Marketing contracts

Marketing agreements and contracts outline intentions to deliver certain volumes of products for an anticipated price.  They can be a useful tool for producers to manage financial risks buy securing sales, catering products for a particular customer, managing cash flow and securing debt financing by demonstrating future sales.  Contracts can also have additional benefits such as increasing communication within the food chain, sharing of production knowledge and developing long term-relationships.   Entering into contractual relationships can ensure that farmers are producing what the market wants. 

The use of contracts can be critical for businesses that purchase and process, package or redistribute original inputs.  Marketing cooperatives, feed mills, food and beverage processors–and even food service establishments–can utilize contracts to secure supply, reduce costs, increase efficiency, reduce waste and acquire inputs based on exact specifications.  Contracts can be very useful for products that are in high demand.  

Given price, volume and quality variability, contracts are becoming a more common tool for farmers to secure their inputs.  In the case of feed it can provide price stability and guaranteed access given high demands from both food and energy markets.

Contract components can include:

• targets for quality, specifications, volumes and delivery dates
• deliverables based on number of animals, live or hanging weight for livestock; acres, tonnes, cases or specifications like protein or sugar content for crops.
• quality or specification targets
• incentives for exceeding targets penalties for not meeting targets
• provisions for cancellation and crop failures
• payment terms and schedules
• conditions such as site visits, inspections and testing of samples
• requirements for storage, transportation and post-harvest handling
• phases (pre-season communication, contract to buy/sell, pre-harvest contact, post harvest verification, etc…)
• specification of inputs or production practices (such as animal welfare)

Inclusion of different elements can reflect trust, track-record and credibility of the parties.  Contracts involve trade-offs and shifting of risks.  For example, a meat processor requires consistent, high flavour and uniform sized steaks for their customers – white table cloth restaurants.  They may use grid pricing to pay the best price for desired sizes and fat marbling.  Grain producers may wish to base the contract on acres, rather than tonnes, to hedge against poor yields.

Processors can manage risks by matching purchase contracts with sales contracts.  Contracts can also ensure that processes work smoothly.  Different phases and ‘check-in dates’ can enable all parties to adjust if yields or quality are low, enabling the processor to purchase additional products.  Defined delivery dates can ensure that the volume of purchases does not exceed storage, transportation capacity and ‘just-in-time delivery’.

Some processors publish a forward contract offer (purchase interests) that can contain volume and pricing information.  Here is an example from Homestead Organics http://www.homesteadorganics.ca/contract.htm

Contracts generally have a value that is slightly below market prices, reflecting trade-offs in risks and reduction of marketing costs.  Effectively using contracts requires frequent communication, experimentation and experience.  Contracts can be the foundation for closer cooperation and the formation of Value Chains.

Resource:

Farmers’ Use of Marketing and Production Contracts
http://www.ers.usda.gov/publications/aer747/AER747a.PDF

University of Minnesota Extension: Cash marketing Tools
http://swroc.cfans.umn.edu/SWFM/Files/mrkt/cashtool.pdf

Alberta Agriculture:
Value-based Marketing of Cattle:  More Than Just Carcass Quality
http://www1.agric.gov.ab.ca/$department/deptdocs.nsf/all/agdex3686/$file/420_40-2.pdf?OpenElement