How do I make sure I'm paid?

[just_wondering]

Just signed a contract with a lentil buyer today for .40cents/lb red lentils new crop act of god right of first refusal, payment after 14 days. pretty standard contract.
Now all I have to do is grow the things,
A few Question's
How will these exporter's cashflow these prices to producers?
What will thier CGC bond be?
Is that bond worth the paper it's written on.
with a 32 tonne truck load of lentils now worth approx $28,000.00 should I be Riding shotgun?
An extra % dockage will sure add up.
I have done business with this company before and they have been in business for years but how do I as a farmer avoid becoming a statistic?

[charliep]

Agree you need to be cautious about who you do business with this year on pulse crops given the dollars.

From my understanding, many of the processors use the Export Development Corporation to finance sales. Your question may refer to how they hedge contracted prices/manage their risk. Other doing farmer purchases and export buyer sales back to back, there are no tools available to these companies.

Bonding works okay if a problem after delivery (assuming the bond is adequate to cover the companies purchases from farmers). Reporting lags and other issues have resulted in a short fall between what the company owed farmers and the actual value of the bond. Agricorp in Ontario covers transaction risk through what amounts to an insurance program. Others here can provide more details.

[charliep]

Agree you need to be cautious about who you do business with this year on pulse crops given the dollars.

From my understanding, many of the processors use the Export Development Corporation to finance sales. Your question may refer to how they hedge contracted prices/manage their risk. Other doing farmer purchases and export buyer sales back to back, there are no tools available to these companies.

Bonding works okay if a problem after delivery (assuming the bond is adequate to cover the companies purchases from farmers). Reporting lags and other issues have resulted in a short fall between what the company owed farmers and the actual value of the bond. Agricorp in Ontario covers transaction risk through what amounts to an insurance program. Others here can provide more details.

[charliep]

The Cash Clearing House (project sponsored by WBGA and financed by the private sector risk management program) offers an alternative to cover the transaction risk on forward sales. If the program were available and you/the buyer used it, this would cover the transaction risk of either you or the processing plant not meeting obligations in the contract. Won't go into details unless asked.

[TOM4CWB]

Charlie,

What special crops dealer would pay the margins... as well as the grower needs to put up margin money if the price rises... after the hedge is made.

What about force majure portions of these contracts... if the marketer can't get rail cars... then who is liable?

Who will establish the 'true price' and what margins must be paid... if there are no futures markets to even establish a market trend before basis risk?

Accounts receivable insurance may be the best option... no doubt it will be very costly!

Patience and knowing who you are dealing with... is the best 'insurance'!

[just_wondering]

thanks charlie

Tom re rail car service the contract specifically refers to that and that the buyer is not responsable if rail cars can't be had.
and as far a knowing who you are dealing with.
This company has been in the industry for as long as lentils have been grown in Saskatchewan, and I am comfident of their ability right now, but in the future who knows?

As far as patience, I know that the people forwarding me money will be charging huge interest if my bills don't get paid on time

[melvill]

J_W, check out the info on the CGC page at:

http://www.grainscanada.gc.ca/protection-protection/iappm-mrspp.eng.htm

Particularly pay attention to the rules about the number of days payment is not made. They're all listed in the link How to Manage the Risk of Not Being Paid.

[charliep]

Tom4cwb - Seems like we have had this dance before. Before I go, the AgClearing is an alternative - NOT THE alternative.

What special crops dealer would pay the margins... as well as the grower needs to put up margin money if the price rises... after the hedge is made. Charlie comment: I will note that margins are good faith money and will be returned when the transaction is completed. Does influence working capital and interest costs.

What about force majure portions of these contracts... if the marketer can't get rail cars... then who is liable?
Charlie - Realizing a shipping delay is not the processor/exporters fault but why in the current system is the farmer expected to eat all the costs of carry (storage and interest)? Will depend on contract terms in the AgClearing house but suspect the delivery period will be firm for both parties. In the case of a shipping delay (or some other factor), it will be encumbent on the buyer side to negotiate some alternative delivery schedule including carry costs or be forced to buy out the contract.

Who will establish the 'true price' and what margins must be paid... if there are no futures markets to even establish a market trend before basis risk?
Charlie - The AgClearing will require the developement of better price discovery and reporting mechanisms - I would argue an improvement to the current system. More discussion is needed on how will be done, who does it and who pays.

Accounts receivable insurance may be the best option... no doubt it will be very costly!
Charlie - Another alternative. Does this apply in the thread topic? When I think of accounts receivable, I think of a product that has been delivered and money is outstanding. When a farmer is forward pricing for fall delivery, would this same receivable insurance apply? Am thinking about the occassions when a farmer has high valued DDC on the books only to find the company they dealt with has gone broke/not able to honor the contract.

[padron]

This is a good question that more people should be asking.

As Charlie mentioned, it is the essence of the Western Barley Growers' clearinghouse project. The AgClearing project has demonstrated that contract performance and settlement assurance are important to all segments of the industry - buyers and sellers. It is also evident that while CGC bonding provided some measure of security it really led to producers "self regulating" the risks they took.

Some believe this issue needs more study to assess other alternatives (besides clearing). But the only alternatives that have come forth are bonding, check-off funds and a general reference to some form of insurance. No one has put forward anything remotely of the caliber or measurable to clearing. These other alternatives do nothing to prevent failures. They simply throw money at a problem after it occurs. Clearing is preventative in that it stops people from over extending themselves and creating risk for others.

Clearing works well in other sectors including energy, financial markets and most notably in commodity futures markets. It stands to reason it will work well in physical grain transactions too. Above all, banks understand clearing and recognize the value of securitizing a transaction.

Tom makes a good point about how far banks will be willing to finance an open contract in respect to margin calls. That needs to be addressed. There is assignable value in the hands of farmers that could mitigate some of this risk. This includes Crop Insurance, CAIS accounts, etc. Or it may be that the federal government needs to accept a role in transitioning risk if they do in fact remove bonding from the services of the CGC.

My point here is that there is a pressing need to address this matter. The WBGA have taken a lead role in investigating a potential solution and although it may not be perfect or meet everyone's needs it is a sound business principal to build on. Grain producers stand to gain more from a clearinghouse than handlers or processors so on the basis of that alone one would expect a loud voice calling for action. The fact that there isn't more discussion on this topic leads us to believe most producers are not as informed as they need to be. If anyone wants to learn more about clearing agricultural commodities they can visit the website at www.agclearing.ca or contact me.

Russ Crawford
AgClearing
russ.crawford@shaw.ca

[just_wondering]

thanks all for your replies,
melvill I'll look up that CGC website.

Patron what is the timetable on agclearing am I right to assume that it won't be ready for the 08 crop year?

I guess that the point I was trying to make was tht farmers are not the only ones that are not used to the big $$ 's that will be transacted this year and that it's often in time of exteam volitility that people get over extended.
As well it's also in the good times when shenagigans go on and the scam artists from all over will now be desending on Agriculture.
Watch out for youreslf and your neighbours!

[padron]

Your assumption is correct JW, that AgClearing will not be ready for the Fall of 2008. More likely the Fall of 2009 but only if participants indicate a need for this risk management technique. A potential service provider, banks and the federal government need to believe the marketplace wants a clearinghouse before they will commit their resources to make it happen.

[Burbert]

The Canadian Legal System is for collecting debt, with a contract, you now have the right to sue to get your money. Great system, without a bond being posted, thats what you are left with!

[just_wondering]

Burburt do you even understand that with your security blanket of bonding that you still might not get paid?
What do you do on your farm?
Any special crops?
Any un-bondable crops?
What if I phone their banker and they say yes they have 10 million in the Bank but the bank does not yet know about the 15 million in uncollected debt yet.

[Burbert]

just wondering Gee no, I didn't know that I might not get paid with bond being posted. No don't grow anything unbonded. No special crops. Some un-bondable crops. No never phoned the bank to tell them I had 10 million in my account, I assumed that the level of service would go up if I had that amount of cash in the bank and the greedy little manager would be calling me giving all sorts of advice. Ever see the Beverly Hillbillies Bank manager on TV in the old days, Mr Drysdale as he sucked up to the Clampetts?

[just_wondering]

Burburt I don't know if your smily face conotates sarcasm, or what it means.
Answer the question what do you do,
to ensure you get paid on non board crops?