Home Grain Market Analysis Contract Rollover

Contract Rollover

By Scott Shiels

By now pretty much everyone across the Prairies should have their crop in the bin, but there’s likely far too much bin space left over after what could only be described as a very disappointing harvest.

In a year like this, there are situations occurring that are very much out of the ordinary, and knowing how to handle them, and how best to work through the problems, becomes very important. 

The first thing that I want to cover, or more so clarify, is the meaning of “replacement cost” when there is a shortfall on a contract. This year with the small crop, many producers are being pressed by buyers to “buy out”, or more correctly termed, “buy in” for their contracts. For most of us in the industry, the cost to buy in the grain to fill a contract is determined by the replacement cost of the grain. Now, most producers assume that this price is based off the current bids being offered, but that is not the case. Replacement cost is the price at which the buyer could go and buy the tonnage needed to fill their contract immediately at that time. In many cases, like what we have experienced this fall, that price can vary greatly from the bids being posted at the time. This discrepancy has caused some confusion and, in some cases, some very heated discussions between producer and buyer. There most likely are a lot of individuals on both sides of this that have little to no experience in dealing with this type of situation, so a better understanding definitely is needed here. 

Another big source of confusion this fall has been regarding contract rollovers. Here at Grain Millers, we roll contracts to the following crop year with no penalty or cost to the producer. However, most of the line grain companies, if they will offer a rollover at all, do them differently. In the event a producer and buyer agree to roll contract tonnage over to the following year, the buyers will take the current price, or replacement price, less the contract price, and that will be the price that the producer receives when he does fill the contract. While this likely seems unfair, essentially the grain company is just deferring the cost of the buy in on the contract to help the producer avoid having to actually cut a cheque for the amount that it costs the grain company to replace that grain. 

Understanding how processes like these work can go a long way towards maintaining a strong and healthy relationship between buyers and sellers in these situations. And, as we all know, in this business, good relationships are one of the keys to success on both sides. 

Until next time…