Short on a grain contract? What the buyout will cost
When the crop comes up short, the buyer still needs the grain you contracted and charges you what it costs to replace it. Put in your own numbers and see the likely bill before theirs arrives, and what to ask them for in writing.
“Today’s price” is the buyer’s current bid for the same crop, grade and delivery month as your contract: the price they would pay to replace your grain. If you don’t know the fee, ask for it; SCIC’s worked example uses $30 a tonne.
| What it’s made of | Per | On the shortfall |
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What to ask the buyer, in writing
The buyout changes every day the market moves until it is settled, so get the terms on paper. This list updates with your numbers:
How a buyout is worked out
Most grain contracts set the damages for not delivering in advance, as a formula. The Manitoba Co-operator describes the usual one as “an administration fee plus the difference between the contract price and cost of either buying a replacement product or buying out of a hedge position.” Your contract’s default terms say which replacement price is used and when it is fixed.
So the estimate here is: the shortfall, times how much today’s price is above your contract price, plus the fee on every short tonne or bushel. If today’s price is below your contract price, the price part is zero here; whether your contract credits you the difference, or charges only the fee, is in its default terms.
A worked example
The numbers loaded above: 100 tonnes of canola contracted at $650 a tonne, and the crop only allows 70. The buyer’s bid for the same month is now $720, and the fee is $10 a tonne.
- Shortfall: 30 tonnes.
- Price difference: $720 − $650 = $70 a tonne, so $2,100 on the shortfall.
- Fee: 30 × $10 = $300.
- Estimated buyout: $2,400, on top of not being paid for the 30 tonnes you couldn’t grow.
Every $10 the bid moves before it is settled changes that by $300. These figures are an illustration, not current prices.
Act early
“Terminating a contract as early as possible can reduce losses,” as the Manitoba Co-operator puts it: once you know you will be short, tell the buyer and ask for the buyout terms, rather than waiting and hoping the contract won’t be called. Check your contract for an Act of God or production clause (some contracts are tied to the acres, not a fixed quantity), and ask whether the shortfall can be rolled to next crop year and what that costs.
AgriStability
In Saskatchewan, SCIC says a contract buy-out cost is an allowable expense for AgriStability when the contract was reasonable for the farm: for a crop and an amount it could reasonably produce. Keep the buyer’s written calculation with your records, and check with your provincial administrator or accountant how it is reported.
Questions
Can I fill the contract with grain I buy from a neighbour?
Only if your contract allows it, so ask the buyer first. SCIC’s AgriStability page shows how buying grain to fill a contract is reported, which tells you some farms do it; whether your buyer accepts it, and at what grade, is up to them.
What if my contract is a basis or futures contract?
The same idea applies, but the replacement cost depends on which part was priced. The buyer may need to buy back a futures position as well as replace the grain. Ask for the calculation line by line; this page works on a flat price per tonne or bushel.
Is the fee always charged?
It depends on the contract and the buyer. Ask for it in writing, along with whether interest is charged on an unpaid buyout and from what date.
Keep every contract’s position in one place
GrainPosition tracks your grain contracts, deliveries and delivery windows against what’s in the bin, so a short contract shows up while there’s still time to act, and the buyer’s settlement is checked against the contract when it comes.
There is a live demo with nothing to sign up for, and a free Excel workbook to take away.
Have a lookSources and method
Method: arithmetic on the numbers you enter. Shortfall is contracted minus delivered. Estimated buyout is the shortfall times today’s price minus the contract price (zero if negative), plus the shortfall times the fee. A roll charge, if entered, is the shortfall times that charge. No prices are fetched.
Sources: Rebecca Hannam, “Four things to know about grain contracts”, Manitoba Co-operator, August 25, 2022. Saskatchewan Crop Insurance Corporation, AgriStability: contract buy-outs.
Were you paid right on your last grain settlement?
Send me a photo of the settlement, and the contract if you have it. Within a day I’ll email you back what each line is, what’s worth asking the buyer about, and any grade or payment deadline that’s still open. Free, no account.
Ruslan Glick, Winnipeg. Not a farmer, so I check against your contract and the grain rules, not opinions. Top Crop Manager wrote about GrainPosition.