GRAIN CONTRACTS: by MJ9C04X

VIEWS: 74 PAGES: 18

									               GRAIN CONTRACTS:
   TYPES, KEY TERMS AND ISSUES,
 ENFORCEABILITY, DAMAGES AND
                   DEFENSES
                Brought to You by
Legal Aid of Nebraska Farm Law Project
                  1-800-464-0258
                With Funding from
Nebraska Department of Agriculture &
    USDA Risk Management Agency




  Legal Aid           Nebraska          USDA

 of Nebraska         Dept. of Ag.   Risk Management

                          1
                                        INTRODUCTION

    Over the past three decades, grain contracts have become increasingly complex. Producers
face a contracting environment filled with risk – and opportunity. A detailed discussion of the
each type of grain contract, its comparative risks and benefits, and an evaluation of market
conditions to which it is best suited is beyond the limited scope of this publication. Further, there
is an enormous body of materials and information, available in print and electronically,
addressing such issues. That said we provide a brief discussion of the various types of contracts.
We also identify certain publications that: (1) explain the purposes and mechanics of certain
types of contracts in greater detail; (2) discuss the effectiveness of such contracts as risk
management tools; and (3) identify market conditions under which one type of contract may be
preferred to another. Our primary goal, though, is to provide information that may help you in
reviewing grain contracts, and understanding how they define and impact your legal rights,
responsibilities and potential liabilities. In addition, due to the 2012 drought many farmers likely
face production deficits under their forward delivery contracts. Accordingly, we address in
general fashion how the law may apply to such a dilemma.

    Like our other general publications, this handout is intended for informational purposes,
only. This means two things. First, with respect to data, opinions or conclusions we obtain from
by extension services and other specialists, we rely upon such information ourselves, but cannot
warrant or guarantee its accuracy to others. Second, the handout is not legal advice. There may
be similarities in the types of issues grain producers face, but each farmer’s legal concerns,
challenges and solutions are unique, framed by his or her actual circumstances, crops, contracts
and related business dealings. If you have questions regarding the legal or contractual
consequences of the 2012 drought on your rights and liabilities under your individual grain
contracts, we urge you to consult a lawyer, promptly, to obtain advice tailored to your individual
farming operations. If you find yourself in such a situation, we welcome and invite your call.

                      THE MOST COMMON TYPES OF CONTRACTS

    Not all elevators or other buyers offer all potential forms of grain contracts. Further, the
terms and conditions, service fees, if any, and minimum quantity requirements may vary among
buyers. Thus, the following descriptions of the common types of grain contracts are generic by
necessity:

SPOT CONTRACT: This is the traditional and likely most common type of contract. With a
spot contract, a producer sells his grain at delivery for the current marketing price. Typically, no
prior arrangements need to be made, no contract is written, and there is no minimum quantity
requirement. Settlement is either made promptly or payment is deferred until a later date. Title to
the grain passes upon application to the spot contract. Be aware that corn delivered on a spot

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contract basis may be applied to fulfill your delivery obligations under existing contracts, so
you may not receive the anticipated settlement.

FORWARD FLAT PRICE CONTRACT: This contract locks in a flat price for grain to be
delivered at a specific future date. This type of contract is also commonly referred as a forward
delivery contract. The price, quantity, and delivery period are all established at the time of
contracting. Title of the grain does not pass until actual delivery. Usually, there is a minimum
bushel requirement. There may or may not be a service fee. This type of contract is also
commonly referred as a forward delivery contract. In exchange for locking the price, you lose the
opportunity to sell your grain at higher prices, should the market be trading higher at the time of
delivery. The risks associated with such contracts include potential liability for failure to
deliver the required grain when prices are trading above the contract price.

BASIS CONTRACT: The term “basis,” as applied to grain contracts, is the difference between
the cash price and the underlying futures as traded on the Chicago Board of Trade (CBOT). This
type of contract allows the producer to partially lock in a future delivery price. Specifically, this
type of agreement enables producers to lock in a basis, but establish the futures price at a later
date. The initial contract establishes the quantity to be delivered, the delivery period, and the
basis relative to a particular futures option month. Title of the grain passes upon application to
the contract, which also stops any storage charges in the event the grain was delivered before the
final price was fixed.

        For the producer, basis contracts may be appealing because storage charges stop upon
application and because such contracts enable the producer to take advantage of higher futures
prices. However, while the basis is fixed, the producer is still subject to price risk if the futures
prices fall. Typically, the futures price does not need to be set on the entire contract quantity all
at one time; instead it can be set in increments giving the producer more flexibility. For further
discussion and cautionary advice on basis contracts, see Wisner, Understanding Risk in Basis
Contracts, Iowa State University Extension Service, Publication PM-1697c (1997).

FUTURES FIRST CONTRACT (OR HEDGE TO ARRIVE): This type of contract locks in
a specific futures price at the time of contracting without establishing a basis level until a later
date. A delivery date, quantity and futures pricing based on a specific month are determined at
the time the contract is written. Generally, the basis does not need to be set on the entire contract
quantity all at one time; instead, it can be set in increments giving the producer more flexibility.
Typically, the basis level must be set on or prior to the first date of delivery or the first notice day
of the established futures month, whichever is earlier. Such contracts, though, often allow intra-
year or inter-year rollovers. Title to the grain passes upon application to the contract. These
contracts pose substantial risks to the producer, especially with respect to inter-year rollovers.
For further discussion and cautionary advice on HTA contracts, see Wisner, Understanding Risk


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in Hedge to Arrive Contracts, Iowa State University Extension Service, Publication PM-1697b
(1997).

 MINIMUM PRICE CONTRACT: These contracts allow producers to set a minimum price
received while still having the opportunity to realize a gain in a rallying futures market. A
minimum price can be set anytime from contract inception to a date specified in the contract.
The minimum price is equivalent to the current cash price less a premium charge and service fee.
A Minimum Price Contract typically gives the producer flexibility by allowing the producer to
receive a 100% advance equivalent to the minimum price and the opportunity to realize a further
gain with a positive futures market move. Title to the grain passes upon application to the
contract.

        A variation of this type of contract is the so-called Minimum Price Contract - No Basis
Established. This type of arrangement allows producers to wait until a later date to establish
their basis level. This contract also allows them to set their minimum futures price while still
having the opportunity to realize a gain in a rallying futures market. A delivery date, quantity and
minimum futures price based on a specific month are determined at the time the contract is
written. The basis does not need to be set on the entire contract quantity; instead it can be set in
increments. The basis level must be set on or prior to the first date of delivery or the first notice
day of the established futures month, whichever is earlier.

MIN / MAX CONTRACT: These agreements establish both minimum and maximum prices.
By establishing a minimum as well as a maximum price, the producer is able to establish a
futures window and typically obtains a lower premium payment. Some elevators offer a variant
where no basis is established.

PRICE LATER (DELAYED PRICE) CONTRACT: Delayed price contracts allow producers
to deliver their grain to the elevator, but set the price and basis at a later date. Title passes to the
elevator at the delivery date or contract date if the grain is bought out of storage. These contracts
typically involve storage charges and service fees.

PRODUCTION CONTRACTS: These are agreements where the producer agrees to plant and
grow specified grains on identified acres/production units in a manner set out in the contract, and
the instruction and control of the other contracting party. The producer typically has no legal
title to the crop.

    For guidance in determining which contract best suits your particular risk strategy and best
suits existing and potential future market conditions, see Wisner, Commonly Used Grain
Contracts, Iowa State University Extension Service, Publication PM-1697a (1996). It appears
that numerous extension services in other states have used this publication as the baseline for in
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making their own recommendations. You should, of course, consult your local extension service
for assistance on such matters.

                              KEY ELEMENTS OF GRAIN CONTRACTS

         Grain contracts vary widely in their complexity. Regardless of complexity, the producer’s
first task in the contracting process is to examine whether the proposed grain contract
satisfactorily addresses the six basic elements of grain contracting:

            the quality (grade) of grain delivered or to be delivered
            the quantity of grain being contracted
            date by which delivery is to be completed
            location for delivery
            the price or formula to be used in determining the net price
            price adjustments if you are unable to meet the specified grade

    With respect to HTA contracts authorizing roll-overs, there is an additional essential element:
the contract should clearly describe the process for changing delivery dates, including any
limitations or restrictions on the number of times or when you may exercise your roll-over
option, plus the costs and consequences of exercising the roll-over option.

                              CHECKLIST OF CONTRACTING ISSUES

        Determining whether the contract adequately and clearly addresses the core components
of a grain sale is not the end of the analysis. A number of extension agencies recommend a
checklist initially developed by the Iowa Attorney General’s office for production contracts in
evaluating contract risk.1 That checklist, though, raises many issues common to other forms of
contract. We provide a modified version below. Of course, no checklist can address all the
points and issues you may need to consider in the contracting process. Nor is the checklist a
substitute for seeking legal or expert advice on the proposed contract. However, it is helpful if
evaluating the clarity and comprehensiveness of the contract, not to mention the potential
consequences of entering into the agreement.




1
  The Michigan Farm Bureau has prepared an updated version of the checklist, as it applies to production
contracts subject to Michigan law.

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A. IDENTITY OF PARTIES

  1. The Buyer

        Who is the other contracting party, and what kind of business entity is it? Does it
         have a designated representative? Who signs the contract for the other party, and
         how is he or she described in the signature block?

         If the buyer is a subsidiary company, then does the contract make the parent
         company responsible for payment if the buyer defaults?

  2. The Seller

        Is the producer correctly identified in the contract? If the producer is a business
         entity, does the signature block correctly state the capacity in which you are
         signing the document, i.e., as the producer’s representative? Or are you
         assuming personal responsibility and liability with respect to contract
         performance?

        Does the contract contain any provision referring or describing you or the
         producer as a “merchant” for purposes of the Uniform Commercial Code (UCC),
         either in general or as the UCC has been adopted in your state?

B. PRODUCTION ISSUES

  1. Facilities and Equipment.

        Does the contract require you to make investments in equipment or facilities?

                     o Do you need to acquire or replace any special drying, storage,
                       irrigation, or other handling equipment to perform the contract? If
                       so, does this equipment require extra management, fuel, utilities,
                       or repair?

                     o If it is a production contract, is its duration adequate to recover
                       your investment? Can the contract be terminated before your
                       investment is fully recovered?

                     o If it is a production contract, does it require your facilities or
                       equipment to be approved or certified? Is special calibration
                       needed?

                     o If it is a production contract and identity-preserved grains are
                       involved, then will you need special storage facilities?


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2. Production Costs

     Do you know your costs of production for the crop involved? If not, then you
       should consult the local extension service or others for estimated costs of
       production.

     Do the requirements of the contract increase the production costs above those
       normally expected?

     Are you required to use inputs or techniques that are more expensive than
       normal?

     Are you required to buy inputs from a certain source?

3. Amount of Production

     What is the quantity of grain you are required to deliver under the contract?

     If it is a production contract, are you required to deliver a fixed or minimum
       amount of grain? Does the contract include any penalties, liquidated damages or
       other charges for failing to deliver the required amount?

     If you fail to deliver the required amount, are the buyer’s rights and your
       liabilities stated in the contract?

     Do you have to find substitute supplies to fulfill the contract if you have a
      shortfall?

     Are you responsible if the shortfall is due to an "Act of God" such as weather,
       insects, plant disease?

     If it is a production contract and the weather prevents planting, then can you make
       adjustments in the number or location of acres? Are there trigger dates for these
       adjustments?

     If it is a production contract, are you responsible if the shortfall is due to
       production decisions you did not make (such as fertility or pest programs)?

     Under Nebraska’s version of the Uniform Commercial Code, it is easier to be
      excused for a breach of contract because of impracticability (such as bad
      weather) if the contract involves the output of particular tracts of the land. Does
      this contract list the fields on which the crops are to be grown?

     Under Nebraska’s version of the Uniform Commercial Code, it is also easier to be
       excused for a breach of contract because of casualty (crop loss) if the contract
       identifies the grain to be delivered to your particular tracts of the land. Does this
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           contract limit the grain to be delivered to the output from your particular
           production units?

    4. Yield/Production Penalty

         If it is a production contract, does the contract specify the expected yield of the
           crop involved?

               o If specialty grains are involved is the projected yield less than one would
                  normally expect?

               o Does the contract address compensation for this yield reduction?

    5. Growing Obligations

         Are you able to meet the contract’s quality (grade) requirements?

         If it is a production contract, are you able to comply with the growing obligations
           in the contract? Are you willing to comply with these obligations and give up
           certain decision-making freedom on how, when, and where to grow crops? What
           authority does the buyer have to enforce growing obligations? Can the buyer
           enter your land and do work on the crops? If so, who is responsible for any
           damage?

         Is a specific pest control program required?

         Is the hybrid involved herbicide susceptible or resistant? Is the hybrid involved
           insect susceptible or resistant?

         Is a particular fertility program required?

         Do you need to maintain a distance from other crops to prevent cross pollination
           or other adverse effects?

         How much crop residue is left from this crop and how does that impact your
           conservation compliance plan?

C. PAYMENT AND DELIVERY ISSUES

    1. Payment Terms

         What is the amount you are being paid?

         How are you being paid? Are the terms of payment clear?

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     If you are being paid on the price of the grain, then how is that price established?
      Is it established based on Chicago Board of Trade or is there a different pricing
      method?

     When is the grain priced? Can the grain be forward priced?

     Who, in fact, markets the grain?

     Are corn or soybean check-off funds collected on the grain?

     If applicable, is the schedule of payments firmly set? Does this schedule satisfy
       your cash flow?

2. Discounts

       If there are discounts in price based upon the condition of the grain, then how are
        they calculated, and by whom? Who inspects the grain, and how? Who collects
        samples, and how? Who tests the samples, and who pays for the tests? Can you
        examine the calculations used to determine the discounts?

       Are the methodologies for computing discounts stated in the contract, or
        elsewhere, and if so, what the methodologies and are they subject to change
        between contract formation and delivery?

3. Premiums/Bonuses

       If there are premiums or bonuses involved, then how are they calculated and when
        are they paid? Can you examine the calculations used to determine these
        premiums or bonuses?

4. Condition of Crop

       What does the contract require as to the condition of the grain such as moisture,
        foreign material, test weight, oil content, protein content, etc.?

       Has the Federal Grain Inspection Service established quality standards for this
        grain and these factors? If not, then what standards are used? Can you achieve
        those standards?

       What about aflatoxin and other mycotoxins? Is the grain mycotoxin resistant or
        susceptible? What are the mycotoxin limits under the contract?

        Who conducts the quality tests and when?

       If you disagree with the test results, then can you get a third-party, independent
        test? How are conflicting test result disputes resolved?
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       What are the penalties for quality non-compliance? How is the amount of the
        penalty determined? Is it set in the contract language itself or is it determined at
        the time of harvest?

       Are you penalized if the quality non-compliance was caused by adverse weather
        conditions or other factors out of your control?

       Who bears extra costs incurred to achieve quality compliance (such as extra
        drying to achieve test weight)?

       Does quality non-compliance on a portion of the crop result in penalties being
        imposed with respect to the whole of the crop?

        If the grain is rejected as a specialty grain, then can it be sold in the open market
        as regular grain?

       If the grain is rejected on quality grounds, what else can you lawfully do with it?

5. Delivery Site/Delivery Date

       Where is the crop to be delivered?

       Are there any special handling procedures?

       Who pays for the delivery to the site?

       When is the crop to be delivered?

              o    Is the date set in the contract? If not, then who sets the date?

              o What is the penalty for late delivery? Early delivery?

              o What if late delivery is due to circumstances beyond your control?

6. Payment Date

       When are you entitled to receive payment?

       If payment may be made after delivery, then what guarantee of payment do you
        have?

7. Ownership of Crop/Risk of Loss

       Who owns the crop? Usually the party with title of ownership bears the risk of
        loss. Does the contract modify this rule?

       Who bears the risk of loss of the crop in the field, in storage, or in transport?
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     8. Liens

           Does the contract prohibit you from granting liens or security interests on the crop
            to a third party such as a landlord, lender, or supplier?

           If a production contract is involved, will the buyer grant you a producer's lien in
            the crop superior to other interests?

     9. Buyer Credentials

            If you have concerns about getting paid under the contract, then will the buyer
            provide you with a financial statement? A list of producers the buyer has
            contracted with in the past?

            Is the buyer bonded for this type of obligation?

            If a production contract is involved, does it appear that the buyer is committed to
            contracting in the region? Has the buyer made investments in fixed assets or
            relocated management to the region? Are production contracts the buyer’s core
            business?

     10. Your credentials.

           If the buyer questions about your ability to perform the contract, then are you
            willing and able to give the buyer a financial statement and names of individuals
            who will verify your financial stability and management abilities?

D. OTHER LEGAL ISSUES

     1. Dispute Resolution

           Does the contract provide for alternative dispute resolution such as mediation or
            arbitration before the parties can take a dispute to court?

                o Mediation is negotiation between you and the buyer facilitated by a
                  neutral third party.

                o Arbitration is a process where a third party arbitrator hears the dispute like
                  a judge and renders a decision, usually binding on the parties.

                o If the contract calls for arbitration, is it binding arbitration, and do you
                  have a copy of the arbitration rules referred to in the contract?




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                     In particular, does the contract call for arbitration in accordance
                      with the rules issued by the National Grain and Feed Association
                      (NFGA)?

                     In particular, does the contract incorporate by reference the
                      NFGA’s Grain Trade Rules as governing the parties’ relations
                      under the contract?


2. Termination of Contract.

       Under what conditions, if any, can the buyer terminate or cancel the contract?

       Under what conditions, if any, can you terminate or cancel the contract? What if
        you become sick, disabled, or die? What if you go bankrupt?

       Production contracts raise additional issues:

              o If the buyer may terminate the contract, are there objective standards
                or is it in the discretion of the buyer? For example, can the buyer
                terminate the contract if the buyer determines you have not complied
                with quality provisions? Or, does the buyer have to verify the quality
                problems with independent testing?

              o Can the buyer terminate the contract for minor breaches of the
                contract?


              o How much notice does the buyer have to give prior to termination?


              o Are you given an opportunity to cure a problem before termination?
                How much time are you given for this?


              o What are your rights after termination? Can you sell or use the crop
                not purchased under the contract?

3. Extension or Renewal of Contract

       If applicable, under what conditions may delivery dates or other performance
        requirements on your part be extended?

       If applicable, under what conditions may delivery dates or other performance
        requirements on the buyer’s part be extended?

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       If applicable, under what conditions can the contract be renewed? Are there
        standards or is it up to the buyer?

4. Legal Relationship of Parties.

       Are you and the buyer both merchants for purposes of the UCC?

       If a production contract is involved, what legal relationship does the contract
        create between you and the buyer? Is it a landlord/tenant relationship,
        employer/employee relationship, independent contractor, partnership, joint
        venture, agency?

       Does the contract refer to a bailment?

       The legal relationship involved will affect your rights and duties under the
        contract and may have important tax consequences.


5. Approval of Others/Assignment

     Do other parties have to approve the contract, such as your landlord, lender, or
       spouse?

     Can the contract be assigned or transferred by you or by the buyer to other
       parties? This may have important tax consequences. It might also affect the
       status of the agreement as a legal forward contract or an unlawful futures
       contract.

6. Farm Programs

       Does the contract affect your eligibility for farm program payments? To be
        eligible for USDA programs, you must have a "beneficial interest" in the
        commodity. This is determined by looking at the contractual terms regarding title,
        risk of loss, and payment.

       Is the crop considered a program crop for purposes of payment or base retention?
        How will this affect your established farm program yield?

7. Insurance

       Are you required to buy multi-peril, hail, or other crop insurance? Liability
        insurance (for risks such as pesticide drift)?

       Can you get Federal Crop Insurance for the crops involved? If so, then can you
        use your actual production history or will other yield determinations be used?
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       8. Protection of Intellectual Property

             If a production contract is involved, are you required to take any special steps to
              protect the buyer’s property interests in the grain's germ plasm (genetic
              material)?Are you responsible for the security of germ plasm?

             Who owns the germ plasm? Does the contract limit your ability to save seed to
              plant on your own farm in future years?

       9. Choice of Law/Venue/Change of Law

            Does the contract specify the state law that governs? Is this choice of law fair?

            Does the contract set a venue (location) for any lawsuit that might be filed? Is this
             location fair?

            Does the contract permit renegotiation or nullification of the contract based upon
             changes in the law occurring after contract formation?

       10. Duration of Offer.

             How long do you have to accept the contract? Is there an expiration date for
              signing?

       11. Put It in Writing or Object

             You should not rely on oral agreements or interpretations of the contract. Reduce
              all understandings or modifications to writing.

             If you receive a purchase agreement or order form the buyer after verbal
              negotiations, it is possible for such a document to become legally enforceable,
              even if you do not sign it. You must protest or reject the writing promptly, and no
              later than ten (10) days, if you do not want to perform the agreement or you
              disagree with any of its terms.

                                     RECOMMENDATIONS

   Multiple extension services offer the following recommendations with respect to grain
contracts. Their recommendations are worth repeating here.




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      Before you sign a contract, know and understand all of its features and how they will
       affect your business. Understand how it reduces market risk, where it exposes you to risk,
       and your obligations.
      If in doubt, don't sign. Get assistance if you do not understand any aspect of the contract.
       Ask the elevator manager or other buyer and, if necessary, an attorney.
      Know the other party to the contract. If possible, have information on the party's financial
       condition and ability to perform obligations. Be sure the other party can explain to your
       satisfaction how the contract works under all possible market conditions.
      Know how your net grain price will be determined under all conditions. If a formula is
       involved, be sure you understand how it works. Use it to determine what your price
       would be with extreme market conditions.
      Understand the implications if your production falls short of the quantity you have
       contracted to deliver. A production shortfall can affect your net income and financial risk
       exposure, as well as your ability to meet contract obligations. The contracting firm may
       establish a position in the futures or options market to support your contract and in doing
       so assumes financial obligations that depend on timely fulfillment of your contractual
       obligations.
      Maintain good communication with the other party to the contract before signing and
       throughout the life of the contract.
      Work through a sensitivity analysis using extreme price movements and considering the
       possibility of your production dropping well below the contractual volume.

    Examine and thoroughly understand each of these areas before you enter into a sale or
purchase contract. Remember that contracts are legal instruments that obligate both you and the
other party to certain financial commitments. The 2012 drought and resulting production
shortfalls, as discussed below, highlight the need for careful contract review.


        DEALING WITH DROUGHT-CAUSED PRODUCTION SHORTFALLS:
           ENFORCEABILITY OF CONTRACT, DEFENSES AND DAMAGES
       If you are facing a drought-caused delivery shortfall under a forward or deferred delivery
contract, there are three basic questions you need to have answered:

              Is your agreement enforceable?

              Assuming that the contract is enforceable, does the drought constitute a legal
               excuse preventing you from being held liable for failure to meet contract delivery
               requirements?


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              Third, assuming you are subject to an enforceable contract and drought does not
               excuse your duty of performance, what is your exposure to the other contracting
               party?

        Enforceability. Generally, forward grain contracts are enforceable if they are in writing
and signed by both parties. However, such contracts may be unenforceable if the agreement
constitutes an unlawful futures contract for purposes of the federal Commodity Exchange Act
(CEA).2 This is a complex issue that entails sophisticated legal and factual analysis. In general,
courts appear predisposed to construe such contracts as lawful forward delivery contracts, rather
than unlawful futures contracts. That said, agreements that at first blush appear to be legitimate
forward delivery agreements may in fact be disguised futures contracts, depending on their terms
and the actual dealings between the parties. Contracting to deliver more grain than you regularly
or historically produce and being able to unilaterally cancel the agreement subject to a payment
set in advance appear to be among the red flags.

        Forward delivery contracts may also be unenforceable if they exceed $500.00, but are not
writing and not otherwise subject to one of the exceptions to the signed writing requirement
codified at Neb. Rev. Stat. § 2-201.3 Farmers should be aware that one of these exceptions is
expressly tailored to grain sales. Under this exception, the elevator does not need a written
contract signed by the producer to enforce a sale of grain in excess of $500.00. The farmer is
likely obliged to perform the agreement if: (1) the elevator sends written confirmation of the
forward sale; (2) the confirmation document contains certain statutorily required information;
and (3) you fail to object to the written confirmation within 10 days. See Neb. Rev. Stat. § 2-
201(2) (b).

      An attorney, of course, should be consulted in determining whether these or any other
grounds exist for contesting the enforceability of a forward or deferred delivery obligation.

       Drought as Excuse for Nonperformance. Assuming your agreement is enforceable, the
next question is whether a production/delivery shortfall attributable to drought constitutes a
breach of contract. This answer is subject to multiple variables. The express terms of the
contract are the first place to look. The standard-form terms and conditions used by elevators
and other sophisticated buyers typically place no conditions on the grain as to source, other than

2
        Compare with Sack Bros. v. Great Plains Co-op., Inc., 260 Neb. 292, 616 N.W.2d 796
(2000) (based upon a factually and textually sensitive analysis, the hedge-to-arrive contracts at
issue in this case were found to be lawful cash forward contracts, as opposed to being illegally
traded futures contracts).
3
       See for example Farmland Service Coop, Inc. v. Klein, 196 Neb. 538, 244 N.W.2d 86
(1976); and Kimball County Grain Co-op v. Young, 200 Neb. 233, 263 N.W.2d 818 (1978).

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requiring the delivered product be grown in the United States. In particular, the grain to be
delivered generally is not identified to your particular production units. Under such
circumstances, producers are likely obliged to deliver the fixed quantity of grain, regardless of
their own crop’s failure, and are in breach of contract if they do not.4

        In other words, unless the contract -- or some other legally sufficient and admissible
evidence -- establishes that your delivery obligation was limited to the crops actually produced
by you; or that the source of the grain to be delivered was limited to your production units; or
unless the contract expressly states that drought is an excuse for nonperformance, or the drought
is so severe you cannot obtain replacement corn on the open market, the fact that the 2012
drought diminished if not destroyed your individual crop likely will not excuse you from
performing your forward delivery obligations.

        Conversely, if the grain to be delivered is identified to your particular crop production,
either expressly or by way of the rules governing contract interpretation or construction, then the
drought likely immunizes you from liability. See Neb. Rev. Stat. 2-613. Similarly, if the source
of the grain is identified to your particular production units, either expressly or by way of the
rules governing contract interpretation or construction, then the drought likely immunizes you
from liability. See Neb. Rev. Stat. 2-615.

         A lawyer should assist you in determining whether the drought qualifies as an excuse for
performing your forward delivery contract. On this issue, not all contracts are created equal; nor
are all of them necessarily ironclad. Under some circumstances, your contract negotiations may
impact the interpretation and application of your forward contract.

         Exposure for Breach. Assuming you are subject to an enforceable agreement and that
the drought does not constitute an excuse for nonperformance (thereby immunizing you from
liability for breach), what is your exposure?

        If you breach a forward delivery contract, the buyer as a general proposition is entitled to
recover the amount it pays to “cover” your breach, namely, procure replacement grain, plus
incidental and consequential damages. See Neb. Rev. Stat. §§ 2-711, 2-712 and 2-715. In the
alternative, the buyer may simply sue for damages proximately caused by the breach. See Neb.
Rev. Stat. §§ 2-711, 2-713, and 2-715. If the buyer elects to sue for damages, the buyer is entitled
to recover the difference between the market price at the time when the buyer learned of the
breach and the contract price together with any incidental and consequential damages, but less
expenses saved in consequence of the seller's breach. Neb. Rev. Stat. § 2-713.


4
      See for example ConAgra, Inc. v. Bartlett Partnership, 248 Neb. 933, 939-940, 540
N.W.2d 333, 337-338 (Neb. 1998).

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         Potential Reduction of Exposure. If the buyer “covers,” such action must be done in
good faith and without unreasonable delay. Neb. Rev. Stat. §§ 2-712. If the buyer elects to sue
for damages, the buyer is entitled to recover the difference between the market price at the time
when the buyer learned of the breach and the contract price together with any incidental and
consequential damages, but less expenses saved in consequence of the seller's breach. Neb. Rev.
Stat. § 2-713. In the event of anticipatory breach, namely, when the seller expressly rejects or is
clearly unable make the future grain delivery, the buyer may only wait a commercially
reasonable time to take remedial action. Neb. Rev. Stat. § 2.610. In Nebraska, this date under
proper circumstances may be as early as the date the seller notifies the buyer that the forward
delivery will not or cannot be made.5

        In other words, if you sit silently and wait for the delivery date to pass, your exposure
will be based on the price of the grain at that time. Thus, if a producer faces a material shortfall
and cannot or will not incur the cost of obtaining and delivering replacement grain in timely
fashion, it appears prudent -- and fair – that the producer advise the elevator of the production
deficit at the earliest possible date, especially if grain prices are likely to escalate as the delivery
date approaches. Any such action obviously should be the subject of careful scrutiny and
analysis with your counsel as well as your business advisors, if any, to insure you understand the
risks, consequences and benefits of such action, as well as likely trend in grain prices as the
delivery date approaches.

                                           CONCLUSION

        Grain contracts are complex documents with much at stake. Their terms and conditions
typically are not drafted to protect -- much less advance -- the producer’s interests. Care should
be taken in their review, and steps taken to reduce your exposure in the event of future crop loss.
Consult with an attorney as to the measures you might take, such as contractually limiting the
grain you must deliver to that actually grown by you and/or limiting the source of the grain to be
delivered to your production units. Do not fear negotiation. Also, be wary of arbitration
agreements in general and the NGFA process in particular. In the event of a dispute, you stand a
better chance with a local jury of your peers than an arbitration panel that may very well be
composed of buyer representatives. Also be alert to clauses obligating you to litigate anywhere
other than your local Nebraska state or federal court. As to the merits of any particular grain
contract at any given time, consult your extension service.




5
    See Trinidad Bean & Elev. Co. v. Frosh, 1 Neb. App. 281, 494 N.W.2d 347(1992).

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