Contracts rarely protect growers against drought, so growers may face penalties
With early-season drought threatening yield prospects, it might be time for growers to contact buyers to discuss the contracts they have signed, says a lawyer.
Craig Zawada, chief executive officer of WMCZ Lawyers, said farmers typically sign contracts in spring and have no further contact with buyers until the delivery date.
“Whenever there is a breach coming up, the tendency of the breaching party is to clam up, stay out of touch and not deal with the other party,” he said.
That is not a recommended course of action.
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Zawada said it is a good idea for farmers to reach out if they suspect they won’t be producing enough crop to meet the contract specifications.
Growers and buyers may be able to work out some type of alternative arrangement if there is early communication about the pending shortfall. For example, it will give buyers time to find alternative supplies.
Even if buyers are unwilling to find a compromise, farmers at least know where they stands and can prepare for what lies ahead.
“It might help you later on, if nothing else, just to show a court that you as a producer have been acting in good faith and did all you can,” said Zawada.
“It might just give you a bit of a break if there is ever a case going against you.”
He acknowledged that having regular contact with a buyer can be difficult when it is a large, faceless corporation, but farmers often know who they are dealing with and may be able to work something out.
Chuck Penner, analyst with LeftField Commodity Research, said yield prospects are dwindling with each additional week without significant rainfall.
“We’re getting very close to that tipping point now where we can conclude there will be reduced yields. It’s just a matter of how much,” he said.
“I’m already penciling in reductions. I’m trying to be conservative with those for now because there’s a danger in writing off the crop too early.”
Even a five percent reduction in pulse crop yields could significantly affect prices because of the “exceptionally strong demand” coming from India and Turkey.
There will be little carryout of peas and lentils from the 2014-15 crop, and what will be carried forward won’t be No. 1 or No. 2 quality.
“That’s all gone,” he said.
Penner encouraged growers who think they will have a short crop to consider buying out their contracts sooner rather than later because he expects pulse prices to increase during the summer. The higher they go, the bigger the penalty.
He believes pulse growers did a lot of forward contracting this spring because prices were attractive.
Zawada said contracting seems to becoming more popular in the post-Canadian Wheat Board era.
Many contracts contain act of God clauses, but they typically protect growers from extreme weather events such as tornadoes. It is rare for one to cover drought.
However, every contract is different, so it is important for farmers to familiarize themselves with the specifics of their contracts or seek a lawyer’s advice if they feel they will be in breach of the contract.
Zawada said large farm operations may be able to hedge against the risk of default by buying grain from others, but it is more feasible for most farmers to leave that up to the buyer.
“The buyer is going to have more of an exposure and maybe more alternatives to hedge themselves.”
