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Wednesday, August 6, 2008

Grain Contracts: Floods and Price Fluctuations

GrainWhat is a grain farmer obligated to do when a flood causes loss of a crop? Is the farmer still obligated to deliver grain under forward contracts? If the flood causes the market price of grain to increase, can the farmer demand more than the contract price? What damages might be assessed against the farmer if he fails to deliver the grain? This, and many other questions are addressed in a report from the University of Illinois: "Grain Contracts, High Prices, Floods, and Failure to Deliver." The report is authored by Donald L. Uchtmann, a Professor Emeritus in the Department of Agricultural and Consumer Economics at the University of Illinois at Urbana-Champaign, A. Bryan Endres, an Assistant Professor in the same department, and Stephanie B. Johnson, a law student at the University of Illinois.

The 4-page report, which may be of interest to contracts profs, begins by explaining:

The 2008 flood wreaked havoc on farmland throughout the Midwest. In addition to destroying thousands of acres of crops, the floods have contributed to an increase in grain prices compared to the fall of 2007. The flooding has some grain farmers wondering what to do if they cannot deliver on “forward contracts” to sell grain entered into before their crops were lost to the floodwaters.

Also, some elevators may be wondering what would happen if an unscrupulous farmer who contracted to sell gain to the elevator when prices were lower were to ignore these contracts for future delivery and, instead, sell the grain on a higher spot market. For example, what are the likely legal consequences if a farmer ignores a contract entered into in the fall of 2007 to deliver 2008 corn at harvest for a price under $4/bushel and, instead, sells the corn on the cash market after harvest at, say, $5/bushel?

Here's the abstract of the questions raised by the report:

This article addresses important issues arising when a farmer’s crop is lost to floodwaters or when market prices rise much higher than the contract prices negotiated when grain prices were lower. Is a grain contract binding if it was never signed by the farmer? Does the inability of a farmer to harvest a crop because of flood provide an excuse for the farmer not to deliver grain as required by contract? What if a farmer harvests a crop but prefers to sell it at a higher price than the contract price negotiated before a rise in grain prices? What damages might be assessed against a farmer who fails to deliver grain as required by contract? Is a farmer still liable for breach of contract damages if the farmer files bankruptcy? This article is part of a law-related educational program for Illinois family farmers made possible by a gift from the Illinois Bar Foundation. The assistance of the Agricultural Law Section Council of the Illinois State Bar Association in reviewing the article also is appreciated.

[Meredith R. Miller]

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