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

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
CropLife 100CHS To Build $3 Billion Fertilizer Plant In North Dakota
September 5, 2014
The fertilizer plant in Spiritwood will be the single largest investment in CHS history, as well as the single largest private investment project ever undertaken in North Dakota. Read More
EquipmentNew Holland Acquires Miller-St. Nazianz
September 3, 2014
The assets of Miller acquired as part of the transaction will become part of New Holland Agriculture, a CNH Industrial brand, building on a successful four-year partnership between the two companies. Read More
CropLife 100Pinnacle Acquires East Kansas Chemical
September 2, 2014
Ranked 82nd on the CropLife 100, East Kansas Chemical will operate as part of Pinnacle's Performance Agriculture brand. Read More
MAGIE 2014 ShowStopper
EquipmentJohn Deere Again Wins MAGIE ShowStopper Award
August 25, 2014
For the second consecutive year, John Deere was honored at the Midwest AG Industries Exposition (MAGIE) for its new R4045 sprayer. Read More
ManagementExpert To Discuss Farmland Value, Rent At Farm Science Review
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

Latest News

Palmer pigweed in soybean stubble
HerbicidesValent To Discontinue Gangster Herbicide
September 22, 2014
Valent will discontinue Gangster Herbicide after the 2015 growing season as growers can now deploy Fierce XLT herbicide in soybeans. Read More
Equipment2014 Product Of The Year Voting
September 19, 2014
Many new products were introduced to the ag retail marketplace this year. From this group, CropLife IRON and its consulting partners have selected five finalists for the Product of the Year award. Please cast your vote today to help us determine the winner. Read More
Equipment2014 Farm Science Review Crowd Tops 2013 Show
September 19, 2014
The 52nd annual Ohio State University Farm Science Review welcomed more than 130,000 farmers, industry professionals, FFA students and agricultural enthusiasts during the three-day event. Read More
Seed/BiotechUSDA Approves Enlist Following Rigorous Review
September 18, 2014
Dow AgroSciences now awaits EPA registration of Enlist Duo herbicide, the companion herbicide to the Enlist traits, which is expected in the near future. Read More
BlendersYargus Appoints New Plant Manager
September 18, 2014
Steve Shaffer will direct and coordinate daily operations at the company’s Marshall, IL, manufacturing plant, where the Layco line of material handling equipment is produced. Read More
CropLife 100Pinnacle Acquires Kansas-Based Cedar Ridge Supply
September 16, 2014
Cedar Ridge Supply will operate as part of Pinnacle's Performance Agriculture brand. Read More
StewardshipSecretary Vilsack Highlights Innovative Conservation Ef…
September 15, 2014
Nearly $16 million in Conservation Innovation Grants (CIGs) will be awarded to 47 organizations to help develop cutting-edge ideas to accelerate innovation in private lands conservation. Read More
Seed/BiotechSyngenta Responds To Cargill Lawsuit
September 15, 2014
Syngenta believes that the lawsuit is without merit and strongly upholds the right of growers to have access to approved new technologies. Read More
Equipment2014 Farm Science Review Launches Mobile App
September 15, 2014
Smartphone and tablet users planning on attending the 2014 Farm Science Review can now download this year’s customized mobile application. Read More
CropLife 100Southern States Coop Grower Sets Georgia Soybean Yield …
September 15, 2014
Georgia farmer Randy Dowdy's soybeans yielded an astonishing 110.66 bushels per acre, crushing the previous record of 82 bushels-per-acre. Read More
NIMITZ Treated vs Untreated pepper plant
InsecticidesNIMITZ Nematicide Approved By EPA
September 12, 2014
NIMITZ is a novel, non-fumigant nematicide with simplified application features, user safety and an active ingredient with a unique mode of action. Read More
InsecticidesMarrone Bio Innovations Receives Patent For Chromobacte…
September 11, 2014
The patent is the first step for MBI in developing a commercially viable product to inhibit infestations of corn rootworm larvae across America and other regions. Read More
HerbicidesDow AgroSciences: Keeping The Pipeline Stocked
September 11, 2014
Dow AgroSciences is embracing product diversity to drive the company’s future. Read More
CropLife 100CHS Is Official Partner Of New St. Paul Ballpark
September 10, 2014
The new ballpark in St. Paul, MN, officially became CHS Field with Twin Cities-based CHS Inc. revealed as the naming rights partner. Read More
EquipmentHagie Honors Farming Stewardship Leaders
September 10, 2014
The Iowa Farm Environmental Leader award recognizes Iowa farmers as environmental leaders that are committed to healthy soils and improved water quality. Read More
Precision AgPlantBeat: Your Plants’ Pulse In The Palm Of Your Han…
September 10, 2014
A new agronomic monitoring and recommendation service from Phytech could rewrite the book on real-time plant health status monitoring. Read More
StewardshipCCAs Making Headway With 4R Program In Lake Erie Wester…
September 9, 2014
Certified Crop Advisers are implementing the 4R Nutrient Stewardship Certification program in Lake Erie's Western Basin to improve water quality. Read More
MicronutrientsMicronutrients Going Macro
September 9, 2014
Between 2014’s fantastic growing conditions and a heightened awareness on plant nutrition, the major players in micronutrients are gearing up for another big year. Read More