Contract Negotiations and Washouts
Communicate early and know your contract terms and conditions.
With harvest under way in many parts of SA, the full extent of drought and frost damage in crops is being realised. Growers who have contracts in place are urged to consider their likely harvest yields and quality, whether they will have enough grain and potential legal risks of not supplying contracted tonnages.
Growers are encouraged to proactively manage these risks. GPSA recommends getting in touch with your broker or trader to consider risk management options sooner rather than later.
For growers who think they may not be able to physically deliver grain against their contract, you may need to consider a contract washout.
It is a commercial decision whether or not to washout a contract and each trader will have different policies. Generally, the trader is entitled to replacement value, but each trader may have different policies or provide different options.
The key to managing your risk is to communicate early, know your contract terms and conditions, consider your options and your financial position before you make the decision to washout or not.
What is a contract washout?
Grain Trade Australia has provided a definition of a contract washout and some options that buyers may offer in its Guide to taking out contracts.
According to the Guide, a washout can be offered if a seller cannot fulfil their contractual obligations because of actual or expected crop failure. In this event, sellers have the option of covering their contractual commitments by seeking replacement grain to deliver against their contract, and most grain marketers can assist in this process.
If a seller chooses to washout a contract, the cost is the difference between the contract price and the “applicable market value” at the time the washout takes place. Applicable market value is usually based on where grain is actually being traded (bought and sold). Sometimes administrative charges can also apply. Washout fees and administrative charges should be clarified before entering into a contract.
Buyers may offer alternative options should the seller be unable to fulfil the terms of the contract. Options could include an agreement to extend the delivery period, or to buy-out of the defaulted portion of the contract at fair market price based on the close of the market on the next business day.
Where can I find out more information?
Get in touch with your broker or trader as a first step to discuss your options. Grain Trade Australia can be contacted via phone: 02 9235 2155
Further assistance measures
Rural Financial Counselling in South Australia is delivered through Rural Business Support. Rural Business Support can be contacted via phone: 1800 836 211
Additional business and financial assistance can also be found through the following services and programs listed in the PIRSA Dry Conditions Fact Sheet.
Members can also contact GPSA for further guidance.
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