Grain contracts leave farmers paying to produce

ARBORG, Man. — For the third time in about an hour, Dave Shott got up from his kitchen table and walked to a patio door to light a cigarette. During his short trips from the table to the open door, Shott continued to tell the story of how and why Viterra sent him a bill for $40,527.27.

Shott, who farms 4,900 acres in Manitoba’s Interlake, usually grows oats, canola, soybeans and wheat. In most years, he contracts a portion of his oat production because he likes to deliver the oats straight off the combine to the elevator.

This summer that plan didn’t work out as expected. A severe drought and relentless grasshoppers reduced his oat crop to almost nothing.

“We averaged about 30 bushels. That’s horrible for oats,” said Shott, while taking a seat inside his log farmhouse west of Arborg. “Never, in my wildest dreams, would I think I couldn’t get 40 bu. oats. Especially when we’re used to getting 120-170.”

In total, Shott produced 28,000 bushels of oats. But in the spring he signed a contract with Viterra to deliver 40,000 bushels to the company’s elevator in Rosser, Man.

After a number of phone calls with Viterra representatives, starting in the middle of July, Shott says he wasn’t able to resolve the contract shortfall with the grain company. He was hoping they would rollover the contract to 2022, when Shott would deliver the remaining 12,000 bushels to Viterra next fall. But the two parties couldn’t agree on the terms.

“I got frustrated in the end…. I said, I’m done. Cut my cheque for what you owe me. Take off what I supposedly owe you. And we’re done.”

Following that conversation, Viterra emailed him a bill of around $41,000, based on a spread price of $194.52 per tonne for 208 tonnes of oats.

It’s been several weeks since he spoke with a representative of Viterra and many weeks since harvesting the oats, but Shott is still angry.

He admitted he signed the contract and promised to deliver the oats. But when there’s a dispute over a contract and it can’t be resolved, it seems like the grain companies have a massive advantage over producers, he said.

Shott isn’t alone.

This fall, hundreds of western Canadian farmers were unable to satisfy their production contracts for canola, oats and other crops, because heat and drought slashed yields in half or worse.

Many growers are staring at huge penalties of $100,000 to $200,000 or higher for failing to fulfill their contracts.

In late August, the Agricultural Producers Association of Sask­atchewan and six commodity groups sent a letter to the Western Grain Elevator Association asking grain companies to forgo the penalties.

“Your co-operation in waiving administrative fees and being willing to consider re-negotiation of contract terms for the current production year will lessen the financial impact of a poor year for farmers,” the letter said.

In late September, APAS took a further step on grain contracts.

It launched a survey to gauge the financial impact on Saskatchewan farmers, related to contract shortfalls and battles with grain buyers.

Many producers were mad enough to respond and share details of their contract disputes.

“We have over 200 responses now, which is surprising. We didn’t think so many producers would be willing to talk about financial matters,” said APAS president Todd Lewis.

“(It) shows how widespread the problem is and how big the problem is.”

One of the common themes in the responses is the issue of the penalties. Most producers would concede that penalties are reasonable when farmers have the grain. The penalties deter those who want to get out of the agreement to capture higher prices in the open market.

“But when producers haven’t produced the grain… it’s just another financial penalty to them,” Lewis said. “They would sell the grain if they had it but they couldn’t produce it (because of drought)…. That’s the biggest over-reaching thing that producers are saying.”

Some farmers, including Lewis, believe a standardized contract is needed.

“Let’s have seven or eight main features of every contract, so producers know what they’re looking at,” he said, adding the grain companies could add other elements to the contract, if they see fit.

A Viterra spokesperson did not provide comment, saying the Western Grain Elevator Association is handling media inquiries about grain contracts.

Wade Sobkowich, WGEA executive director, said there is a fair amount of confusion around administration fees. Typically, the fee is the replacement value, or the added cost of buying the grain from someone else.

As an example, say a farmer is short 20,000 bushels on a $4 per bushel oat contract and the grain company has promised to deliver oats to a United States mill.

“They need to acquire the grain to make up for (the 20,000 bu.),” Sobkowich said.

So, the grain company buys the oats from another farmer, maybe at $7.50 per bu., and charges the additional cost (above the $4 contract price) to the farmer who failed to deliver the 20,000 bushels.

“No matter how you structure it, in most cases it (the fee) comes down to replacement value,” he said.

The idea of walking away from the contracts isn’t financially feasible for grain companies, Sobkowich said.

“They’ve sold that grain. So, they need to acquire it somehow,” he said, noting farmers have the option of buying grain from another producer to fulfill the contract.

“We’re encouraging them to do that…. What we’re saying, if you can get the grain at a lesser value… please do that.”

Shott didn’t mention that option as a way to fill the requirements of his contract, likely because oat growers in eastern Manitoba had poor yields this year and few have oats available to sell.

At his kitchen table, Shott looked down at a paper copy of page three of his grain contract and tapped it with the back of his hand.

Some producers say this comes down to individual responsibility. If a farmer signs a contract, the farmer must accept the risk.

Shott admitted several times that he signed the contract.

But like most producers, he didn’t read every word in the agreement.

“You don’t pay a lot of attention to it till it matters. Until it hits you, you don’t read this. You think they’ll deal in good faith,” he said. “I don’t know what the mechanism is to keep it fair for everybody. It has to be fair for the other side too…. But (now) it always seems so one-sided.”

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