Cash Forward Grain Contracts—Can I Get That in Writing?

By Porter J. Martin and Leah H. Ziemba | September 12, 2011

Practically speaking, most grain is bought and sold over the phone. Then, a confirmatory contract is completed by the buyer and mailed to the farmer/seller to sign and return. But, the story doesn’t end there. Depending on whether you are dealing with a “merchant,” the transaction that you thought was final, may not be a valid contract. 

Nearly every state in the United States has adopted a statute of frauds which requires that certain contracts be in writing. In most states, a contract for the sale of goods in excess of $500 is not enforceable until there is something in writing to indicate that a contract was made.

In the business of buying and selling grain (and other goods), it is common for one merchant to send the other merchant a letter of confirmation or an already-prepared form contract. The receiving merchant (in this case, the farmer) is expected to sign the form contract, leaving him or her with no opportunity to amend the terms. The Uniform Commercial Code (which has been enacted, with modifications, in every jurisdiction in the United States), provides that unwritten contracts between merchants are enforceable if a written confirmation of the contract is received within a reasonable time, unless written notice of objection to the contract is given within 10 days. 

The UCC’s “merchant confirmatory memo rule” precludes a merchant that receives a confirmatory memo from relying on the statute of frauds as a defense, if the receiving merchant does not object to the confirmation. Of course, the initiating merchant must still be able to establish that an oral contract was actually made, and that the written confirmation applies.

So, how does this relate to cash forward grain contracts? The farmer you contract with may or may not be a merchant, leaving the contracting merchant at risk of losing the sale contract and, perhaps more importantly, with increased hedge exposure in volatile markets. In deciding whether a farmer is a merchant, courts consider whether the farmer regularly deals in goods of the type involved or is familiar with the practice of buying and selling the goods at issue. Relevant factors in most jurisdictions include such things as the length of time the farmer has been engaged in the practice of selling specific product, the degree of business acumen, the awareness of the operation and existence of sale markets, and the experience and knowledge of practices unique to the particular product.

Although most modern courts tend to conclude that a majority of farmers are merchants, the determination is on a case-by-case and state-by-state basis. This means, the contracting party may have to expend litigation costs in order to enforce an oral contract. Therefore, it is never a bad idea to review your contracting procedures considering the following points:

• Know your customers. Consider which of your customers would be considered an experienced grain trader and seller, and which would not. Do you require the farmers you contract with to declare themselves a “merchant”?

• Confirmatory letter procedure. Consider putting oral agreements in writing, request the farmer’s signature, and require that the farmer confirm whether he/she is a merchant or not. 

• Timeliness of confirmatory memo. Also, even if the farmer does meet the definition of a “merchant,” the confirmatory memo must still be sent within a reasonable time. Various courts have considered the time period within which is “reasonable” so you should consider reviewing case law in your jurisdiction.

• Contract due diligence. Review your contracts for completeness (are the signatures in the file?) and accuracy. Form contracts sometimes get used for years without a thorough legal review. Ask whether the contract you use still provides adequate protection.

Authors: Leah H. Ziemba
Member Energy and Sustainability and Agribusiness, Food Processing and Distribution Groups, Michael Best & Friedrich LLP
(608) 283-4420

Porter J. Martin
Leader Corporate Mergers and Acquisitions Group, Michael Best & Friedrich LLP
(608) 283-0116