Drought-battered producers facing another crisis — contract penalties
Deadly combo of crop failures and sky-high prices leave some facing huge penalties on unfulfilled contracts
By Alexis Kienlen
Reporter
Published: August 9, 2021
Although this harvest will be meagre, Jason Saunders expects to fulfil his grain contracts this year. But countless farmers across the Prairies won’t be able to — and many face substantial penalties when they can least afford it. Photo: Supplied
The drought is squeezing producers from all sides, with many facing another calamity — not having enough crop to fulfil their grain contracts.
“There are issues because the drought is so widespread,” said Jason Saunders, vice-chair of Alberta Wheat and a dryland farmer from near Taber. “There was aggressive forward contracting on canola and old-crop wheat because of the record-high prices happening in the spring.
In normal times, there’s the option of sourcing canola or grain from farmers who have a good crop. Moreover, prices tend to fall between the time a portion of the crop was pre-sold and harvest.
But that’s not the case this year.
“This year is different, because more areas have been hit by drought. Finding the production needed won’t be easy — it’s a Prairie-wide issue,” said Saunders.
Not being able to fulfil contracts — and having to take a big loss — are a huge concern this year as prices, especially for canola, are sky high and producers were more likely to forward contract, said Alberta Canola general manager Ward Toma.
“We’ve had two very rare events happening at the same time,” he said. “Historical, high, never-heard-before prices at the same time we’re having a historic low production that is shrinking every day.
“We see crop disappearing every day because of the dry condition in the Prairies, and we see record prices at the same time.”
But there’s little that his organization, or others, can do once a contract has been signed, said Toma.
“It’s a voluntary contract between you and the grain company,” he said. “You accepted it, and that’s part of the problem. With contract law, you sign that document and you (have to) abide by those terms.”
Kevin Auch took a “very conservative” approach when pre-selling part of his pea crop. But he’s not sure he’ll even harvest the 13 bushels an acre he needs to fulfil that contract. photo: Supplied
However, many producers “just look at the price” or assume that if they have a complete wreck, there’s some sort of way out.
“Unfortunately, we have people learning these things the hard way,” he said. “They don’t take the time to read the contract and understand what the terms are. They just look at the price.”
Be up front
But there are other reasons why farmers sign grain contracts.
“The idea is that you pre-sell some of your crop, so you get harvest movement or soon thereafter,” said Sylvan Lake producer Mike Ammeter. “It’s a cash flow issue — I need the money, I need this grain sold and to get it moved — (or) maybe it’s a storage issue.”
Pre-selling is not uncommon but “it’s all over the map as to how farmers approach that,” he added.
Some are more aggressive but even those who take a conservative approach can be caught in a year like this one, said Ammeter.
“Maybe it’s your habit to pre-sell 20 to 30 per cent of your crop, and now you’ve got nothing. How do you tackle that?”
The first thing to do is to call the grain company, he said.
“You have to do your best to negotiate out of it. Be up front and do your best to come to an agreement on how you’re going to settle this.”
That’s the advice that farm organizations across the Prairies are giving their members right now. But again, this year is different. For example, in past years some companies might have agreed to roll the contract over to next year. But this year, grain companies are in a bind, too, noted Toma.
“The shortage of the crop is going to be a problem — not just for the farmers who can’t deliver the product, but also to the grain companies that can’t make their deliveries,” he said.
It all makes for a very tough situation.
“I don’t see the grain companies would allow you to purchase back your grain (contract) until you harvest and you deliver everything you’ve got,” said Saunders. “And then if you’re still short, it would be a case where (you) would buy it at market price.”
Nevertheless, contact your grain company immediately, he said.
“Grain companies that get a phone call from producers saying they are short — they have to send their representatives out to look at the field. They don’t take your word for it, unless there has been a widespread hailstorm.”
Also, during droughts people often think they have less crop than they do, said Saunders, who is pretty sure he will be able to fill his contracts.
“We’re harvesting our winter wheat right now,” he said in an interview in late July. “It’s not very good, but there’s still something. At times, people are just saying there’s zero. They can be short, and not be at zero.”
One-sided deals?
But the situation is once again shining a light on the nature of these contracts, which Saunders calls one sided.
“They (grain companies) have out clauses, but there aren’t any out clauses for producers,” he said. “I think an equal contract is all I could ever argue for at this point — one that has equal risk and liability on both sides.”
Although smaller companies handling special crops might let a producer out of a contract, Saunders said he has never seen a large grain company or a primary elevator do that.
Even though he only pre-sold a small portion of his pea crop, Carmangay producer Kevin Auch doesn’t know if he’ll harvest enough for his contract.
“A 13-bushel-acre average is what I’ve contracted, but this is the worst crop I’ve seen since the 1980s,” he said. “I thought I was being very conservative, but I might be short on my contract a little. It’s going to be nip and tuck here.”
Some farmers may find themselves first delivering whatever they harvested to the elevator and writing a cheque to a grain company, he said.
“Some of them say, ‘You’ll make up the difference between the price that you contracted it for, and the price that it is now — that could be $2, $3, $4 a bushel depending on what it is,” said Auch. “It gets a little scary when you’re having to take $2, $3, $4 a bushel out of the meagre crop that you have and apply it to the crop you’re short on.”
Producers should pull out their contracts and give them a thorough read, he said.
“Some contracts have Act of God clauses, so if you have that, you’re fine. It just depends on what the contract says.”
However, Act of God clauses are more common in pulses and specialty crops, and are not commonly seen in wheat and canola, he said, adding a grain company “can’t take that loss either.”
“They make their money by shipping the grain,” said Auch. “They have a margin in there, and that’s the margin that they pay to get it to the customer. Now the customer is still expecting that product at that price.”
While some have argued crop commissions in the Prairie provinces, should band together to pressure grain companies to make contracts more fair to farmers, their role is very limited in this regard, he said
“The only thing commissions could do is inform farmers of what they are signing … (and) warning farmers of some of the pitfalls,” said Auch, who served as Alberta Wheat chair in 2016-18.
The advice to call your grain company as soon as possible really is the best option, he added.
“I’ve already talked to one of my grain buyers that I am going to be short on my pea crop,” he said. “They are aware of that, and if they have anything on their end that they can start working on, they can mitigate it.”
You should also talk to the grain company about any fees, said Daryl Fransoo, chair of the Western Canadian Wheat Growers Association.
Often, producers aren’t aware of the fees and that they can vary widely, said the Saskatchewan farmer who has been taking a lot of calls from growers worried about their contracts.
“Farmers are getting charged over and above the spread when they’re buying their contract out,” said Fransoo. “Grain companies are calling it an administration fee. It differs greatly between companies.”
ABOUT THE AUTHOR
Alexis Kienlen lives in Edmonton and has been writing for Alberta Farmer since 2008. Originally from Saskatoon, Alexis is also the author of two collections of poetry, a biography, and a novel called "Mad Cow."
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