Grain Contracts

A forward (or deferred) grain contract is a legally binding commercial agreement between a producer and a grain buyer/dealer with a committed delivery period, and predetermined conditions that may include price setting.

Forward grain contracts are valuable marketing tools for both the buyer and the producer to plan their business and reduce uncertainty. This provides a competitive edge to the whole grain industry.

The grain buyer/dealer uses forward contracts to secure grain supply for upcoming export contracts. They are taking risks by signing up to export amounts that are not produced yet and rely on these contracts to meet their commitments.

Producers sign forward grain contracts to manage stocks, plan cash schedule, and reduce price risk.

Forward grain contracts allow the producer to secure a cash price for grain that has not yet been delivered. By doing so, it helps them eliminate downside price risk and improves their ability to plan. Forward marketing is an essential part of a diversified marketing plan.

When a producer defaults on delivery, the buyer would have to replace the same quantity and quality of the grain to meet their commitments. Additionally, the buyer would have to conduct operational steps and financial transactions to re-contract the grain and make a similar transaction and get it delivered at the same period of the original contract.

When the buyer knows of the contract default on or after the delivery period, this will have additional negative consequences because, even if they are successful in finding similar grain in the market, it would take additional time to have the grain delivered. Therefore, it is very important to inform the buyer long before the delivery period, should you have difficulties in delivering on your commitments.

If the buyer cannot find the grain to replace the original contracted grain, they will probably incur a loss that goes beyond the simple value of such grain.

The overall replacement cost for the grain buyer may include multiple costs, such as:

• Cost of time and resources spent to replace the existing contract and make similar transactions, which would refer to the administration costs;
• Price differential between the contract and the market;
• Quality premium paid for by the buyer when the replacement grain is of higher quality;
• Quality discount encounter by the buyer vis-à-vis the importer, if the replacement grain is of lower quality;
• Transportation cost if the replacement occurs at a distance;
• Cost of lost export/shipment transaction;
• Cost of delayed or missing railcar loading;
• Cost of demurrage at the port due to delayed or missing delivery;
• Cost of lost reputation among clients and partners;
• Cost of risk management related to hedging and taking positions in the futures market;
• Operational cost when the elevator is running below its optimal capacity.

It is common among the trade that anything beyond the market price differential (difference between the market and the contract) is considered administration fees or penalties. This may be also mischaracterized in some contracts. However, the proper economic term is the replacement cost.

The best way for the producer to comprehend the replacement cost is to try to replace the grain they have committed through their contract, and account for every cost they will incur to deliver identical grain on the same period. In this exercise, note that things may be quite different between replacing the grain before delivery period and afterward.

Many unpredictable events can occur after signing a contract; for example, weather and market conditions may hinder the producer's ability to deliver on their contract commitment. Here are some of the common risks for the producer and ways to mitigate them:

Risk of Production Failure: the actual production is below expected production for several reasons, including weather conditions, pests, or calamities.

To mitigate this risk:

• Carefully read your contract to understand what you commit to and comprehend all terms and conditions.
• Find out whether there is an "Act of God" or "Force Majeure" clause (the terminology used might be different between companies). If not, assess the risks you are taking by signing the contract.
• Understand how replacement cost is calculated and the effect it will have on your payment under the contract.
• Determine what the implications will be of your failure to meet the terms of the contract.
• Commit only a fraction of the lowest historical production to the contract. This fraction may differ depending on your experience, your risk management strategy, and your business style.
• Have a conservative yield expectation even if historical data seem to be favourable.
• Enrol in Crop Insurance to cover your weather and calamity-related risks. You can also explore different price options and coverages with crop insurance, including the contract price option.
• Enrol in AgriStability program to protect your revenue and cover any potential extra costs related to contract buy-back.

Risk of Quality Discrepancies: A single and short weather event may deteriorate the quality of production, leaving the producer with a lower-quality harvest that may be subject to discounts.

To mitigate this risk:

• Carefully read your contract to understand the implications of grade differentials.
• Make sure there is a clear schedule of discount in your contract.
• Commit only a fraction of the lowest historical production to the contract.
• Have the buyer explain and set out in the written contract the details regarding grade differentials and relative prices.
• Enrol in Crop Insurance to cover your production quality as well.
• Enrol in AgriStability program to protect your revenue and cover any potential extra costs related to contract buy-back.

Risk of Market Price Increase: When signing a forward contract with a pre-determined price, while locking in a desired price, you are taking the risk of selling below the market price if the market is trending upward.

Note: In a downward market trend, the buyer takes a market loss when executing a forward contract. That is why most buyers hedge their forward contracts by taking opposite positions in the futures market for the same product.

To mitigate this risk:

• Carefully read your contract to understand the implications of contract default, including failure of delivery and grade differentials.
• Commit only a fraction of the lowest historical production.
• Enrol in Crop Insurance to cover your production quality as well.
• Enrol in AgriStability program to protect your revenue and cover any potential extra costs related to contract buy-back.
• If possible, hedge your production to cover your market risks. You can manage price variations by hedging your forward price through the futures contract for certain commodities. For example, canola can be hedged via the canola futures market managed by the Winnipeg Exchange District, and spring wheat contracts can be hedged via the Minneapolis Grain Exchange. Please seek the help of grain marketing professionals for this purpose.

Before signing a forward contract:

• Make sure you have been provided with a contract before you start your grain delivery. Ensure you have the full agreement with all the pages.
• Read the contract thoroughly and understand all terms and conditions, including penalties.
• Contact the buyer if you have any questions.
• Do not assume the same terms and conditions apply every year. The grain companies often change their terms and conditions with or without notice to their suppliers. Make sure you carefully read the entire contract that you are signing.
• Some companies do not provide a hard copy of the contract and may refer you to their website. Ask for the complete copy or where to find the entire contract.
• Seek legal advice: call your lawyer if you have any questions or you don't understand any clause.
• If you are not comfortable with the agreement, ask the buyer to modify the terms and conditions, and ultimately look for other ways to sell and deliver your grain if necessary.
• Ensure all negotiated terms are recorded in writing; verbal agreements are difficult to prove.

The Government of Saskatchewan is not in the business of arbitrating grain contracts or providing legal or marketing advice on grain contracts.
The Saskatchewan Ministry of Agriculture is committed to providing general information on what contracts are and the general risks related to signing forward contracts.
Producers can connect with a ministry extension specialist by contacting the Agriculture Knowledge Centre: 1-866-457-2377.

The Canadian Grain Commission (CGC) has the authority to arbitrate disputes related to commercial grain transactions, but both parties (the buyer and producer) must consent to the process:

• Either the signed contract should state that the CGC may arbitrate the dispute; or
• Both parties (the buyer and producer) agree to the CGC arbitration process after a dispute has arisen.

Under the Canada Grain Act, the CGC has limited powers related to grain purchase contracts. The CGC contract authorities are limited to requiring that penalty provisions be included in contracts if grain companies refuse to accept their grain deliveries.

The CGA provides limited powers to the CGC to arbitrate grain contract disputes (see role of the CGC, above).

Role of your crop commission

For the most part, the crop commissions act as advocate for their members on issues including grain contracts. In the summer 2022, some commissions and producer groups sent a letter to the Western Grain Elevator Association asking them to work with farmers to reduce penalties and eliminate admin fees.

At 2022 Annual General Meetings, most crop commissions adopted a motion to work together to help create more "fair" contracts, and explore what can be done in the long term.

Some crop commissions may work with the producer and buyer to try and come to a solution for issues or concerns with a specific contract.

Some producers' organizations focus on education and information. The Canadian Canola Growers Association adopted a resolution in 2014 to increase farmer's education and understanding of grain contracts. Their Practical Guide to Navigate Grain Contracts is one of the most important resources available to producers.

Communication and relationship with your elevator/the buyer

Ongoing communication with your grain buyer is crucial: talk to the elevator as soon as you have any issue with your ability to deliver on your commitments. An early notice will give more time to the grain company to anticipate the impact and help you resolve the problem.

It is very important to a build good relationship with your buyer/client. Many issues may be settled through negotiation without the need for litigation, which may involve increased financial costs.

Canada Grain Act and Canada Grain Regulations
Acts and regulations

The Canadian Grain Commission website
Penalty provisions in grain delivery contracts
Producer rights at delivery
Official Grain Grading Guide

Saskatchewan Crop Insurance Corporation

Producer and commodity groups
Agricultural Producers Association of Saskatchewan (APAS)
Saskatchewan Wheat Development Commission (SaskWheat)
Saskatchewan Canola Development Commission (SaskCanola)
Saskatchewan Barley Development Commission (SaskBarley)
Saskatchewan Pulse Growers (SPG)
Saskatchewan Flax Development Commission (SaskFlax)
Canary Seed Development Commission of Saskatchewan
Prairie Oat Growers Association (POGA)
Saskatchewan Mustard Development Commission (Sask Mustard)
Saskatchewan Forage Seed Development Commission (SFSDC)

Other Industry Resources
A Practical Guide to Navigate Grain Contracts
Grain Production Contract Checklist | Iowa Grain Quality Initiative
The National Grain and Feed Arbitration's Trade Rules
The National Grain and Feed Association's Arbitration System
What Are the Different Types of Grain Contracts?
Explore Grain Contracts | CargillAg

For more information or if you have additional questions, please contact:

Agriculture Knowledge Centre
Telephone Number: 306-694-3727
Toll Free: 1-866-457-2377
FAX: 306-694-3938
Mailing Address: 45 Thatcher Drive East, Moose Jaw, SK, S6J 1L8
email: aginfo@gov.sk.ca