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Do Price Later Contracts and Pool Agreements Affect the Navy Market?
March 15, 2002


2001/2002 may prove that contracts, Canada and consolidation do influence the navy market more then we expected.  With the navy bean seemingly under valued, the discussion of why this is has been addressed from the boardroom to the coffee shop. 

Most navy bean producers are aware that seeing prices at $50/cwt is rare, but it has happened in the 70s and 80s. Late 1994 showed MN/DAK navy grower prices reached $28.50/cwt with total production in the U.S. and Canada reaching 6,667,000 cwt. 

The U.S. production of navy beans in 2001 will get close to reaching an all time low, or at least dating back to 1921.  If we combine 2001 numbers with carryover and Canadian production, the chart shows we still maintain a very tight market scenario.

So why is the navy market seemingly sluggish in 2001/2002?

A possible answer to the question is best described in the following article titled, Think Carefully Before Signing Pools and Price Later Contracts. It was written and widely circulated in the industry many years ago, but still applies today.

In combination with this marketing opinion, there are other risks involved when signing contracts. Jon Meilke, Executive Secretary, Licensing and Rail Division, ND Public Service Commission shares his thoughts on those issues as well.

Think Carefully Before Signing
Pools and Price Later Contracts

 Please note: Contracts with price later and pool agreements have certain risk involved and there are differences between companies that provide them. These contracts have been with us since the beginning, and for many classes. The following articles are not intended to imply that you shouldnt get involved in contracting. But, the influence these contracts and pools may have on bean markets, especially todays navy market, is showing a potential trend that we need to be aware of.

For the past couple of years the dry bean industry has seen a steady increase in the number of new marketing tools for the bean grower, such as Price Later Contracts and Pools. Initially, these marketing tools were intended to add stability to the marketplace by keeping the flow of beans to the marketplace steady. Ideally, this would make for a more stable, well-organized supply/demand scenario. Unfortunately, this has not been the outcome. As a matter of fact, quite the opposite is occurring.

In analyzing the pros and cons of these marketing tools, we must begin with the most basic principle of supply/demand economics. What makes the bean market move? Very simply, demand must be greater than available supply for the market to rise, and conversely, available supply must be greater than demand for the market to fall. With this basic principle in mind, lets examine the merits of the Price Later Contracts and Pools.

If, as a grower, it is your desire that the market appreciate, then as a group you must restrict available supply. When demand catches up with and eventually surpasses available supply, you will begin to see the market move up. At this point, it is important to gradually feed the market so as not to create an over supply. Is that what happens with the Pools and Price Later Contracts? Absolutely not! Actually, the exact opposite happens.

When a grower signs up for the Pool or Price Later Contracts, he at that point, passes title of his beans to the warehouse for a partial payment or a promise to pay later. Even though the grower technically has not sold the beans, by putting the beans on a Price Later Contract versus an official warehouse receipt, the warehouse has the legal right to ship the beans before the grower has sold them. By allowing this to happen, the grower has just eliminated the most vital ingredient for making a market rise &DEMAND!

When a grower allows a warehouse or canner to ship his beans without paying for them, he is in effect eliminating demand. Consumers are eating beans that the grower hasnt yet sold. This demand cannot be retrieved. If we continue to lend beans to the market, thereby eliminating the need to purchase beans, the demand may well never surpass supply. Consequently, the market will never appreciate and most likely will always be flat or failing.

You may say to yourself, My small amount of beans cant have much of an impact, but dont be so sure. For instance, the navy bean market is very small in comparison to the market of other commodities. On the demand side, as few as 10 canners control a very large percentage of the navy bean market share. On the supply side, five companies control approximately 70% of the Michigan supply of navy beans. Therefore, how each individual grower markets his beans does have an effect on this small market.

Navy Production, United States, 1920-2001
(1,000 Cwt)

If a bean grower wants to participate in a more orderly marketing program, he can accomplish this on his own by selling 1/12th of his crop at the posted board price on the 15th day of each month. Do not settle for partial payment or any other gimmick. The most important message is: DO NOT TRANSFER TITLE OF YOUR PRODUCT UNTIL YOU ARE FULLY PAID.

One very important point relating to the Price Later/Pool Contracts, is the risk that they pose to participants. Perhaps the most important comment to be made regarding this point is that when a grower transfers title to a warehouse or canner without being paid in full, he or she  becomes an unsecured creditor. In other words, if a grower has signed onto a Price Later Contract or Pool Agreement, and the company that has issued the Agreement files for protection under the bankruptcy laws or is proven to be insolvent, the grower, unlike those holding negotiable warehouse receipts, is unprotected and very likely would not receive full payment for his crop.

If, after weighing the pros and cons surrounding Price Later and Pool Agreements, growers feel that they want to participate, they must have confidence in the company they are going to do business with.

In summary, lets ask ourselves why we grow dry beans. Most people say they grow beans because they are one of the last truly supply/demand price driven commodities. Because our industry is so small in comparison to other commodities, we always have an opportunity for rapid price movement if a dramatic change in supply, demand or emotion occurs. If, as a grower you like that, you should demand a warehouse receipt and immediate payment in full when you decide to sell. On the other hand, if you want to transfer title without being paid, expect a very flat pricing pattern. The pricing range will be very narrow and it will be unlikely that prices will ever get very high because you have eliminated the demand.

Purchase Contracts:  Know
What You Are Agreeing To

By John Meilke, Executive Secretary,
Licensing and Rail Division, North Dakota
Public Service Commission

Production and purchase contracts are marketing options that many bean buyers make available to farmers.  While these agreements may provide farmers with certain benefits, there are also risks associated with them. Farmers must understand the pros and cons of these transactions so they have a full understanding of what they are agreeing to and a willingness to accept the risks involved.

An important first point to understand concerning production contracts is the fact that these agreements are civil matters.  If a dispute arises concerning these agreements, it will not be settled by asking the North Dakota Public Service Commission, the warehouse licensing authority, to resolve the matter.  The PSC cannot and will not resolve contractual disputes.  If the parties to the agreement cannot resolve the dispute, they will have to go to court.

Some production contracts are structured to require the delivery of the crop and for staged payments over several months after delivery.  In situations such as this, title to the beans typically passes to the buyer upon delivery.

In North Dakota and in many other states, the portion of the beans that is paid for within 30 days of delivery is considered a cash transaction.  It is extremely important to recognize, however, that the portion of the transaction that involves payment more than 30 days after delivery is considered a credit-sale.  Delayed price and deferred payment contracts are two common forms of credit-sales.

North Dakota law requires that credit-sales contracts contain language that says that the contract is not protected by bond coverage in case of buyer insolvency.  In other words, credit-sales represent the voluntary extension of unsecured credit.

Farmers must recognize that this language means exactly what it says.  If the warehouse becomes insolvent and is unable to pay for the beans, the farmer will not be provided with protection in an insolvency proceeding. There is no bond protection for credit-sales and even if the PSC has money available from the sale of beans in the warehouse, it cannot use this money to pay farmers who entered into credit-sale agreements.

This lack of coverage in an insolvency proceeding does not mean that farmers are not owed the money.  It does, however, mean that they will not be entitled to payments in an insolvency proceeding.  Rather, they will probably have to be a party to a bankruptcy proceeding and even then, they will be an unsecured creditor and will be at or near the bottom of the list when it comes to being paid.

Farmers must recognize the risks associated with production, deferred payment, and credit-sales contracts.  If they cannot accept or afford the risk, they should not enter into the agreement.


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