April 24, 2003
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 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 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 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.