Grain Contacts
With the large volume of grain to handle this harvest and the record high prices, the logistic and financial capacity of grain buyers will be tested. Sellers will need to be conscious of protecting their income in a market that could be less predictable than in the past.
Grain Growers have produced a publication called Managing Risk in Grain Contracts, which covers important considerations for farmers to be aware of when entering into grain contracts.
Reading the full publication is recommended for those selling significant quantities of grain. It can be found at: Managing Risk in Grain Contracts - A Grower's Guide | The national voice for Australian grain farmers. (graingrowers.com.au)
Following are some key points which may be relevant to clients:
Always keep a record of discussions and confirm details with the buyer, (text or email) for clarity as soon as possible after the agreement.
Conduct due diligence prior to selling grain. This may include basic research on the buyers payment terms, history, reputation and their management. For larger transactions it may involve a search of the Personal Property Security Register (PPSR). Over time it is prudent to establish long term relationships with reliable buyers at a fair price rather than to chase the top dollar.
Spread the risk. Where large quantities of grain are being sold over a relatively short time period, it may be wise to sell to more than one buyer. In this case the impact of a late or non-payment will be reduced. Where payment terms are short and grain is sold over the medium term, this may not be necessary as the seller has time to react to a delay in payment by holding back grain or selling elsewhere.
Ensure that the payment terms are agreed upon prior to entering into a contract. Payment terms of 7 days from delivery are becoming industry standard. Avoiding longer payment terms will reduce risk no matter who the buyer.
Understand the terms and conditions. The seller should read the terms and conditions of any contract before agreeing to it. Any issue with these should be negotiated prior to making a commitment. In particular, growers should be aware of delivery specifications, premiums and discounts.
Be aware that ownership is generally transferred with delivery of physical grain, meaning that the seller loses ownership of the grain regardless of whether payment has been received. For larger transactions it may be possible to negotiate an Ownership & Passing of Title clause, which offers the seller some protection by transferring ownership only once full payment for the grain has been made. If the grain is co-mingled, the clause needs to include a reference to the buyer being a trustee for the seller with the seller having a claim to the proportion of the total proceeds reflected by their percentage contribution to the co-mingled stack.
The Personal Property Securities Register allows for a security interest in grain to be publicly registered. This preserves the sellers right in the grain between giving up possession and being paid. A PPSR search can be used to investigate the solvency of a buyer and some brokers may do a PPSR as part of their service. A PPSR allows for grain to be repossessed if a buyer fails to pay and becomes insolvent, plus it protects against the buyer on-selling the grain before paying the seller.
For larger transactions Debtor Insurance can be used to cover a buyer defaulting on payment. Such insurance becomes an additional cost of the sale, plus it also requires additional administration. For this reason, it is most likely to be used by larger business selling large quantities on longer payment terms.
Relative to the time and effort that goes into growing a crop, many growers take a somewhat relaxed attitude towards selling grain. Managing risk throughout the sales process requires some attention to detail such as reading a contract in its entirety. Fortunately, there are a broad range of options available to sellers and for those that are efficient and organised, it is relatively easy to form long term relationships with reputable buyers who offer a fair price and favourable payment terms. Fostering these relationships and remaining loyal to them generally pays off over the longer term.