International Grain Contracts
Apr 17, 2017
Tracey Lockwood from Lansford, Pennsylvania asks about international grain contracts:
"Over the past few years, I've noticed that China frequently cancels its contracts with the US and turns away our shipments of corn/ethanol products. Is China still responsible for payment of the product in accordance with the contracts, even if they renege on the agreement? If not, how does this affect prices/revenues for the US, especially after incurring shipping costs? Are these international contracts enforceable? If not, what is the point of having contracts? Why do we continue to do business with China?"
Tracey, the short answer to your question is, "Because they can". And that's the long answer too. When you are by far the biggest buyer of commodities in the world, you play by your own rules.
Keep in mind the global forces to police such agreements like the WTO, are now out of favor. Should the US pull out of such trading organizations we would have even less power to seek redress for broken promises.
I asked the public relations people at a big grain merchandiser about how cancellations worked and received a very polite and very vague answer. There doesn't seem to be any firm rule, at least that is publicly shared.
One thing they did note was shipping companies are the ones who take the biggest hit, and carriers are starting to fold those costs into prices for cargo to China, as well as trying to include some damage clauses in their contracts.
But shipping is in greater surplus than corn or beans right now, so even global cargo carriers have little leverage.
Reading between the lines, however, this is my guess - and I do mean guess. When commodities are tight due to production problems or robust demand, grain merchandisers remember being stiffed by customers like China.
I would expect what goes around comes around applies to international grain trading.