Grain trading in a bad economy

by World Grain Staff
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The world of international grain trading is changing fast. The global economic crisis and its aftermath have had a major impact on how international deals are done and how the law views international contracts when there’s a problem. Speakers at the Global Grain 2009 conference in Geneva, Switzerland in November gave their insights into some of the details.

In a volatile market and highly difficult economic conditions, people find they are in contracts they would like to get out of. But it’s difficult to persuade a judge that your contract should be invalid just because it no longer looks like a good deal, Brian Perrot, partner in the law firm Holman Fenwick Willan, told the conference. "It’s very difficult to rely on a bargain that’s gone sour to escape the contract," he said. "The law will not step in to save the parties from bad bargains."

He discussed the concept of "frustration," which can end a contract. One typical example is where the goods have been destroyed. Another is where the requirements of the contract become impossible or illegal, as in the case where war breaks out and fulfilling the contract becomes trading with the enemy. But what a lot of people have been asking their lawyers recently is whether they can claim that contracts that have turned into bad business can be described as "frustrated," so that they can avoid having to carry them out. "It is seldom successfully invoked," he said. "You fix a price and you take a gamble. Somebody wins and somebody loses."

There are a lot of cases in which people are trying to argue otherwise "We have $300 or $400 million in London resting on that concept," he said. "All being well, they will lose."

There’s also the concept of Force Majeure. This is in the GAFTA (Grain Feed and Trade Association) 100 contract used for international grain trading. "Sellers shall not be responsible for delay in shipment of the goods or any part thereof occasioned by any Act of God, strike, lockout, riot or civil commotion, combination of workmen, breakdown of machinery, fire, or any cause comprehended in the term ‘Force Majeure.’ "

"Does that clause cover economic hardship? The better view is that it doesn’t," he said.

The potential solution to this is to put an economic hardship or Force Majeure into the contract, but it’s not easy to come up with something which the courts will accept. "I see many hardship clauses that don’t make the grade," he said.

He quoted the judge in the 1923 case of Larrinaga & Co vs. Societe Franco Americaine des Phosphates. "No one can tell how long a spell of commercial depression may last; no suspense can be more harassing than the vagaries of foreign exchanges. But contracts are made for the purpose of fixing the incidence of such risks in advance, and their occurrence only makes it the more necessary to uphold a contract and not to make them the ground for discharging it." Lord Sumner had said.


One of the most dramatic changes to the law governing contracts in recent years has been the overturning of Rule B, a process of attaching a defendant’s tangible or intangible property in any United States District Court. He described this part of the Federal Court Civil Procedure Rules as a "very useful tool for securing maritime claims."

The way it worked was that if your contract was denominated in U.S. dollars and you could persuade a U.S. judge that it was a maritime claim, you could intercept the funds of the other party if you thought there might be some risk. "We tried to make them as wet as possible," Perrot said. "Once you were getting a reputation for being Rule B’d to death, it became self-fulfilling.

"Judges in the (U.S.) became sick of Rule Bs," he said. "It was actually damaging the U.S. currency. The existence of the rule was a good reason to try and avoid having contracts denominated in U.S. dollars."

Then came "Shipping Corporation of India vs. Jaldhi," an Oct. 16, 2009 ruling that electronic fund transfers are no longer subject to Rule B attachments. He described Rule B as "seriously tamed."

"You can still use Rule B for a maritime claim where there is real property in the U.S.," he said. "What you can’t do is intercept funds passing through. The Rule B tide has changed."

Rule B had been a quick and relatively cheap security process, and he warned that the maritime industry may have to look to the arrest and injunction regimes of other jurisdictions. The full effect of the ruling is still unclear. It is also not clear whether other security arrangements put in contracts can now be challenged. "We’ve had more opinions than we can cope with," he said.

He also looked at the effects of the global economic meltdown on Forward Freight Agreements (FFA). As many of the parties became insolvent, there were mass defaults. "The market collapsed," he said. "That really did put the contracts and the parties genuinely under serious pressure."

That meant parties were looking for loopholes to exploit so that they could get out of the contracts. "The great problem with the market was the absolute lack of confidence and trust," he said.

He predicted more regulation and changes to the system. "The new world on the FFA market will probably be a cleared world," he said.

However, that raised the question of whether there was a contract of a trade that had not cleared. "My own view is that there is a contractual commitment," he said.


Although the law is looking like more of a minefield, the international market in dry bulk shipping has picked up well. Chris Tsirikos of PwC in Piraeus, Greece called 2008 and early 2009 the most volatile period the market had ever seen. "The dry bulk market has shown extreme volatility recently and yet faces challenges which are hard to ignore," he said. "What we have been seeing recently is the formation of more private funds set to up to invest in shipping."

"Although the uncertainty is by no means over, the dry bulk market has seen a few positives over the last six months," he said. "Earnings in dry bulk have improved significantly since the beginning of the year. The financial crisis was not responsible for the fall in shipping markets. It simply added to make things worse." He explained that dry bulk shipping is heavily dependent on iron ore and coal, with the total grain trade equivalent to 4,000 to 5,000 voyages a year. "That’s about three voyages for each vessel," he said. "The relation between charter rates and vessel values is obvious. Vessels are a commodity and vessel charter may be managed as a commodity as well."

At current rates they are making money. "The break-even for a five-year-old Panamax is about $10,000 to $12,000 a day," he said. "Today we’re looking at $20,000 to $25,000 a day. We are actually quite good."

Tsirikos believes that the dry bulk market’s bull trend could stay around for a bit longer. "The Chinese factor is the reason for the surge," he said. "Many vessels that were laid up recently have yet to position themselves. This may be the tomorrow that saves the lives or extends the lives of several small shipping companies. Everything looks rosy for the dry bulk sector."

However, new building was likely to put an end to price rises. "We are headed for lower rates in the medium term," he said. "The market is expecting lower rates (in 2010) and contracts are pricing at these levels.

The credit crunch has meant some cancellations. "Traditional loan financing has all but ceased," he said. "Banks have said that they’ll stand by their existing customers, but the tap is off. It is not a matter of predicting the future; it’s a matter of being best prepared."


One place dependent on shipping to sell its grain is Western Australia, and the end of the single desk system has made its work that much more complicated, Andrew Crane, CEO of the Perthbased CBH Group, one of the trading companies working under the new system, told delegates.

"The single desks have certainly gone," he said. "Putting together a cargo became a more complex business.

"More choice means more confusion for the growers. One industry that blossomed as a result of deregulation is consultancy."

"No one lives in Western Australia," he said. "Everything we grow gets put on the ship. In Western Australia, there’s not a tradition of storing on farm. Growers delivered straight from the paddock to the storage facility. They are planning to build more. This will give them more time to make their marketing decisions."

In the first year, probably considering such a momentous change, things went reasonably well, he said. But having replaced a single desk with 20 buyers/sellers, he predicted future consolidation. That could mean fewer than five major companies within a few years.

Chris Lyddon is World Grain’s European editor. He may be contacted at: