Posted: Thursday, June 09, 2011 9:00 AM
Carol Ryan Dumas/Capital Press
Clark Kauffman, past president of the Idaho Association of Hay Growers, said growers should hold onto their hay until buyers pay up.
Experts stress need for solid contracts, nudging buyers to make payments
Industry insiders say high hay prices, short supplies and an ailing economy have increased the chances for fraud and payment problems on both ends of sales transactions.
But experts say there are common-sense precautions growers and buyers can take to help prevent them from becoming victims.
While hay often trades in large amounts on forward contracts, payment on delivery is a good practice to protect both buyer and seller.
Growers have to take pre-emptive measures, said Clark Kauffman, a Filer, Idaho hay grower and past president of the Idaho Association of Hay Growers, now the Idaho Hay & Forage Association.
"Get paid before you 'sell' the hay," he said.
"My policy is unless it's someone I have a trusting, long-term relationship with, I get (payment for) 90 percent of my estimated weight before anything leaves the farm," he said.
As for selling to someone he doesn't know, he's careful and would never keep delivering without payment, he said.
"If I deliver a ton or two and don't get paid, then I'm out one or two ton, not 100 tons," he said.
In addition, while he might sell to people he knows and trusts with only a verbal agreement, admittedly not the best practice, he never deals with someone he doesn't know without a written contract, he said.
He also suggests taking things a step further with someone a grower doesn't know or thinks is having trouble.
"You're selling a high-dollar product, why not get a credit reference from their bank?" he said.
"They have to be extremely business-like with their relationships with other businesses," said Roger Cramer, Northwest Farm Credit Services senior vice president of risk management.
Just like a bank would require information in a loan application, they might ask for financial information, tax returns, financial statements, sources of income, and how long the person has been in business, he said.
"If you're selling on credit, it's your prerogative to ask for that," he said.
Credit reports are another avenue but, ultimately, people have to determine what level of due diligence they want to perform, he said.
Considering the difficult economy in the last two to three years, he thinks people would be inclined to increase their due diligence or, in a grower's case, have buyers pay in advance, but that's not typically how things are done in rural areas, he said.
"My two best pieces of advice is to be extremely business-like and use legal counsel, even if in the past they've done business on a more informal basis," he said.
For growers, "the fundamental question is do they want to extend credit," said Dawn Justice, president and CEO of Idaho Bankers Association. "If they do, they have to consider there is a risk and they might not collect on the end."
Credit agreements are attractive because growers can charge more for the service, but growers need to look at the risk and whether they can sustain that risk if it happens, she said.
If they decide to extend credit, they should leverage the risk by taking incremental steps in payment and delivery, she said. If a grower delivers the first load of hay and hasn't been paid, he should demand to be paid in full for both loads before making a second delivery.
In "rolling the dice on the whole load, you have no leverage, you're just out the money," she said.
The same could be said for buyers who pay a large amount in advance for hay.
Get a contract
There should always be something in writing, Justice said.
"That way everybody knows what the deal is and has a clear understanding," Justice said. "If you as a businessman decide 'I'm OK with a handshake,' if things go bad, you might not have a leg to stand on."
Kauffman agrees on the benefits of a contract.
"A contract would probably give you better standing in court, but it's only as good as the people that sign it," Kauffman said. "So I go back to 'get paid and then deliver the hay.'"
Folks in agriculture typically give those they deal with every chance to make good on a commitment, but everyone Capital Press spoke with said these are risky times.
There's no formula to draw on to determine when it's time to pull the plug on the deal, Justice said.
"Whether 'it's in my best interest to carry on a little longer or in my best interest to cut my losses' is impossible to say because every business is a little bit different," she said.
Kauffman said honest, hard-working people can get behind on a payment and it's acceptable to work with them. But growers can keep the hay in their yard while letting the buyer catch up before he receives any more, he said.
While some state agriculture departments in the West require licensing and bonding for hay dealers, others don't. But even bonding doesn't offer a lot of protection for the grower, covering only a small percentage of the value of what a hay grower might have "sold."
Idaho repealed its licensing and bonding law in 2009 due to lack of consensus among producers on the future of the program. Oregon didn't renew its requirements when they expired under a sunset clause in the 1990s. Washington and California both require hay dealers be licensed and bonded.
While the bond wouldn't cover much of what a grower might have delivered, the departments do provide listings of licensed and bonded dealers, as well as complaints against dealers. The departments have the ability to revoke licenses and investigate complaints.
A grower also has the option to file suit against a buyer in the case of wrongdoing.