Fertilizer Contracts: A More Formal Relationship

Ask any ag retailer what makes their business model work and chances are good that their answer will involve the word “relationship.” Grower-customers are not only trusted business partners, but also friends and “good guys.” In this environment, handshake agreements have traditionally been good enough to seal deals worth millions of dollars for both sides.

But according to J. Stephen Lucas, president of Jayhawker Consulting Co., LLC, this view of the ag retail world has been largely rendered obsolete by the events of the past two years. In today’s world, handshake deals need to be replaced with formal contracts, to protect both sides from wild fluctuations in the commodities market and prevent “he said/she said” debates that could ultimately end up in court.

“In the grain business, using contracts is second nature,” said Lucas, speaking at the 2009 Agricultural Retailers Association (ARA) meeting. “We don’t do anything without that confirmation. I’m horrified that people buy and sell stuff without contracts. Sure, you can view your grower-customers as friends and good old buddies, until there’s a $100 per ton difference in the fertilizer price. Then, without a formal contract in place, you may find out that grower-customer isn’t such a good old guy after all.”

Jim Shelton, manager of agronomy for Landmark Agronomy Services, Juda, WI, agrees that handshake deals are becoming a thing of the past. “It’s just good business to have a contract,” says Shelton. “Everyone who buys a $2,000 motorcycle has to sign a contract to make the purchase. It doesn’t make sense that our industry will sell $100,000 worth of fertilizer with just a handshake.”

Preparing For The Future

According to Shelton, Landmark has been using fertilizer contracts in its business since 2006. “Back then, the fertilizer market was booming and all the prices were steadily ratcheting up,” he says. “But we realized that market would eventually fall back down to Earth, and all these handshake deals could potentially come back to bite us in the you-know-where.”

To get started, the cooperative used the contracts it signed with crop input suppliers as templates to create its own contracts. These were then reviewed by Landmark’s legal representatives for clarity.

Introducing the fertilizer contracts into the company’s business model took a little bit of time, says Shelton, but not because of reluctance on the part of the grower-customers. “Once we explained the risk and volatility aspects of the fertilizer market to them, there was no problem,” he says. “Besides, growers tend to understand the idea behind contracts because they’ve used them with their grain business forever.

Sample Contract

“The toughest part was getting our sales representatives to buy into this concept,” he continues. “That took us almost a full year to accomplish.”

Today, formal contracts for fertilizer purchases at Landmark represent 100% of the cooperative’s business transactions. In the past year, says Shelton, more than 1,700 contracts were filed with the company. “We even have an online contract option for growers if they prefer,” he says.

Offering Protection

In Spring 2009, ARA formed the Fertilizer Contract Task Force with the objective of developing an ARA-branded fertilizer contract confirmation that specifies the mutual agreed upon terms of the buyer and seller between any two business entities in the distribution system: manufacturer, distributor, retailer, and end user. The association undertook this effort in response to the extreme volatility that has occurred with fertilizer prices and supplies over the past few years. This was viewed as a way to help establish better risk management, more accountability, and common terms and conditions.

The sample contract was formally introduced at the ARA annual meeting in December. Among the items spelled out in the document are breach of contract penalties, technical assistance from the seller, and taking disputes to arbitration. According to Jacob Bylund, a lawyer specializing in agribusiness with Faegre & Benson LLP, this should protect both buyer and seller from the threat of default in tough financial times, such as the ones most retailers and growers experienced during late 2008 and 2009.

In addition, says Landmark’s Shelton, the formal contract can be used to spell out liability terms with grower-customers that store fertilizer. “We put that on the back of all of our contracts,” he says. “The language says that the grower is responsible for any damages if there is a release of fertilizer we delivered from the equipment on his property. This protects us from any environmental claims that could come up.”

Since implementing its fertilizer contract arrangement, Landmark has found the system to be quite effective at not only protecting the company from cancelled orders, but saving money as well. “It took a lot of the guesswork out of our operations because everything we needed to do was spelled out beforehand in the contracts,” he says. “Without contracts in place during 2009, I’m convinced our company would have lost an additional $4 million in revenue on top of what we did lose.”

His advice to other ag retailers is to not delay in implementing their own fertilizer contract programs. “Given what’s happened to our industry during 2008 and 2009, with constant price ups and downs and some grower-customers looking to back out of their verbal purchase agreements, the time is definitely right to start using contracts to protect yourselves,” says Shelton. “If ever there was a year to launch this kind of thing with your grower-customers, it’s 2010.”

Leave a Reply

Fertilizer Stories

FertilizerFall Fertility 2014: Forecasting Fertilizer Use
September 7, 2014
Great crops this year have tapped the soil, and fall work is definitely called for, but how challenging will that get? Read More
Aerial view of the West Fertilizer explosion site
FertilizerFertilizer Companies Blame City For West, TX, Explosion
August 6, 2014
El Dorado Chemical Co. and CF Industries contend the city failed to properly train the first responders and had insufficient protocols in place to battle the April 17, 2013, blaze at West Fertilizer Co. that triggered the explosion. Read More
FertilizerThe Fertilizer Institute: New President, Renewed Energy
February 3, 2014
Chris Jahn relishes the opportunity to lead the organization through the challenging times ahead. Read More
FertilizerA New Cycle For Fertilizer Demand
January 2, 2014
Changes in the corn market could have a major impact on the crop nutrients sector in 2014, say experts. Read More

Trending Articles

HerbicidesAdjusting To The New Reality Of Weed Control
November 4, 2014
Even with new cropping systems being readied for market introductions, weed control will remain a challenge for many. Read More
StewardshipResponsibleAg Begins Auditor Training
October 31, 2014
ResponsibleAg auditor training is now underway at the Ford B. West Center for Responsible Agriculture in Owensboro, KY. Read More
InsecticidesNew Research Study Shows The Value Of Neonics
October 29, 2014
The study evaluated seed treatment, soil and foliar uses of neonicotinoid insecticides in the U.S. and Canada. Read More
Crop InputsPlatform Specialty Products To Acquire Arysta LifeScience
October 20, 2014
Once the acquisition is complete, Platform Specialty Products will combine Arysta LifeScience with previously acquired companies Agriphar and Chemtura Crop Solutions. Read More
Seed/BiotechMonsanto Offers New Support For Ferguson, Area Communities
October 8, 2014
Monsanto Co. has committed $1 million in new support for several collaborative efforts in Ferguson, MO, and surrounding communities in North St. Louis County. Read More
Seed/BiotechUnapproved Genetically Modified Wheat Found In Montana
October 3, 2014
USDA reports that one year after discovery of Monsanto's unapproved wheat in a single Oregon field disrupted U.S. wheat export sales, the GMO wheat has again been found in Montana. Read More

Latest News

soybean field
Crop InputsABM Patents Microbial R&D Technique
November 25, 2014
Focused Microbial Diversity (FMD) is a newly patented technique employed by Advanced Biological Marketing (ABM) to research and develop microbials that will be used in ABM products Read More
Crop InputsStorage Options Help Grain Growers Go To Market
November 24, 2014
While on-farm storage in a traditional upright storage bin is one possibility for storing grain, it may not be for everyone. Read More
Eric SfiligojGiving Thanks For Another Great Year
November 24, 2014
As Thanksgiving Day 2014 arrives, agriculture has plenty to be thankful for. Read More
Crop InputsSyngenta Cost-Cutting Program To Affect 1,800 Jobs
November 24, 2014
The company's Accelerating Operational Leverage program will result in job reductions and relocations totaling around 1,800 across the company, the majority of which will occur in 2015. Read More
EquipmentAGCO Announces Operator Of The Year Finalists
November 20, 2014
Four custom applicators have been selected by AGCO Application Equipment as finalists for 2014 Operator of the Year, an honor that recognizes them as being among the top professionals in their industry throughout North America. Read More
MicronutrientsH.J. Baker Expands Tiger-Sul Business
November 20, 2014
H.J. Baker has created and filled two strategic positions in business development and sales within its Crop Performance Division. Read More
soybean field
FertilizerGeneral Mills Honors United Suppliers For Nitrogen Opti…
November 19, 2014
United Suppliers winning proposal detailed SUSTAIN, a consulting network that provides customized products and services for farmers using a needs-based system approach. Read More
EmployeesOhio AgriBusiness Association Awards $25,000 In Scholar…
November 19, 2014
Each year, the Ohio AgriBusiness Association Educational Trust scholarship program awards scholarship dollars to students enrolled in an agriculture-related field attending several state colleges. Read More
ManagementServi-Tech Names New CEO
November 17, 2014
Servi-Tech has named Greg Ruehle its new president and CEO. Read More
CropLife 100Pinnacle Ag Acquires Colorado Aerial Application Outlet
November 17, 2014
Ft. Lupton, CO-based Reck Aviation — a full-service chemical application company providing aerial crop applications of fertilizers and crop protection products — will operate as part of Pinnacle's AgOne Application Services brand. Read More
Eric SfiligojMcDonald’s Message: Biotech Crops Scarier Than Cancer
November 17, 2014
Despite their potential health benefits, one of the world’s largest potato users will pass on a new biotech offering. Read More
MicronutrientsWinField Releases 2014 NutriSolutions Results
November 14, 2014
A number of significant regional and national crop deficiency trends emerged from the 2014 WinField NutriSolutions tissue sampling program. Read More
FertilizerH.J. Baker Opens Chinese Production Lines
November 14, 2014
The occasion was the official launch of the Tiger-Sul sulphur Bentonite production line of two much anticipated fertilizer products in China, T90CR sulphur fertilizer and TZinc micronutrient enhanced sulphur fertilizer. Read More
ManagementOhio Certified Crop Adviser Program Accepting Nominatio…
November 14, 2014
The award recognizes an individual who delivers exceptional customer service for farmer clients in nutrient management, soil and water management, integrated pest management and crop production in Ohio. Read More
HerbicidesSyngenta Announces Acuron Trial Plot Results
November 14, 2014
Acuron was tested at 167 trial locations across 35 states. Trials included 95 Syngenta locations, 54 university locations and 18 distributor locations. Read More
Crop InputsVerdesian Expands Sales Force
November 13, 2014
The new sales representatives will work with growers, retail partners and distributors to oversee technical training and product education. Read More
EquipmentAGCO Raises $100K For Wounded Warrior Project
November 13, 2014
AGCO Corp. partnered with local AGCO dealers across the U.S. and Canada to raise nearly $100,000 in support of wounded service veterans. Read More
HerbicidesDow AgroSciences Announces Launch Of Enlist Duo Herbici…
November 12, 2014
It will be launched in conjunction with a stewarded introduction of Enlist corn, and seed production of Enlist soybeans in 2015. Read More