NFU calls for universal “Act of God” clause in forward contracts

The record drought in Western Canada made the 202021 crop year a disaster across the prairies. Yields on some crops are as low as one or two bushels per acre in the hardest hit areas. Some farms got enough rain to harvest a modest crop, but dry conditions are so widespread that many had significant yield loss.

This production crisis puts a spotlight on the need to address the power imbalance between farmers and the grain companies.

Farmers who locked in prices in the spring are selling their contracted grain for less than today’s market prices.

However, many are short of crop to fill their contracts because of the drought. The hardest hit had contracts that did not include an Act of God or Force Majeure clause[1] that would release them from obligations if circumstances beyond their control prevented them from producing the contracted grain. Instead of selling a crop, they are forced to buy local grain to make up the shortfall or to pay the difference between the contracted and current prices in cash, often with an added per bushel “administration fee”.

Paying input bills and operating loans under these circumstances is going to be impossible for some, and cause serious hardship for many more.

“The drought hammered farmers all across the prairies this year. There is no question that many farmers are short grain through no fault of their own. But the grain company holds all the cards when it comes to grain contracting, and farmers have no real ability to get adjustments made before signing those contracts. By enticing farmers to sign contracts that don’t include an Act of God clause, companies transfer all the risk to farmers,” said Dean Harder, of Lowe Farm Manitoba. “For some crops, smaller companies will include Act of God clauses based on your production, so we know it can be done. But the large multinationals that don’t offer Act of God clauses are collecting the difference from individual farmers in a disaster year, even though they collect huge amounts of data to assess production risks, and have the physical and financial ability to spread shortfall risks across their entire global operations.

“Farmers sign contracts in the spring before we know what the year is going to be like in order to buy a place in the line come fall. Locking in a decent price in the spring based on your normal yield for a portion of your crop increases the chance you’ll have the cash you need before operating loans and input bills come due in the fall,” said Bill Gehl, of Regina, Saskatchewan. “When the rains don’t come, grain companies should have to shoulder their share of the production problem instead of placing all of the burden on the farmers.”

When the Canadian Wheat Board marketed all of Western Canada’s wheat and barley for export and for domestic human consumption, farmers got paid full value for their crops and were offered Force Majeure clauses on delivery contracts. The CWB, as the grain farmers’ selling agent, obtained the best price possible for the crop as a whole.

“The CWB reduced risk for farmers by offering Force Majeure and through pooled pricing that paid farmers a higher final payment when prices rose. Without the CWB, selling grain is much riskier,” said Gehl. “A return to orderly marketing would provide the best risk management system while ensuring farmers get the full value of their crop when sold.”

The NFU is urging the federal government to create regulations under the Canada Grain Act that would require all grain contracts to include an Act of God clause. Until then, companies should be required to provide the option to carry over shortfalls in the event of crop failure, allowing farmers to deliver grain owing at the contract price the following year.

Since the cost of having to buy-out shortfalls can be included in a producer’s AgriStability expenses, the NFU also urges the governments of Alberta and Saskatchewan to follow BC’s and Manitoba’s example and allow late enrolment in AgriStability. This would help thousands of farmers who have not yet enrolled in the program. While a short-term fix, it could keep more farmers in business and provide needed support to rural communities.