of the parties.

Interestingly, I have reviewed grain contracts that give the elevator the ability to be excused from performance or declare a “Force Majeure”, but specifically say that the farmer cannot. How is that for fair?

Of all the terms in a grain contract, I would think that the ability of the farmer to excuse or delay performance would be most important. At the very least, there should be equal terms for both the farmer and the elevator to excuse or delay performance.

Grain Contracts

DISPUTE RESOLUTION

Almost all grain contracts call for disputes to be handled by the National Feed and Grain Association’s board of arbitrators. This means any dispute will be determined by an arbitration board, and its results are binding. So, instead of settling differences in the farmer’s county court, or the elevator’s county court, the dispute will go through the NFGA, located in Washington, D.C. The NFGA has its own set of trade rules and arbitration rules, so the farmer will need to find specialized legal counsel that handles these matters. I’m not saying having to arbitrate with the NFGA is bad, it’s just important to realize where disputes arising from most grain contracts will be decided at.

In closing, there are many other areas of grain contracts that farmers need to consider, but the above are some of the major areas. Farmers should understand the contract terms and work with their elevator to address problem areas. If an elevator refuses to modify their contracts, take the grain somewhere else. Quite frankly, I’d prefer to work with an elevator that employs neutral or friendly contracts, even if the elevator pays a little lower per bushel price, than an elevator that pays more and uses a one-sided contract.

Remember, when the unexpected occurs, all that will govern the situation is the writing on whatever contract you signed, or as in the case with grain contracts, the contract you did not sign.

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2017-10-07T16:41:43+00:00