The “model fertilizer contract” that the Agricultural Retailers Association unveiled on Nov. 19 (GM Nov. 23, p. 13) was a hot topic at ARA’s 2009 Conference and Expo in Ponte Vedra, Fla. The contract was developed as a voluntary tool in response to “the extreme volatility that has occurred with fertilizer prices and supplies over the past several years,” ARA said, and was the focus of a panel discussion on Dec. 2 at the conference.
The panel consisted of Jacob Bylund with the law firm of Faegre & Benson LLP; Jim Shelton of Landmark Cooperative in Cottage Grove, Wisc.; and Steve Lucas of LD Commodities. The well-attended session focused on formal buyer/seller contractual agreements and the use of arbitration to settle disagreements. Panel moderator Dr. Dave Downey of Purdue University said the discussion was timely because of “frayed trust” between retailers and growers after years of conducting business with only a handshake. “There is a need to formalize the sale agreement in a legalized way,” he said.
Lucas, who has experience in arbitrating disputes in grain sales, said the recent pricing volatility in fertilizer has all but mandated the need for sales contracts at the retail level. Shelton agreed, saying his company was “moving to another layer of professionalism that didn’t exist in this industry before.” He said virtually 100 percent of Landmark’s fertilizer is now sold under contract, and the company executed 1,700 plant food contracts last year. “Selling $100,000 worth of fertilizer on just a handshake just doesn’t make sense,” he said.
Bylund cautioned the attendees to always do a proper counter-party risk assessment as a part of any sales contract. When properly executed, he said written fertilizer sales contracts eliminate the need to hire a lawyer 90 percent of the time. “You want to formalize the contract because you don’t want the law to dictate the terms of that contract,” he said.
Lucas said contract disputes are best resolved in arbitration. “Arbitration is cheaper than going to court, it’s faster than going to court, and you get a better result,” he said. Most of the cost associated with court cases involving contract disputes are spent on educating the judge and jury about the business. “With arbitration, you’re dealing with people who already know,” he said.
Shelton noted that Landmark’s terms allow growers to buy out of a contract if they choose, but the legal agreement protects both parties, particularly in times of volatility. He said Landmark would have been hit with an additional $4-$5 million in losses in 2009 if they hadn’t had contracts in place with their farmer customers.
All the panelists agreed that 2010 would be a good year for dealers to start using fertilizer sales contracts if they hadn’t before, especially after the wide price swings experienced in 2008 and 2009. Shelton noted that Landmark began using fertilizer sales contracts with growers in 2006-07 as the markets were going up. “If we would have tried to start the program in 2009, it wouldn’t have worked,” he said.
Lucas cautioned, however, that the contract is a “double-edged sword,” and that both sides are then expected to perform no matter what the price is. “Using contracts doesn’t take all the risk away, but it gives a structure to better manage it,” he said. “This won’t make a bad trade better, but it sure will give you a leg up. It’s a valuable tool to help you manage counter-party risk.”
Bylund agreed. “Having the contract with you is the 900 pound gorilla in the room when you go to meet with that counter party,” he said.
At the time of its release in November, ARA said its model contract could be used throughout all segments of the distribution chain, from manufacturers to distributors, retailers, and farmers. “A model fertilizer contract that can be utilized by industry on a voluntary basis should help companies better manage their risks and provide consistent terms and conditions when dealing with their suppliers or customers,” ARA said.
A PDF of the draft version of the ARA model contract can be viewed at http://greenmarkets.pf.com/ARA.pdf.