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The Impact of Contract Laws

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Many times forward grain contracts will contain security clauses which provide that the grain is pledged as security for the grower's performance of the agreement. The grain buyer may then attempt to secure its interest in the grower's grain by filing a financing statement with the relevant state's secretary of state.

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									LEGAL Q&A


     The Impact of Contract Laws
     How grain licensing and financial regulation affect your contracts and the markets
     By Adam Hertzke & Todd Langel


                he world of forward grain contracting boiled          financial strength of the licensee, states may also require



     T          down to its most basic elements is relatively
                simple. A grower and processor agree, for
                example, that the grower will deliver a certain
                quantity of grain at some definite time in the
                future for a price determined today. A major
     benefit to the grower is that it knows the price it will
                                                                      periodic financial reporting in order to maintain a
                                                                      license, and may require the posting of a surety bond,
                                                                      letter of credit, or other assurance that the licensee can
                                                                      make good on its contracts.
                                                                         Often, as part of the licensing scheme, purchasers
                                                                      are required to pay into a state-administered grain
     receive for its grain and can plan its operations accord-        indemnity fund that will protect unpaid cash sellers of
     ingly. Conversely, the processor knows both the quan-            grain in the event the purchaser defaults, files bank-
     tity of grain it will receive and the price that it will pay     ruptcy, or is placed in receivership. In some instances,
     and can, likewise, plan accordingly. Since forward grain         states regulate substantive terms of forward grain
     contracts lack complex-                                                                          contracts, even under the
     ity, few appreciate the                                                                          simple example discussed
     degree to which the law                                                                          above. Usually, if a state
     governs — or can other-        ❚ Since forward grain contracts                                   regulates standard forward
     wise affect — their trans-                                                                       agreements, it does so by
     action. This article brief-
                                    lack complexity, few appreciate                                   dictating the information
     ly addresses the various         the degree to which the law                                     that must be found in the
     ways in which state reg-
     ulation of grain contracts,      governs their transaction. ❚                                    agreement. For example,
                                                                                                      a statute may require that
     the requirements of the                                                                          forward contracts contain
     Food Security Act, and                                                                           such standard terms as the
     the Dodd-Frank Wall Street Reform and Consumer                   date of execution, quantity contracted for, price, and the
     Protection Act can weave their way into the parties’             grade of the grain. Often, state statutes mandate the date
     agreement.                                                       by which a producer must be paid following delivery.
                                                                         Fundamental changes in the grain industry have
     State regulation of forward contracts                            drawn additional attention to licensing requirements in
        Many agricultural state legislatures have established         recent years. Price volatility, trends of increasing farm
     statutory schemes designed principally to protect farm-          size and contract exposure, together with the influx
     ers and agricultural producers. Aside from this general          of industrial (biofuels) grain purchasers have caused
     theme, however, consistency of the requirements from             state legislatures to begin to reevaluate the
								
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