A proactive approach to contracts

Written by David Perry on 5th October 2017 | 5 minute read

Wellgrain went into administration on 2nd March 2017, and the case highlights the hardship faced by farmers when grain merchants default on payments. How can farmers reduce their risk of exposure to such events?

The root of the issue is that, typically, the grain merchant sets the conditions of the sale. In most trades, the seller sets the conditions: but grain merchants are a little different. They enter into hundreds of transactions annually – whereas farmers make only a handful of transactions annually. The different scale of these relationships fosters a dynamic which favours the merchant. Naturally, merchants issue contracts which favour their own interests. They don’t contain clauses to protect farmers, such as retention of title clauses, which ensure that ownership of the grain is only transferred when it’s paid for.

Farmers should take a proactive approach to contract and payment terms – and avoid signing contracts issued by merchants without carefully reviewing them first. Many contracts give merchants scope to delay payment for up to two months. Farmers should reject this, because it’s difficult to monitor the level of credit given and associated risk. Many farmers affected by Wellgrain had previously been paid outside their agreed payment terms - if a consignment isn’t paid for within your payment terms, alarm bells should sound! Monitor merchant payment patterns carefully, and think carefully about continuing trade with merchants who fail to meet agreed payment terms.

However, it’s often difficult for individual farmers to negotiate contract terms with large businesses. The NFU is working with the industry to agree a set of standard terms, balanced around the needs of both parties. Whilst not compulsory, merchants opting into the standard terms would be able to reassure farmers that their terms are NFU approved.

Of course, sometimes it’s impossible for farmers to protect against payment issues. Credit insurance provides a level of security against that risk. It’s relatively expensive but provides a pay-out in the event of a merchant defaulting, and can help control financial loss.

In the farming industry, many agreements are based on trust and verbal communication. Wellgrain highlights the need for written contracts (and legal supervision) – for farmers, this is the best way forward.

This article was originally published in September 2017 in the British Farmer & Grower - the NFU’s award-winning members’ magazine: https://www.nfuonline.com/home/magazine/

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