WESTERN PRODUCER — Farmers can cancel deferred delivery grain contracts at any time, as long as they are prepared to pay the damages outlined in the contract.
John Stewart, managing partner at D’Arcy and Deacon law firm in Winnipeg, said farmers should be sure to cancel contracts formally in writing. He spoke last week during a webinar presented by the Canadian Canola Growers Association.
Some farmers complained last year that companies wouldn’t let them out of contracts.
In an interview, Stewart said a conversation between a farmer and an elevator agent does not constitute cancellation. Often these conversations go along the lines of the farmer saying the crop doesn’t look good and the agent suggesting they wait and see if the situation improves, he said. Even if the farmer at that point says he doesn’t want to wait, that doesn’t mean the contract has been cancelled.
“If you’re going to terminate something you have to terminate it clearly and unequivocally,” said Stewart.
Sending an email, followed by a letter, would do.
“The grain companies don’t need to agree with the cancellation,” he said, but they will want compensation as outlined in the mathematical formula contained in the contract terms and conditions.
Stewart used a simple example of a contract to sell 100 tonnes of canola at $1,000 per tonne. A producer terminates the contract on a day the canola is $1,200 per tonne.
“Let’s say (the company) had to go buy (cash) canola at $1,250 a tonne, even though the contract on the commodity exchange was $1,200…they’d pay $125,000 to replace the canola that I promised to sell them for $100,000. I would owe that company the $25,000.”
There could be other damages, such as transportation charges, as well.
CCGA’s policy manager, said the webinar was held in response to the circumstances of 2021 when there was so much uncertainty about the crop and so much angst about contracts.
“It was a different year in terms of there just wasn’t enough supply to fulfil the contracts and for grain companies to fulfil their obligations as well,” she said.
She encouraged farmers to read the fine print in their contracts.
Stewart said the company cannot just arbitrarily set an amount of damages to be paid.
He said many farmers last year knew the drought was affecting them and that they might not be able to meet obligations.
“Some of them tried to go ahead and terminate the contracts at that time and were either not very forceful or were talked out of it by the elevator agent,” he said.
Prices had already risen by early July and kept rising to record levels. In turn, that pushed damages higher. They could have limited their exposure by taking a stronger stand, he said.
Few actually formally canceled their contracts.
Stewart said nobody saw the depth and breadth of the drought and canola prices moving from $12 to $30 a bushel, which pushed damages so much higher than might be expected.
“The take-away from this is that in years when it looks like your production is not as much as you expected, make a realistic assessment of what’s going on on your farm and take steps accordingly to minimize the possible damages that you might face in the event that you’re unable to deliver the canola that you contracted to deliver,” he said.
Meanwhile, , found most contract terms favoured the buyers.
The report looked at 21 different contracts after numerous complaints about 2021.
Many producers reported that grain companies handled shortfalls differently and inconsistently, and that some companies didn’t allow early contract buyouts, which lead to large penalties.
“The failure by producers to deliver tends to be governed by a litany of conditions outlining damages and fees, while the infringements by buyers to take delivery are generally dealt with by automatically extended delivery periods ranging from 60 to 180 days, while occasional small storage fees apply,” said the report.
The report suggested better collaboration to simplify contract terms and make them clearer. It recommended standardized contracts that are fair to both parties and that the Canadian Grain Commission take on producer contract training, standard contract administration and contract arbitration.
