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

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
FertilizerOSHA Hammers West Fertilizer With Over $100K In Fines For April Explosion
October 10, 2013
The Occupational Safety and Health Administration is fining the parent company of the West Fertilizer plant, Adair Grain Inc., $118,300 for 24 violations. Read More

Trending Articles

EquipmentAdvance Your Technology IQ At MAGIE
August 13, 2014
The Midwest AG Industries Exposition (August 20-21) is the place you need to be to see, study and evaluate how new advances in the equipment, operations, crop protection and fertility sectors can help your business prosper. Read More
HerbicidesScouting Key To Next Season’s Soybean Herbicide Program
August 12, 2014
When growing soybeans, growers need to think ahead to stay one step ahead of weeds. That means examining weed threats and evaluating which herbicides work best. Read More
StewardshipMichigan Agriculture Leaders On Toledo Water Ban: We Want To Be Part Of The Conversation
August 8, 2014
Leaders of Michigan agricultural organizations said Thursday that the government should not have a “knee-jerk reaction” based on last weekend’s water ban in Toledo due to fertilizer run-off in Lake Erie. Read More
CropLife 100BRANDT Acquires Lemon Ag Services
August 4, 2014
The acquisition of Lemon Ag fits BRANDT’s aggressive corporate strategy of providing superior agronomic advice and services for customers in central Illinois. Read More
Eric SfiligojThe Resurgence Of Crop Protection
August 4, 2014
Plenty of new offerings over the next few years should see a rebirth for the crop protection products category in terms of market share. Read More
LegislationUSDA Implements Key Farm Bill Crop Insurance Provision
July 30, 2014
The new Supplemental Coverage Option, available through the federal crop insurance program and set to begin with the 2015 crop year, is designed to help protect producers from yield and market volatility. Read More

Latest News

InsecticidesDuPont’s Prevathon Approved For Dry Beans
August 22, 2014
DuPont Prevathon insect control powered by Rynaxypyr has received EPA registration for foliar use on dry bean crops, including dried shelled peas and beans. Read More
ManagementNCGA DuPont New Leaders Program Enters Sophmore Season
August 20, 2014
The National Corn Growers Association and DuPont are pleased to announce the second year of the NCGA DuPont New Leaders Program. Read More
FungicidesVerdesian Links Up With Mitsui, Hokusan
August 20, 2014
Mitsui Chemicals Agro, Inc., and Hokusan Co., announced the signing of an exclusive licensing agreement allowing Verdesian Life Sciences global access to its patented technology for suppressing mycotoxin contamination in wheat and barley. Read More
SprayersUniversity Of Illinois Introduces New Spray App
August 18, 2014
University of Illinois Extension has released a new smartphone app for making sprayer-related calculations. Pesticide Spray Calculator, or Spray Calc, Read More
Crop InputsSyngenta Names New Manager Of Federal Government Relati…
August 18, 2014
Laura Wood Peterson has joined Syngenta as manager of federal government relations, based in Washington, DC. Read More
ManagementExpert To Discuss Farmland Value, Rent At Farm Science …
August 18, 2014
While cropland values in Ohio increased in the past two years, they have remained flat in 2014, declining in some cases, according to an Ohio State University agricultural economist. Read More
EquipmentDeere Announces Factory Layoffs
August 18, 2014
Deere & Co. has announced it will reduce the size of its manufacturing workforce at some agricultural equipment factories in response to current market demand for its products. Read More
HerbicidesNew DuPont Afforia Herbicide Gives Crops A Clean Start
August 18, 2014
DuPont Afforia is a preplant herbicide for soybeans and other field crops that provides excellent burndown and residual control of many challenging weeds, such as marestail and waterhemp. Read More
Equipment21 Products Showcased At MAGIE 2014
August 18, 2014
The annual Midwest AG Industries Exposition is upon us. Here is CropLife IRON's look at some of the products visitors can expect to see at this week's event. Read More
EquipmentAGCO Seeks Nominations For 2014 Operator Of The Year
August 15, 2014
Ag retailers throughout the U.S. and Canada are encouraged to nominate their best applicators. Read More
EquipmentAdvance Your Technology IQ At MAGIE
August 13, 2014
The Midwest AG Industries Exposition (August 20-21) is the place you need to be to see, study and evaluate how new advances in the equipment, operations, crop protection and fertility sectors can help your business prosper. Read More
ManagementCropLife’s Buyers’ Guide Issue Now Availabl…
August 13, 2014
One of our most read issues of the year — the August Buyers' Guide — is ready to download on the iPad. This popular issue features equipment for "In The Field," "At The Plant" and "In The Office." Read More
WebinarsWebinars On Demand
August 13, 2014
Register for one of our upcoming Webinars or access our archive of past Webinars to view recordings of presentations that may be of interest to you. Read More
HerbicidesBASF: Fall Burndown Benefits Go Beyond Weed Control
August 12, 2014
While unpredictable weather may delay application timing of spring herbicides, more growers are adding a burndown application in the fall Read More
HerbicidesScouting Key To Next Season’s Soybean Herbicide P…
August 12, 2014
When growing soybeans, growers need to think ahead to stay one step ahead of weeds. That means examining weed threats and evaluating which herbicides work best. Read More
StewardshipNitrogen Efficiency Supports Environmental Stewardship
August 12, 2014
As growers prepare for another harvest, it’s important to consider how nitrogen stabilization not only supports healthy plant growth but also fosters environmental stewardship. Read More
Seed/BiotechMycogen Seeds Introduces 19 New Corn Hybrids For 2015
August 12, 2014
Many of the new hybrids feature Mycogen's SmartStax Refuge Advanced technology for maximum protection of the genetic potential and planting convenience. Read More
HerbicidesDow AgroSciences Introduces Enlist Ahead App For Enlist…
August 12, 2014
Designed for use with the Enlist Weed Control System, the app is a precision agriculture tool for maximizing weed control performance, managing weed resistance and making responsible applications of Enlist Duo herbicide with Colex-D Technology. Read More