This case study is designed to help vegetable growers understand the risks and requirements of entering into a Vegetable Supply Agreement or Contract, rather than selling produce through the existing wholesale markets.
The case study is based on a real grower and their business situation to help others understand how decisions are made.
Some vegetable growers from Western Sydney were discussing their business decisions and highlighted that failure with direct supply contracts had cost them $500,000 in recent years.
CASE STUDY : Vegetable Supply Agreements or Contracts
Some of the problems included:
- Verbal agreements that were never documented, and hence not adhered to
- Unclear quality specifications for the crop
- Having product rejected without just cause
All of which have resulted in growers thinking that contracts are just too hard, and that selling through the wholesale markets is easier. This is despite there appearing to be good financial opportunities available through sales to contract processors.
The historical problems for these growers include two main issues:
- Verbal contracts (with companies lacking integrity), and
- Insufficient detail and communication of the quality specification and what occurs when the quality specification is not met.
A contract or a supply agreement is simply a document that formalises a relationship between a buyer and a seller of goods and gives details as to the nature of the exchange and what will happen when particular events occur, such as if the crop does not meet a specification.
If either party does not meet its obligations, as outlined in the contract, then it can become very serious, sometimes with legal and financial consequences.
The relationship between the buyer and seller still needs to function effectively with good communication and both the buyer and seller need to act with honesty and integrity.
It can be unwise to enter into a supply agreement with a company that does not have a solid financial position or a reputation of poor relationships with growers.
Why enter into a supply agreement ?
A supply agreement is useful even if it is not the entire solution for a vegetable business, e.g. it may only account for half of a businesses production with the balance going through the central markets.
What impact will this have to my business ?
There are good opportunities with formal supply agreements, but at the end of the day they still only formalise a relationship between a seller and a buyer.
The impact to each business needs to be considered:
- Is the price satisfactory ?
- Are the quality parameters reasonable ?
- Is there unnecessary risk involved ?
- Are my QA systems adequate ?
Best practice contract management
Some tips for managing supply contracts include:
Ensuring a good strategic fit between the parties. Make sure that your objectives are compatible with the purchaser.
Using the supply agreement as a basis for discussing different scenarios like quality, delivery delays, payment, quality and pricing.
Not accepting handshake deals or verbal agreements.
Undertaking a due diligence process on the purchaser. Make sure that they are a legitimate business with ability to pay for the goods they purchase from you.
Understanding the purchaser costs of production and market that they operate in so that negotiated prices are appropriate and sustainable.
Understanding the sliding scale of cost of production as it relates to variances in production and quality.
Remembering to review dates for the supply agreement and make notes in your diary as to when you need to complete any actions.
Ensuring transparency in negotiations and discussions.
This case study has been facilitated by Horticulture Australia Limited (HAL), in partnership with AUSVEG, through the National Vegetable Research and Development Levy. The Australian Government provides matched funding for all HAL R&D activities.
This business case was produced and edited by RMCG (ph: 03-9882-2670). RMCG produces these business cases with the expectation that users exercise their own skill and care with respect to its use. Before relying on or altering any business practices, users should carefully evaluate the accuracy and relevance of the information for their purpose and should obtain appropriate professional advice relevant to their particular circumstances.