Biodiesel Magazine, ND
07-10-06
Legal Perspective
Feedstock: Procurement contracts must help manage risk
By Mark Hanson and Todd Guerrero
One of us recently had lunch with a longtime colleague, Don Hofstrand, from
Iowa State University and discussed the changing landscape of grain supply
and demand, particularly as it relates to renewable energy consumption. It made
us reflect on the maxim, “good facts obscure the law,” and the corollary “the law
is defined in times of changing facts.” The surge in renewable fuels is premised
on the abundant, renewable supply of grain feedstocks at commercially stable
prices. The dramatic changes in supply and demand, occurring within 50 miles of
biofuel facilities throughout the Midwest grain-producing states, are also having
local and regional effects on grain feedstock. Because of these changes, more
facilities are revising their practices, procedures and risk assessment when
assessing start-up potential, expansion and ongoing operations.
Many consultants and databases are available to conduct grain availability
studies within a given area. Some studies even assess the changes of corn and
soybean plantings and availability. In areas with new consumption sources, it
may take a year or two before area supply and demand adjust.
While many developers and facilities assume grain availability, lenders and
financing sources are requiring contracted grain procurement. The Uniform
Commercial Code (UCC) generally covers grain procurement contracts where
grain is defined as “goods,” similar to commercial transactions. Federal and state
clear title laws, however, have a separate procedure for obtaining and clearing a
security interest in grain sourced from producers, which generally will not be
identified as part of a UCC search. Grain procurement agreements should have
provisions about purchasing grain free and clear of liens, with a recognition that
undisclosed liens may subject the buyer to “double payment” if the federal clear
title provisions are not complied with. The grain clear title laws do not cover
products manufactured from grain, such as oil, but in times of short grain
supplies, oil suppliers who contract grain purchases may nonetheless be at risk.
To be enforceable, the language of feedstock procurement contracts generally
needs to describe the purchase/sale transaction, price, quantity and delivery
requirements. Developers sometimes propose to “lock up” their supplies with
“requirements contracts” or contracts that generally provide that the supplier will
meet all of the feedstock requirements of the facility at market price. Vague
language will make the contract more difficult to enforce. We generally
recommend using ranges of volume and pricing to reflect the parties’ intention. If
it is the intent to purchase feedstocks at any price, that intent should be clearly
stated.
For many contracts, failure to deliver feedstocks will result in direct (the
difference between the contract and the market price) and consequential
damages (loss resulting from not having the feedstock, particularly if substitute
feedstock cannot be acquired). Some contracts waive these provisions or specify
liquidated (specified and limited) damages, which need to be carefully
considered.
Feedstock procurement and pricing presents a substantial risk profile in all
biofuels facilities, particularly for biodiesel. A timely review of these risks is
necessary, and the risks must be addressed in feedstock procurement
agreements.
Mark Hanson and Todd Guerrero are members of the Agribusiness & Energy
Practice Group of Lindquist & Vennum PLLP, a leading provider of legal
assistance on renewable energy projects throughout the country. They can be
reached at (612) 371-3211.