This is the main premise of questions Midwest producers are asking this year:
“I couldn’t get all of the acres planted that I had intended, and I have made cash grain sales with my elevator already. There is a good chance that I won’t produce all of the bushels I have sold. I’ve never been in this situation and am not sure how to handle it. I hear different answers depending on who I talk to.”
Learn about the trade rules.
The first place a producer should look for answers is the National Grain and Feed Association (NGFA) Grain Trade Rules, which govern 95% of the commercial grain trades in the US, specifically Rule 28. It is nearly a certainty that your buyer’s contract observes NGFA Trade Rules. It should state this somewhere in the contract.
Rule 28 provides that in the event the seller is unable to fulfill a contract within its specifications, the seller must notify the buyer first by phone and then in writing. The buyer must then choose whether to
(1) Agree with the Seller upon an extension of the contract; or
(2) Buy-in for the account of the Seller, using due diligence, the defaulted portion of the contract; or
(3) Cancel the defaulted portion of the contract at fair market value based on the close of the market the next business day.
If the Seller fails to notify the Buyer of his inability to complete his contract, as provided above, the liability of the Seller shall continue until the buyer, by the exercise of due diligence, can determine whether the Seller has defaulted.
Buyer’s non-performance is treated with identical terms as Seller’s non-performance.
Understand how the official rules can play out in the real world.
This situation is just as uncomfortable for the Buyer as it is for the Seller, particularly if a new merchandiser is involved who may not have experience with situations like this. Secondly, the Buyer knows how he manages this situation could very much affect his relationship with the Seller, whether constructive or destructive, in the future.
There is a good chance that there are plenty of other producers in your same situation within your geography. This can become a very big deal for all involved, if the defaulted volumes are significant.
Note the Buyer DOESN’T HAVE TO agree to roll the bushels forward to the following year. The Buyer may or may not be able to easily do this. He may have expensive barge freight booked or rail cars leased just for this delivery period… or he may owe this grain to an end-user who is counting on the shipment. The Buyer may need to “buy-in” (meaning replace in the open market) the defaulted quantity because he can’t get out of a sale he has made using the Seller’s assumed grain deliveries (particularly, but not limited to, NGMO corn or soybeans.)
(C) Failure to perform any of the terms and conditions of a contract shall be grounds only for the refusal of such shipment or shipments, and not for recision of the entire contract or any other contract between the Buyer and the Seller.
Note each contract is considered separate from any others between the same two parties. Just because a Seller cannot fill an October-delivery contract for example, doesn’t mean he automatically cannot fill a different contract. Each contract is addressed separately.
(D) This rule does not permit compensation to the defaulting party to a contract. (This is the kicker.)
This may seem to many Sellers to be the most unfair. Say for example that a Seller has 10,000 bushels of soybeans sold at $10.00 for December 2019 delivery to a St. Louis river terminal. As of this writing (August 5, 2019) the December 2019 bid is $8.80 Delivered. A Seller, knowing he did not plant enough soybeans to fill this sale, might ask to cancel the contract, thinking he would be owed $1.20 per bushel (the difference between the sales price and the current bid, perhaps with a small cancellation fee deducted.) However, note that Rule D states, “This rule does not permit compensation to a defaulting party to a contract.” That means the Buyer has the right to cancel a contract at the same price it was traded at, and doesn’t have to give the Seller the price difference, if it is in the Seller’s favor. Yet all of the other rules state the Buyer can “buy-in” grain (often at a much higher price) for the account of the Seller. How is that fair? The answer is that it is not, yet there are two sides to the coin.
Buyers feel that expecting them to put out a grain bid every day, enter into a contract with Sellers, hedge (and margin) that grain in the futures market, book transportation, possibly generate a payment advance, and lock up a corresponding amount of their finite grain storage costs money. They are not in business to give Sellers a temporary market. In the above example, the Buyer would get to keep the $1.20/bushel price difference, genuinely unfair as it seems.
Note that in any case that a Seller might find himself short on production to fill a contract, the Seller can choose to buy the grain from a friend or neighbor, to be delivered to a Buyer in the Seller’s name. The Buyer would issue payment to the Seller, and the Seller would issue payment to his neighbor. The price of this grain purchase does not have to be same as the contract price! The Seller does not need to have a Grain Dealers License in this situation.
Know your contract.
One final note: READ YOUR CONTRACT, FRONT AND BACK. There are a lot of pertinent details in the tiny boilerplate language which is often buried on the back of the paper contract. If you find yourself in a default situation, sit down with your Buyer, and discuss what options you both may have in resolving the issue. In some cases, the result is a win-win, although more often it turns out to be a win-lose or even a lose-lose situation that pleases no one. It won’t get better however, the longer it remains unaddressed.