The abrupt crash in commodity and fertilizer markets this past year triggered a wave of bankruptcies and frayed partnerships. Dozens of ethanol reorganizations short-changed farmers who had forwarded contracted with them; the bankruptcy of the largest poultry integrator in the country left some contractors without a market; and both dealers and farmers were stung when fertilizer depreciated 70 percent in one year. Personal reputations and hand-shake deals could end up being very costly, two attorneys warned attendees at the National Agricultural Bankers Conference this week. In fact, they argued that an attorney's $250 per hour rate at the onset of a business deal would look cheap if it prevented some of the financial fallout they're seeing in contract disputes now.
In a briefing on counter-party risk--the risk that the party signing a contract won't perform--Jacob Bylund and Michael Stewart of Faegre & Benson had an important message for farmers and agribusinesses at the National Agricultural Bankers Conference in San Antonio this week. Don't contract with the Easter Bunny, or his close relative, Santa Claus.
By that the ag attorneys mean a limited liability company (LLC) or limited liability partnership (LLP) that doesn't include a personal guarantee on big-ticket obligations. Take a pork producer who raised weaner pigs under a five-year contract and had borrowed to build a $5 million building to fulfill his side of the deal.
"The only thing worse than having a semi-load of weaner pigs be rejected [when finishers couldn't make money] was discovering his buyer had the legal status of the Easter Bunny," says Bylund.
LLCs are often paper shells that don't own any assets to back their business, not the good person who attends your church or coaches your kids' baseball team or plays golf at your club, Bylund observes. Other lenders say these pork contracts--especially farrowing contracts--are being shredded faster than they were written, and that 30 percent or more are in dispute in Iowa's most concentrated livestock counties. Add to those damages custom harvestors or crop producers who supplied dairies with feed and forage. Contract risk won't be an isolated incident in agriculture in 2009 or 2010.
Before entering a business relationship, clearly identify the exact person or legal entity being contracted with from the outset of the relationship. He advises that you obtain a personal guarantee on all contracts over the size threshold you'd feel uncomfortable losing. Whether that's 20,000 bu. or 200,000 bu. depends on your risk tolerance.
"If you're dealing with an LLC and you don't have a personal guarantee, run away," Bylund says.
He also explains how judges can negate the $7 corn contracts you sold to a bankrupt ethanol plant, why written contracts are far preferable than requiring deposits for fertilizer orders and why you'll see more signed confirmations when you sell grain. Subscribers can read the full story, "What Ag Learned from Price Shock" on the Farm Business page.
© Copyright 2009 DTN. All rights reserved.
