Grain contract tips for trouble-free selling

Price volatility in the grain market increases the number of contract disputes between growers and buyers, although the number of arbitrations remains a tiny fraction of the tens of thousands of successful ex-farm grain contracts executed every season.

The vast majority of ex-farm grain trade is conducted on the Agricultural Industries Confederation (AIC) No. 1 contract, based on negotiations between trade and grower representatives and which is regularly updated.

As well as using the contract for individual deals, most merchants issue standard terms of trade every year or season. These tend to deal with general trading terms and are wider than the grain contract, with the company’s own terms and conditions usually prevailing if there is any conflict with AIC terms.

Growers need to be familiar with both these general terms and with grain contract terms, which may change from year to year particularly as new food safety legislation is introduced, says James Potter, NFU senior legal adviser. As with so much paperwork, it is often not properly read until there is a problem.

“In any contract, the questions of who, what, where, when, how much and when is it due are the essentials. The HGCA Cereal Sellers’ Checklist is designed to help farmers ask the right questions to avoid the most common problems with contracts.”

The time pressure at mill and other intakes, compounded by time pressure on the farm and sometimes difficulties in getting hold of the grower, means it is essential for growers to understand contract terms, says Mr Potter.

For example, some merchants have tightened weight tolerances in recent years. Mycotoxin limits also need to be checked carefully as these vary depending on the end user. Legal limits only apply to grain offered for human consumption but there may nonetheless be limits set out in the contract. Quality scalebacks and discounts can often be agreed in advance rather than in a rush at intake when communication might be difficult.

Although it is good practice to retain a sample on farm as lorries are loaded, only the sample taken at delivery intake will be used to determine whether the contract quality has been supplied.

When discussing a contract everything is up for negotiation and growers can introduce their own terms. Many will know where their grain is likely to go to and may set limits on redirection charges or distances, or may want to exclude certain end receivers.

Some contracts refer in general terms to end user’s requirements or standards, or perhaps to “normal payment terms”. Be wary of such general terms and ask for specific terms, advises chartered arbitrator Peter Brown from Suffolk.

One issue is whether a contract exists at all. A contract may be written or verbal, both are valid. While a signature makes proving a contract straightforward, determining the existence of a verbal contract is potentially more difficult, explains Paul Rooke, head of crop marketing at the Agricultural Industries Confederation.

However, most merchants and other first buyers have fairly sophisticated internal systems. Records of telephone calls and a paper trail which includes the issue of contract confirmation notes will generally provide proof that a contract exists. Some merchants also issue monthly statements showing what contracts a grower still has with them.

If anything is not right in the confirmation document, query it quickly – although arbitrations are relatively few, they will look at the conduct of both parties in the lead up to arbitration and how any issues or problems were raised and how they were dealt with, says Mr Rooke.

“If there is a problem, don’t put your head in the sand. Talk to your buyer or get advice elsewhere. In a big proportion of cases things only get as far as arbitration because the parties are not communicating. If you have agreed to something, you have to stick to it unless you can negotiate a change with the other party.”

David Sheppard, managing director of Gleadell says the firm suffers few problems relative to the number of contracts. “But, where there are issues, one of the most common is where we have bought grain for a certain month but the consumer is not able to take delivery in that month.”

To reduce this problem, Gleadell’s pool contracts are now three-month contracts, allowing a longer period in which grain may leave the farm. “We also do a lot of double-month contracts, for example, November/December delivery with payment at the end of December.

“Most things can be sorted. If there is a problem, the key is to talk to the person you did the deal with as soon as possible. A market carry can usually be agreed.

“Too often growers are attracted to a headline price but they fail to check or understand the quality terms. We warn people particularly on breadmaking and milling wheat to be aware of what they are guaranteeing to supply,” says Mr Sheppard.

Although there are fewer than a dozen AIC arbitrations in most seasons, Mr Brown says most arise because of the seller’s lack of knowledge and understanding of contract terms. “For example, growers often don’t know what to do if a buyer fails to collect within the contract period. The AIC contract spells out sellers’ rights very clearly.

“When a grower sells ‘as available’ grain, this is effectively an insurance policy so that the grower cannot be called for the goods before they are harvested and in the store. But growers often assume that this means that as soon as they advise the buyer that it is all in store, the buyer must collect it, whereas in fact the buyer has the rest of the contract period in which to move the grain, so a July/August ‘as available’ contract means that the buyer has until the end of August to collect. If the grower wants to limit this, he can ask for a July/first half of August period.”

Force Majeure is another misunderstood term, says Mr Brown. “This is not designed as a means to get out of a contract; it is designed to provide a means of giving either party a chance to perform the contract once a problem has been remedied. It gives a 30-day period of delay in which this can be done – for example if the electricity is knocked out in a grain store, or if there has been a fire. It doesn’t cover a crop failure or loss to flood or for any other natural causes.”

His advice is to keep good contemporaneous notes of all trade-related discussions in a day book or diary. They can be crucial to the outcome of a dispute.

Having a good system to record loads leaving the farm is also helpful. “I’m amazed at the number of times people have trouble tracing a final load worth £2000 to £3000 for which they haven’t been paid. All growers need to do is have a book in which to record the date, time, haulier’s name, registration number, driver’s name and signature. They should make sure everyone on the farm know where the book is kept and that it must be used every time a load leaves the farm.”

Mediation by a trained third party can sometimes resolve an issue without the need for arbitration. This is usually cheaper and more speedy than arbitration, with costs being shared and a working relationship often being preserved, says Mr Brown.

Avoiding contract problems

  • Read buyer’s terms of trade and query anything you don’t understand or agree with before entering into a transaction
  • Be wary of general terms, ask for specifics
  • Use HGCA cereal sellers checklist (http://www.hgca.com/publications/documents/jun2009_final-HGCA-Cereal_Checklist.pdf)
  • Make and keep notes of conversations and agreements on details such as price, movement times, quality, payments terms
  • Put key dates in your diary
  • Read confirmation notes sent once a deal is agreed – if there is a problem or question, follow it up immediately – in legal terms, your silence will be taken as acceptance
  • Check for variations from standard AIC and FOSFA terms, available at www.nfuonline.com/x39412.xml and www.nfus.org.uk, a typical area is on weight tolerances for the whole contract – these have been tightened by some buyers in recent years
  • Take a sample off the lorry while it is being loaded, seal it and store it carefully. It is not contractual but may help in the event of a problem.

How does arbitration work?

  • Arbitration is a binding process – by using AIC terms both parties agree to accept determination by arbitration
  • Claimant writes submission of claim, respondent responds, claimant always has right of last word
  • Arbitrator writes an award as to who is right and wrong
  • If there is a breach, damages are awarded
  • Can be initiated by either side, but must be started within 90 days of a dispute arising
  • Can be an oral hearing with parties attending, or by exchange of documents
  • Can be single arbitrator if parties can agree, or tribunal of three
  • Losing party usually pays costs, which can be substantial