The season is not over until the money is in the bank!
All the hard work during the year can be for no gain, if a buyer defaults on payment for some or all of the grain sold from harvest.
Who would sell a car to someone they don’t know, let them take it away with the promise to pay for it in 30 days and then just hope like hell they actually pay? So why is this often done with grain sales and how can payment be more secure?
Any grain sale creates a contract between a seller and a buyer, who each agree to the terms. Counterparty risk is the chance that either the seller or the buyer does not comply with the terms of the contract.
What options are available to the seller to reduce the risk of not receiving payment from the grain buyer?
The following is not an exhaustive list, but contains general information about the more common options.
Research the Buyer’s Business before Making a Sale
- Is the buyer and their business reputable?
- Do they have a good record of payment?
- What is known about their financial position?
- Check with other farmers or impartial people in the industry about their experience or thoughts on the business.
Understand the Contract
- Negotiate and clarify the terms of the contract before the agreement is made. Be aware that an agreement can be as simple as a telephone conversation.
- If the terms are not acceptable, don’t enter into the sale.
- Keep a record of the verbal terms and confirm with a signed contract that has been thoroughly checked to ensure that the relevant details are correct.
- Ensure that a “Retention of Title” clause is included in the contract, stating that title does not pass until payment in full has been received by the seller. This clause cannot be relied on solely to recover unpaid grain, but allows the interest in the grain to be legally registered on the Personal Property Securities Register.
- If the terms of contract are not fulfilled by the buyer, such as late payment, the buyer should be notified immediately and no more grain should be sold to that buyer until full payment is received.
- If a sale to a single buyer is of significant proportion or value, a credit report on the business can be obtained from a commercial provider. A credit report will show if there are any defaults formally registered against the business.
- A credit insurance policy can provide coverage for up to 90% of the value of the transaction, in the event of a buyer becoming insolvent, or with some policies, lengthy non-payment by the buyer.
- The various policies need to be closely scrutinised as the level of cover can be different. Some policies may be activated only when the buyer becomes insolvent. Also premiums can vary widely.
Personal Property Securities Register (PPSR)
- The PPSR uses the legal framework of the Personal Property Securities Act (PPSA 2009) to register the seller’s interest in the grain, when it is in the possession of the buyer but not yet paid for in full, or it is in the possession of a third party such as a bulk handler.
- The PPSR makes it easier to identify who is entitled to which assets or unpaid money, when a business become insolvent.
- This is of particular importance when grain is comingled in storage and is either unsold or in a pool, or payment from a sale has been deferred.
- If the seller’s interest in any eligible transaction is registered on the PPSR, their status is elevated to a secured creditor in the event of the buyer becoming insolvent. The likelihood of reclaiming the grain or getting some return is greater than for an unsecured creditor, which they would be otherwise.
- The PPSA is complicated and needs specific legal advice to ensure that the registration will be effective. However, the cost is relatively low for the level of protection obtained against buyer insolvency.
Online Clearing Houses (such as Clear, igrain)
- Online clearing houses provide a secure settlement facility between the seller and the buyer.
- Title of the grain does not pass from the seller to the buyer until the buyer’s funds are in the clearing house’s account. The clearing house administers the transaction for a fee, with payment generally being prompt.
- The downside to online clearing houses is that all not buyers may participate.
Unfortunately, many farmers continue to lose significant amounts of money selling grain to buyers who become insolvent. Sometimes the loss can be absorbed, but if large enough it could be terminal for the farm business as well.
When a grain buyer becomes insolvent they generally pack-up and start business elsewhere.
When a farming business becomes insolvent, it is generally gone forever.