Contracts: A Formal Relationship

During much of 2009 and early 2010, analysts looking at the general economy have noted a fundamental shift, with companies and consumers drastically changing their historic ways of doing things. Instead, cautious and more fiscally responsible patterns are becoming the new normal.

Looking at ag retail, a similar business pattern is emerging, particularly in fertilizer. Following the inventory and price disaster of late 2008 and 2009, many ag retailers have taken steps to protect their businesses by requiring grower-customers to sign formal contracts when purchasing fertilizer. These spell out in detail such things as prices, delivery times, and what happens to both parties in the event one of them defaults.

At first glance, this step towards more formal relationships seems like a no-brainer. After all, ag retailers are in the business to make money, and using signed, legally-binding documents to accomplish this is reasonable. And long overdue, according to many market observers. At the Agricultural Retailers Association meeting, one speaker said he was “horrified” to learn retailers and growers still bought and sold fertilizer without contracts. “In the grain business, using contracts is second nature,” said the speaker. “We don’t do anything without that confirmation.”

Luckily, this message is apparently getting through to ag retailers. In an online survey conducted by CropLife®, more than 70% of respondents said they were using signed fertilizer contracts with their grower-customers.

There remains, however, some level of discomfort with using fertilizer contracts because of its break from tradition. “The tough part of executing this strategy is breaking old habits of both the salesperson and the grower,” says David Hintzsche, president of Hintzsche Fertilizer.

Then, says Wendell Stratton, owner of Stratton Seed Co., there is the relationship angle to consider, since many grower-customers believe that their word to a trusted retailer is enough of a commitment. “These are typically our best and loyal customers and we do not want to do anything that offends them,” says Stratton.

My view is that ag retailers should get over this relationship hurdle. Having a formal contract doesn’t negate being someone’s friend. My 21-month-old son is watched by a nanny. This woman is an important part of my family’s life, attending special events and coming to activities with us such as attending swimming class outside of the normal work week. But we still have a signed contract with her spelling out what she earns per week, what to provide in overtime pay, and how days off are to be handled. This protects us all from any misunderstandings or feelings that one party is “taking advantage” of the other.

Following the rough financial year of 2009, ag retailers need to protect themselves and their businesses. Con­tracts provide this protection. The long-term relationships with grower-customers may change as a result, but they shouldn’t be irreparably broken.

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