Market News & Headlines >> Brock Consultant Katie Hancock's Blog: Minimize Specialty Crop Risk
Insights from Brock Associates Consultant Katie Hancock
Farmers are willing to try new things to make a profit, and specialty markets have enticing premiums—especially looking into 2017. But is it worth it? Older farmers have more experience with this. They’ve learned the hard way and many have been burned. I want to share tips to avoid a costly misunderstanding. I’m specifically referring to row crops, but the thought process applies to any venture.
Young farmers are especially innovative in my opinion, but where’s the fine line between innovative and dangerous? Innovators are risk-takers by nature, but they do it wisely. It’s not necessarily bad to take a chance as long as the mistakes are small. Doing your homework will help.
Assuming the production aspect is straightforward, the best place to start is to pre-approve the contract. This seems extreme, but may prevent stressful misunderstandings down the road. Having a crop in the ground means you’re too committed to turn back!
A contract to me isn’t about suing someone. If it gets to that, you’re already losing. A contract covers the expectations. For example, ‘x’ is what happens under ‘y’ circumstances. An offer to pay you 50 cents above the market isn’t the fine print—that’s the advertisement. Know the difference.
These are the primary questions I would closely examine before diversifying the operation:
Payment terms. Look for clauses of deferred payment. Will you be paid in 30 days? One day? Six months? This is also necessary for landlord communication if crop-share comes into play.
Title. Typically the product is the buyer’s once delivered. Sometimes it’s after full or partial payment.
Cancellation terms. Is the buyer able to cancel the contract?
Premium guidelines. Do you automatically get the premium? Is the premium tied to quality? I view the premium as earned income. It’s not free money, so know how reliable it is. Ideally, the contract will specify exactly what is to be paid or deducted.
Pricing tools. Are you pricing by the acre or the bushel/unit? How do they come up with the price? Not all buyers follow the same guidelines as say yellow corn with a futures and basis price that’s easily monitored. Assuming you won’t oversell, how will they price unsold bushels?
Rights of refusal. Can they reject this product? Do you have anywhere else to go? If you have non-gmo soybeans, you can deliver them as if they were gmo soybeans. Sticking to a common product with significant demand lessens the risk. You have an easy Plan B. Sure you’ll lose the premium, but you aren’t stuck shipping something across the country that others may not want either. Plus, products with a large volume can blend with a crop of poor quality—if that is an issue.
Delivery terms. When and where may you deliver? My biggest issues have been more logistical than financial. It may not be a delayed payment, but rather delayed delivery timeframes. For example, a 50 cent premium isn’t the same delivered at harvest versus storing it for a few months. Consider storage and interest expenses.
Most contracts heavily favor the buyer. They wrote the contract after all. It’s not that you’re trying to be difficult by wanting to see the terms. Understanding the risk by acknowledging potential problems is just good business. You can avoid a problem or at least not be taken by surprise. If for some reason, you struggle to see the contract or expectations in writing before planting, you may want to proceed carefully. Be conservative in the amount you plant if it’s too risky. You can always test the water and try more later.
It’s great to be innovative and diversify, but remember the added risk. This isn’t a time to push your luck too much. Take an opportunity, but remember there is no easy money and no shortcuts.
And most importantly, never do business with someone you don’t trust—regardless of the fine print.
Email Katie at [email protected]