Posted 11/17/2012 11:38 (#2702103) Subject: Regarding contract defaults from below...
I read through the posts below and came away with the following:
a fair amount of folks believe that contract defaults are common, perhaps rampant. I cannot speak for others in our industry, but I will share our experience.
We purchase 90 million bushels of corn per year in Eddyville, and about half of it comes from direct transactions between the farmer and Cargill.
The amount of corn we have a "problem" with would be no more than 2/10 of 1% of our annual purchases. I define "problem" as corn where we have substantial risk of non-performance and have to pursue legal remedies.
We are diligent in tracking signed and returned contract confirmations above 2,500 bushels because that is the first line of defense. The ability to pursue non-performance through the NGFA (national grain and feed assocation) grain trade rules is compromised without good documentation.
The real problem comes when dealing with folks with "nothing to lose".....they have very little equity and/or assets, so you can go through the entire NGFA process, get a favorable ruling, and go to a court and get a judgment against them.....but if they have nothing to go after.
I am dealing with a situation like that right now:
guy from out of the area rented land about 60 miles away from the plant in 2011 and delivered 105,000 bushels of corn...minor issues on delivery, but nothing big. In the fall of 2011 he forward contracted about 30,000 bushels of corn for delivery to us in fall 2012. No big deal, as he had told us he was farming in the same area again in 2012. All contracts signed and returned. No corn has been delivered, guy won't return phone calls, and will very likely not sign for certified mail we just sent. In performing some due diligence we learn he didn't farm in the area, and in fact, may not have been farming at all in 2012.
Here is the kicker----he called in several times in spring and early summer of 2012 and never gave any indication of what was going on.....At the time those contracts had substantial positive equity in his favor, as much as 75 cents to a dollar per bushel.....had he come clean with us, we would have marked the contracts to market and settled up with him.......instead, because of his "nothing to lose" status, he did nothing....and now we are stuck $50,000 and will go through the NGFA process, but with very little hope of actually collecting what is owed.
We think that had he did not do that because our check would have had his lienholders name on it, and then he would not have had access to the money--if he waited until fall and those contracts were $2 in the money under a big crop scenario, he would likely have "sold" this corn to someone else by having us cancel the contracts and re-issue the contract in another person's name who would actually deliver the corn.....then the second party would "split with him in the parking lot"...
So, when you hear someone talking about "just sell it someplace else and don't worry about it", you may want to consider where a guy like that fits into the "got alot", "got a little", or "got nothing" position in their operations.
I really appreciated all the responses about doing the right thing.....we have had millions of bushels delivered this fall that is $1-2+ under the current market, and other than a few passing comments, folks take their obligations seriously and get r done and move on.