Everyone talks about the weather. With a record drought sweeping the Midwest, lawyers in the region are doing something about it.
Some are scrambling to renegotiate contracts for clients including farmers, lenders, food processors and ethanol producers. Many of these lawyers anticipate defaults on those contracts that could lead to arbitration, litigation and, in some cases, bankruptcies. Additional disputes could arise over crop insurance claims.
“It’s fair to say there’s pressure being put on the whole supply chain because of the drought and the increasing commodity costs, and that is going to result in defaults, disputes, arbitrations and litigation,” said Kim Walker, head of the national food and agriculture industry team at Faegre Baker Daniels in Des Moines, Iowa. “For us, our teams are already becoming engaged with those clients in dealing with issues resulting from the drought.”
The U.S. Department of Agriculture has declared drought disasters in more than half of the counties in the United States. Because of shortages resulting from crop failures, the price of corn has surged upwards by 50 percent. That’s bad for everyone in the food supply chain.
“The whole apple cart gets upset when you have this severe of a drought,” said Frank Pechacek, a partner at Willson & Pechacek in Council Bluffs, Iowa.
“It’s fair to say anybody in the producer community — grain, livestock, a major processor of a commodity like ethanol — is feeling this intense pressure because of the high corn prices,” Walker said. “We clearly anticipate an increase in arbitrations and litigations throughout the supply chain because the producers are not able to meet their obligations to supply their commodities.” Agricultural lenders and investors also stand to lose out, he said.
In some cases, he said, food processors should be prepared for grain producers to file for bankruptcy protection. At Faegre Baker Daniels, the bankruptcy and workout teams are bracing for an increase in work associated with such failures, he said.
Jeffrey Masson, a partner in the St. Louis office of Thompson Coburn, said most of his clients have negotiated buyout and insurance protection. Still, he’s been fielding calls from growers who want to file claims against chemical companies because their herbicides aren’t effectively killing weeds, which are competing for scarce water with their crops.
“A lot of what I’m seeing on my desk in the last four to six weeks are complaints about some herbicides lacking efficacy, not working, not functioning,” he said.
TOUGH ON ETHANOL
Of those most harmed by the drought, ethanol producers are particularly at risk. Robert Hensley, a partner and co-chairman of the agribusiness and cooperative law practice group at Dorsey & Whitney in Minneapolis, said several investment and repair projects involving ethanol plants have been put on hold as corn prices rise. In the United States, ethanol is made primarily from corn.
Lenders have halted plans to support the opening of new plants in the past few months, he said. “That work is fairly slow, and I don’t think a lot of those projects are moving forward at the price of corn right now,” Hensley said. “It’s going to be a tough year for ethanol plants in general.”
Added to the cost of corn is the increasing pressure on the U.S. Environmental Protection Agency by poultry and cattle producers, who are being forced to pay more for feed due to the high corn prices, to lift government mandates requiring that gasoline be mixed with ethanol.
Another industry affected is hydraulic fracturing, or “fracking,” the process of extracting oil and natural gas by shattering resource-high shale rock formations using high water pressure. Masson said a lot of fracking takes place in Kansas and Colorado, where farmers have been selling water from their wells to oil and gas companies.
“With drought conditions and water conditions lowering, these farmers are pulling out from that and not selling them water,” he said. “So you’re seeing a quick slowdown in the number of fracking wells that are going to be out there, and that will impact farm income.”
Federally subsidized crop insurance could make the difference in whether farmers and other producers meet their financial obligations this year. Tom Zacharias, president of National Crop Insurance Services, a lobby for crop insurers, estimated that this year’s harvest could produce more than $20 billion in insurance claims. To alleviate immediate costs for the policyholders, insurers this month agreed to provide a grace period for their 2012 insurance premiums.
Pechacek, whose firm represents several crop-insurance companies, said farmers typically insure a percentage of their crop production — the higher the coverage, the higher the premiums. Given the breadth of the drought, most producers will make claims, he said — and that could lead to more disagreements than usual. “If the producer is unhappy with that, they can file a lawsuit,” he said.
Most insurance adjusters won’t assess crops, however, until the end of harvest season, which begins in late September and continues through November, he said. The claims period should begin to wrap up in December. “At this point, from a law office standpoint of the drought, the work we will have of it won’t hit until next year,” Pechacek said. “So, 2013 could be a comparably busy year.”
Amanda Bronstad can be contacted at firstname.lastname@example.org.