Grain contracts don’t account for unprecedented events
Producers need grain companies to allow contract adjustments without penalties during extreme drought
Extreme heat and lack of moisture at critical times during the 2021 growing season led to rapid and severe reductions in grain yield and quality. Many producers harvested crops that yielded far below their long-term production averages. The extent of these production shortfalls was not anticipated in many producers’ grain marketing plans. Thousands of farms were unable to fill their production contracts with grain companies this fall.
Like most contracts, grain production contracts often include provisions that can apply when parties don’t meet the agreed upon contract terms. These can include certain terms and conditions when the seller is unable to produce the contracted volumes due to weather-related production problems. “Act of God” clauses that exempt the seller from their contractual obligations due to weather events are not common in the grain industry. In most instances, contracts will require the producer to “buy out” the unfilled volumes of grain to reimburse grain companies for the production shortfall. Contracts may also stipulate a range of additional administrative fees and other penalties that apply in default cases.
Hurting producers’ bottom lines
The widespread nature of this year’s drought and current market volatility has limited the options available for producers to manage this situation. In a normal year, grain is more easily sourced from other regions to compensate for shortfalls in localized areas. Commodity prices are rapidly increasing as grain buyers and end-users begin to recognize the full extent of this year’s production shortfalls. These market conditions are imposing extraordinary costs for producers who are having to purchase grain at historically high prices to fill outstanding contract obligations.
The financial implications of this situation are significant and will cause long-lasting hardship for many Saskatchewan farm operations. Farms more likely to enter these contracts tend to be younger operations with limited equity, less bin space, more bills to pay in the fall, and those seeking to manage price risk. Operations that were already in a tight cash-flow position may not financially recover from this unanticipated expense.
Solutions needed for financial stability in the industry
“The widespread nature of this year’s drought and current market volatility have limited the options available for producers to manage this situation.”
For many years producers have expressed concerns about the grain industry’s lack of balance and consistency in contract terms. Buyout provisions, administrative fees, and penalty provisions vary considerably between companies and are often set without meaningful negotiations between the contracting parties. Producers have also faced difficulties negotiating fair terms in a market with many sellers and few buyers.
Both long-term and short-term solutions are needed to address this situation in the interest of financial stability in the grain industry. APAS strongly urges grain companies to recognize the severity of the situation, to work with producers to find solutions, and renegotiate contract terms where possible.
APAS has joined the Saskatchewan grain commodity commissions in requesting that grain companies waive administrative fees and penalties on contract defaults related to the drought and is encouraging the grain industry to adopt a coordinated approach in response to this issue to ensure consistent and predictable treatment for producers. APAS is also advocating that governments, producer groups, and grain buyers begin working together to prioritize the development of a standardized grain contract in Canada that protects the interests of all parties.
Let your voice be heard
“Operations that were already in a tight cash-flow position may not financially recover from this unanticipated expense.”
APAS wants to hear about how this year’s extreme drought has impacted producers throughout the province and has created an anonymous survey for farmers and ranchers to share their feedback. To complete the survey, visit apas.ca/graincontracts