Forward Contracts have now been introduced for crops other than rice and cotton.  We recently have been asked to look at problems that have arisen with Forward Contracts for wheat and barley.

What Is A Forward Contract?
A Forward Contract is a contract to sell grain at an agreed price, quality and tonnage, in the future.  For example, in June the farmer might agree to sell 200 metric tonnes of wheat at $200.00 per metric tonne gross of statutory levies ex farm in December. 

The guarantee of a price is often very tempting.  However, problems arise when the price of wheat rises well above $200.00 as it did in late 2007 (as high as $450.00 a tonne) and the harvest fails. 

What Are The Consequences Of Not Being Able To Supply The Grain?
In late 2007, the companies who provided this service asked farmers to repurchase the portion of the grain that cannot be delivered.  This means that the farmer has to buy back from the trader, tonnage that the trader has agreed to buy.  This is so even though generally the payment terms on these Forward Contracts are for payment to be made thirty days from the end of the week of delivery.

Apart from losing on the price of the grain, the market being for example $450.00 with an agreement to sell at $200.00, the farmer may have to pay the trader for grain that he is unable to deliver. 

What Should Be Done?
As always is the case, if there is anything involving a contract the document should be read very carefully.  In the contracts for wheat and barley that Jackson Smith have seen, the trading rules of the National Agricultural Commodities Marketing Association Limited apply.  Those trading rules provide rights to the farmer that he may not be aware of.  For example, if the farmer finds that he will be in default, he can send the notice to the trader and the trader must make an election to do one of the following:

(a) agree to extend the delivery or shipment period;
(b) require the farmer to repurchase;
(c) cancel all or any p art of the defaulted portion of the delivery or shipment.

It may be that the farmer can negotiate a way out of a difficult position with better knowledge of the contract that he has signed.

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