Buying out grain contracts? Some considerations to keep in mind
If you farm across the southern prairies, you are unfortunately no stranger to the lack of moisture in 2021.
High market prices at the start of the year caused many to eliminate some risk on their farm by locking in some grain for the end of the season. However, Mother Nature has taken her toll, and a lack of crop to fulfill those contracts has become a frightening reality.
Yield estimates are coming in, and many farmers are faced with a very real potential of not being able to make their grain contracts. What next?
Colin Penner, farm management instructor at the University of Manitoba, who also farms in southern Manitoba, says the first step is keeping your grain buyer in the know.
“Let them know what’s going on. In some instances there’s a few hoops you’ve got to jump through, but for the most part it’s ‘I don’t have enough grain, how can I move forward from here,’ and at that point the grain company will typically say they will let you out of the contract,” says Penner. “In a year like this, where we see grain prices continue to rise, typically you will have to pay the spread in between what you contracted the price at, and the new price.”
In a strong market year, administration fees on top of filling the price gap can be hefty, depending on the elevator, and what their situation looks like too.
“For a number of grain companies, they don’t want to be looked at as brokers. So they don’t want people to say ‘yeah, I’m going to sell you this much grain,’ and then the market rises and they buy out of the contract. They don’t want to do that,” he says.
To deter that, elevators use admin fees so that contracts work as they should. The added fee can be as high as $30/tonne but another company may only charge $10/tonne. Penner says the fee is meant as a reminder that grain companies aren’t brokers — if you want to hedge your grain, go get a trading account.
What you are able to do (and not do) of course depends on the grain company, and your relationship with them. However, as Penner notes, some companies will offer the ability to roll over your contract, and fulfill it in the following year, by taking a small deferral hit. Another option is to deliver a different commodity to reach the promised tonnage.
“I think grain companies are willing to work with people. It sucks for everyone all around,” says Penner. “It’s expensive for the farmer to buy out, and the grain companies have committed to sales, too. It’s great when we see $20-plus canola, but its tough and it’s frustrating to have to buy out of this for everyone. At the end of the day, you are dealing with a human being on the other end of the line, and it doesn’t help to shout and scream and say ‘I’m never dealing here again.’ Work with the person at the other end of the line. They recognize that it sucks, too.”
Penner’s lesson in hindsight, or wish-he’d-done-it-differently moment? When you do get something figured out with the grain company, make sure you get it down in writing to eliminate any misunderstandings on either end.
“Have your phone call with the guy and then just shoot him an email saying ‘This is what I understood, can you confirm this,’ and then you at least have it in writing. That’s key,” he emphasizes.
Check out the full conversation with Penner and RealAgriculture’s Kara Oosterhuis, below: