A spate of cases involving a Regina-based canola buyer has farmers across the Prairies paying attention to a legal drama between Saskatchewan producers and Input Capital, which has offered long-term “streaming contracts” for canola.
In early May, CBC reported on a class-action lawsuit with six producers accusing the company of predatory lending.
Morris Feduk, a producer from Melville, Sask., and the face of the lawsuit, has accused the company of taking over his livelihood since he signed a multi-year streaming contract for his 2011 canola crop. The contract offered upfront payment for a set amount of grain, essentially pre-buying the canola at a price below market value.
Eric Micheels, agriculture and resource economics professor at the University of Saskatchewan, says that’s par for the course for streaming contracts. “You know they would have to pay below market or what they would perceive to be below market price in the future, or else they couldn’t make money out of it.”
Feduk told CBC the deal was attractive at the time. The company was absorbing part of the risk, while the upfront capital was much appreciated.
But he said when that crop failed to meet his obligation, his debt was rolled into another contract the following year. By 2013, Feduk was asked to put up his land and equipment as security for the new deals. By the end of 2015, after a string of wet years and bad harvests, Feduk’s farm was in receivership and, by the next year, the company had foreclosed on his land and equipment, leaving Feduk with his home section and a much-reduced line of equipment.
It was not the first time the company’s legal battles were in the headlines. Back in March, the Western Producer reported on a dispute between the company and Terry Gustafson of Macoun, Sask. over outstanding balance and a delivery of durum, for which Input said he received profit for in error.
That case claimed that Gustafson owed almost $7.9 million, including almost $3.4 million of interest, which the farmer argued was excessive.
On May 17, a Regina court awarded Input Capital $4.4 million, including interest and court costs, in a case involving a southeastern Saskatchewan farmer who had defaulted on a canola streaming deal. The company announced the judgment May 18, although it was not clear if Gustafson was the farmer in question.
Subsequently Input Capital filed an appeal, despite the positive outcome, claiming the trial judge “… erred on several accounts with respect to the interpretation of the streaming contracts and security…”
As of press time, Input Capital had not released a statement of defence in the class-action lawsuit.
“We completely deny all of the false allegations and accusations made in the statement of claim,” company president Doug Emsley said in an email to the Western Producer. “It is our intention to defend this action vigorously in court where actual facts will matter.”
The company’s Manitoba activity is still minor, according to its last quarterly results, posted May 16. It held only nine streaming contracts in Manitoba as of March 31, 2018, compared to 84 in Alberta and 260 in Saskatchewan.
However, the cases may offer insight for Manitoba farmers, regardless of which company they are dealing with.
Winnipeg agricultural lawyer Anders Bruun said contract disputes rarely make it to court in his experience, making the spate of legal cases in Saskatchewan almost unique.
“When there’s a group that joins together, it has a little more capacity to carry the dispute forward,” he said. “In a lot of cases, the dollar value that’s at stake in a dispute… is not sufficient to make it worth hiring a lawyer, nor is it necessarily the most efficient way to solve the problem.”
In the case of many of Input Capital’s deals however, court documents have reported amounts creeping into the millions of dollars.
Feduk has acknowledged that he did not consult a lawyer before signing his deal with Input Capital, in common between other farmers in the class-action suit, according to their statement of claim.
Both Bruun and Micheels say it isn’t unusual for farmers to forgo legal advice on market contracts. Micheels said most only darken the law office door when they’re doing something like planning for succession, not the more mundane exercise of marketing grain.
He said the streaming service is seen more as an operating loan, for which they wouldn’t normally consult a lawyer. “It doesn’t scream to them that they maybe need to consult legal council.”
Bruun suggests that consulting a lawyer for grain-marketing contracts may take more than a quick 15-minute read-over. Many are badly worded or difficult to interpret, he said, and it may take a lawyer several hours to sort through. Farmers rarely go over a contract line by line, he added. Nor is it common for a buyer to explain all the terms or conditions of a deal.
Bruun said farmers have a fairly sound general knowledge of how contracts work, but few read the specifics and understand the implications of the terms and conditions. The lack of legal advice goes unnoticed in most cases, since the farmer completes his or her obligations and gets paid the agreed amount without ever having to dive into the fine clauses of the contract. When the deal breaks down however, such as in the case of a crop failure, farmers may suddenly find themselves blindsided by those details.
The lawyers suggest that farmers take several steps before signing contracts.
“First and foremost, they need to make an assessment of the financial strength and reliability of the company that they’re looking at,” Bruun said. “What is its business record? How has it been dealing with farmers in previous years; that would be quite an important thing to know.”
Equally important is for farmers to be realistic about their own capacity to fulfil the contract. Aiming too low is preferable to aiming too high and then defaulting if the crop year turns bad.
“They’re better off maybe committing less product than they would normally expect and then adding another safety margin on top of that,” Bruun said. “Because if they’re short, others will be short. The price will be high and the damages will probably be fairly high if they fail to deliver, say, that last 100 tonnes on a contract.”
At the same time, he said, it is also not in the company’s interest if farmers promise more than they can provide.
Understanding interest rates is another key.
“From a farmer’s perspective, you want to use your cheapest source of capital first,” Micheels said. “So that might be retained earnings. It might be a line of credit from a bank. It might be trade credit. It might be from one of these streaming companies. But in order to do that properly, we need to know what interest rate we’re being charged.”
Micheels urged farmers considering a streaming contract to put the deal into similar interest terms as a standard loan in order to “compare apples to apples.”
“They’re getting money up front and they’re paying it back in a crop at a quasi-agreed-upon price, but what is that? What does that work out to be in terms of an APR, let’s say? That’s going to give them a better idea of, is this a good deal for them or not and at what price is that a good deal?” he said.
Likewise, he added, farmers may not be putting enough emphasis on the worst-case scenario and their obligations should the worst happen.
Micheels said farmers may also be tempted to overreach, ultimately leading to defaults, particularly if their expansion plans have started to hit roadblocks with other lending institutions.
In other cases, farmers may hope that an injection of capital will help turn the tides of tight margins by adding investments such as more equipment, but they’ve used up much of their cash as well as bank or trade credit.
“So then this other option comes along and it seems like, ‘I can do this and I’m still able to go ahead with the expansion plan that I have in mind,’ where if you step back and look at it, you’ve been told by a number of other lenders, ‘Hold up a second, maybe you want to slow down.’”
In his interview with CBC, Feduk admitted he was financially stretched before entering his deal with Input Capital, but that he still wanted to expand.
Input Capital was expected to file a statement of defence against Feduk’s class-action lawsuit by the end of May.