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Forage Contracts Help Ensure Payment

A contact could help ensure that forage providers get paid for their product.

Now is the time for dairy producers to plan their 2009 forage needs, according to a North Dakota State University dairy expert.

“Forage is the cornerstone of literally every lactating dairy diet,” says J.W. Schroeder, NDSU Extension Service dairy specialist. “High feed prices and a late spring have delayed and diminished the availability of forage in our area. Weather losses to crops in states along the Mississippi River will only exacerbate the situation.”

Whether producers are selling or buying forage, they should consider entering into a forage contract, Schroeder recommends.

The two common questions forage providers have about a forage contract are:

  • How can I ensure that I’m paid for my forage?
  • What if the quality or quantity of the forage is significantly different than predicted?

Schroeder suggests forage providers secure payment for their forage with a milk assignment or letter of credit.

A milk assignment is a written authorization from the dairy producer that directs the milk buyer to pay the forage provider from the proceeds of the milk sale. The assignment specifies the payment sum and duration of payments.

“The milk assignment is simple and inexpensive, and offers low risk to the forage provider,” Schroeder says.

However, not all milk buyers offer a milk assignment because it is a voluntary service the milk buyer provides. Also, a dairy producer can terminate a milk assignment by providing written notice to the milk buyer.

“For this reason, the forage provider should consider contract provisions that require the dairy farm to provide notice if terminating the milk assignment and also should require a security agreement in addition to the milk assignment,” Schroeder says.

A letter of credit is from the dairy producer’s financial institution. It allows the forage provider to demand payment directly from the financial institution should the dairy producer fail to pay for forage. Schroeder says it’s a simple and low-cost mechanism for ensuring payment.

A forage provider also could take a lien on the forage or against livestock, equipment or other assets of the dairy farm to ensure payment, but this option is more costly and risky for the forage provider because an attorney must prepare lien documents and enforce the lien, Schroeder says. Plus, other creditors of the dairy likely already will have a security interest in the dairy producer’s assets that would take priority over the forage provider’s security interest. Also, some courts will not honor a lien on forage after the livestock consume the forage.

Considering installment payments is another option for forage providers, Schroeder says. Many forage contracts align forage payments with milk sales, which allows the dairy farm to budget payments. Typical arrangements include monthly or quarterly payments, with or without an initial payment upon delivery.

“But even with an installment payment arrangement, the forage provider should require a security agreement or letter of credit in the event payment is not made,” Schroeder advises.

To deal with the uncertainty of forage quantity and quality that creates a risk for both the forage provider and the dairy farm, the forage contract could allow for price adjustments after harvest.

“Utilize forage pricing models to identify acceptable quantity and quality ranges, then adjust prices for values that are above or below the identified range,” Schroeder says. “Many parties are combining price adjustment provisions with longer-term contracts to further minimize risks.”


NDSU Agriculture Communication

Source:J.W. Schroeder, (701) 231-7663, jw.schroeder@ndsu.edu
Editor:Ellen Crawford, (701) 231-5391, ellen.crawford@ndsu.edu
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