A common question asked is how to modify an existing forward contract or production contract if cropping plans change dramatically due to poor weather.
The broad answer is that the parties who signed the contract need to discuss the situation as soon as possible, outline potential adjustments and determine what makes most sense for all of the parties.
The specific solution can vary greatly and will depend upon the structure of the current contract, crop involved and how many other farmers in the area have the same problem. A buyer typically has more flexibility to work with a single farmer having a contract issue than if the problem is widespread throughout the buyer's trade area.
This is because grain elevators and processors normally have recontracted or resold the crop, or products made from the crop, to their domestic and/or international customers. Small shortfalls in deliveries can be covered with additional purchases in the spot market, but large shortfalls can be difficult to replace economically.
Once again, the specific adjustment to a potential contract shortfall can vary greatly. However, some of the possible contract modifications could include changing the location of the fields and updating the legal descriptions in the contract, buying out of the contract shortfall, using existing inventory to fill the contract shortfall, purchasing production from another farmer to fill the shortfall, shifting the contract production to another farmer, shifting the contract production into next year or invoking an "act of God" clause if available.
Many production contracts for smaller market or specialty crops include an act of God clause that releases the farmer from contract shortfalls due to drought, hail, insects, diseases or flooding.
The specific terms of an act of God clause varies greatly among industries and across buyers. Many act of God clauses require the farmer to notify the buyer in writing as soon as possible after an adverse event occurs. Typically, notification must be made within 14 days. If notice is not given, the act of God clause does not apply.
This again shows that opening the lines of communication between buyer and seller as soon as possible is very important.
The weather this spring is creating many challenges and forcing farmers to modify planting intentions. It is important to review and potentially modify marketing plans to compensate for any major changes in expected production.
Addressing potential problems now could prevent major difficulties during harvest.
Source: Frayne Olson, Crops Marketing Economist, North Dakota State University Extension Service