The down economy has had a ripple effect on the wine grape industry. Fewer restaurant meals and reduced entertaining budgets have slowed wine sales, backed up inventories, and bankrupted some wineries and distributors. All too often, growers who delivered grapes in good faith are being paid slowly, and, sometimes, not at all.
While there are always risks associated with grape sales, times of late have been more uncertain than before. But there are strategies and tools available to growers to improve their chances of getting paid, said Jesse Lyon, attorney with Davis Wright Tremaine, in Portland, Oregon. Lyon is sharing those tools during a series of “Getting Paid” seminars sponsored by the U.S. Department of Agriculture and the Washington Wine Industry Foundation. The first was held in Grandview in November in conjunction with statewide grape talks, with two more scheduled in the next two months.
The decline in consumer food and wine purchases has trickled down to the farm, causing a cash crunch for some growers who aren’t getting paid in a timely manner. Banks are asking for more information from grower clients, and they are looking closely at farm budgets during financial reviews. Grower access to capital and loans is more limited than in the past.
“Because of the realities of today’s business environment, we are seeing business and farm practices changing out of necessity, causing all of us to look afresh at our practices,” Lyon said. Many of the tools he outlined during the seminar, such as grape sale and vendor contracts, are not just good business practices but are being requested by banks, he said.
Brenton Roy, diversified grower from Prosser, Washington, echoed that most of the strategies covered—using agricultural producer liens when appropriate and calling on the protections afforded by the Perishable Agricultural Commodities Act (PACA) are good business practices. “It’s a matter of learning how to use the tools,” he said.
Roy of Oasis Farms said his company was impacted by the bankruptcy of a 30,000-case winery, but because they used the Washington State agricultural producer lien, the company was in the front of the line and was the only one who received close to the full amount that was owed.
“Using the agricultural producer lien is not that aggressive and can be done in a way that’s professional and inexpensive,” Roy said, adding that many growers are hesitant to use tools available because they worry about straining relationships with existing or potential winery clients. But he believes that using the state agricultural lien takes some of the pressure off growers, allowing them to be more flexible in dealing with the paying party because they know they are secured.
Roy encourages growers to try the lien and security interest tools once, on clients that are the least likely to pay, and see how they work.
Business relationships are built on trust and personal interaction, and though other factors are involved, that personal contact can be leveraged at times to speed up payment. Lyon explains that wineries are more apt to pay those with whom they have a personal connection. But with more than 650 wineries bonded in Washington, there are a lot of new entrants in the industry wanting to purchase grapes and a lot of new faces for growers to develop relationships with.
Good business practices require that an assessment be made of the new business relationship before agreeing to sell product. Who has the winery done business with before? Who is the winery’s banker? Are there court or public records of interest? What are the payment assurances? Ask for, and check, grower and supplier references.
Lyon suggested that growers have conversations with other growers to learn if a winery recently expanded or may have past financial problems. Unfortunately, there’s not a clearinghouse that can provide growers with background information, he noted. Payment has become such a problem at the wine distribution level that a Web site called Nopay winedistributor.com was launched to list wine distributors who aren’t paying wineries.
There are various reasons why a winery stiffs a grower, ranging from revenue or credit problems and lack of discipline on their part to legitimate misunderstandings about product performance. Or it could be that a grower lacks leverage because the grapes were a spot sale. “Sometimes, it’s because buyers understand that farmers hate to go after money,” he said.
Growers need to have a strategy in using the tools available to them, Lyon said. Written contracts, invoicing on time, using reminder statements and letters, lawyer demand letters, and perfecting liens and trusts are tools that can work together to help a grower get paid. Attention to dates is important as each type of lien has different dates and time frames for payment and filing.
Common law provides that growers have a right to be paid, regardless of a written contract. But a contract can help clarify the business deal, specify the exchange of promises, and provide terms that the law doesn’t. He advises growers to have a “quickie” form on file that can be used for unplanned sales with brokers and wineries.
“Bankers want to see that you have discipline and have contracts with your business relations,” Lyon said.
Even without a contract, language stating that interest will be collected on the unpaid balance and attorney fees, in the case of dispute, will be paid by the losing party can be printed on the bottom of invoices and delivery receipts, Lyon said. “The buyer receiving the invoice has to object to the language. If the only documentation is a bill of lading and invoice, at least it gives the grower some coverage.”
Three types of liens and security interest tools are available for grape growers: Uniform Commercial Code security interest; state agricultural producer lien; and the PACA Statutory Trust. PACA is used heavily in the tree fruit industry, yet few grape growers realize that it covers them also, he said. And even fewer wine producers purchasing more than 2,000 pounds of grapes any one day understand that they are required to be licensed under PACA.
Lyon describes the Washington State agricultural producer lien, also called a processor’s lien, as a “gift” from the Washington State legislature. “By virtue of being a farm producer and selling to a processor, you get a lien,” he said, adding that the lien attaches the moment fruit is delivered to the processor, automatically securing a first-priority interest in the processor’s inventory and accounts receivable. “And that arises just by showing up, even if it’s not in the contract.
“The ag lien puts the world on notice that I’m not just any secured party, I’m a grower. It means that you jump ahead of everybody, including vendors and banks.”