(UPDATED, June 21) Western Growers has sounded the alarm over a letter from Kroger to fresh produce shippers announcing the company’s standardized payment terms of net 90 days.
The letter, which Western Growers linked to on its website, said the new payment terms, applied to “all aspects” of the chain’s business, will be effective Aug. 1.
The letter said Kroger was making the change to:
- Smooth the company’s cash conversion cycle;
- More efficiently manage the chain’s working capital in order to re-invest in business; and
- Harmonize terms with Kroger’s industry peers.
In addition, Kroger said it would offer an early payment option in return for a discount on the invoice.
Matt McInerney, senior executive vice president for Western Growers, said accepting these new payment terms directly conflict with growers’ protection rights under the Perishable Agricultural Commodities Act Trust.
Agreeing to any extension beyond 30 days permanently waives your PACA trust protection, according to Western Growers.
“Anytime any buyer is asking for terms that exceed the maximum (a) grower/shipper/seller is allowed to extend under PACA regulations, to continue to be protected under PACA Trust, is always something we’re concerned about for sure,” McInerney said June 20.
Western Grower members reacted strongly to the letter, he said. “I can’t tell you how my phone and email have lit up over the last 48 hours with this request.”
Under PACA, to be eligible for trust benefits — which gives priority on claims from growers and sellers if a buyer goes bankrupt or simply refuses to pay — a Western Growers blog post said produce suppliers must use prompt payment, which means payment terms of “PACA Prompt” or “Net 10 days”.
Sellers can only extend those terms to a maximum of 30 days.
Anything beyond the 30 days will automatically invalidate suppliers’ protection and rights to the trust provision, Western Growers said.
McInerney said no customer is worth waiving PACA trust rights.
“This is about process, and it is your process that you have the very best business practices in place that would say you need to, at all times, be protected under the PACA trust, no matter who your customer is,” he said. It is not a good precedent for any buyer to have special consideration, he said.
Noting that the produce industry supply chain has benefited from the PACA trust provision since 1984, Western Growers said best business practices mandate that growers not waive trust rights, regardless of who may be requesting the waiver. In addition, if a supplier has outside growers, they would remain liable to them for any non-payment.
McInerney said Kroger’s listing of cash flow among its reasons for the net 90-day terms does not apply to fresh produce in the same way it might apply to other non-perishable products.
“One those unique attributes of produce is our inventory, once taken into possession by Kroger turns into relatively immediate cash,” he said. “So unlike the middle of the store, where other inventory might be sitting for a rather extended period of time waiting to get sold, (produce) turns into immediate cash,” he said. What’s more, he said PACA provisions were given to protect farmers – farmers that also have cash flow needs to invest in their crops.
Kroger’s notion of paying quicker for a discounted bill hits the wrong note, he said.
“We appreciate the challenge with cash flow and because our margins are so utterly slim and the thought of taking a discount for getting paid ... seems counterintuitive and not necessary,” he said.
Western Growers advised suppliers to contact Kroger about grower concerns with the 90-day payment policy.
“We’re looking forward to, hopefully, a resolution that would recognize the need to have farmers of produce treated differently and consistent with a long-standing statute (PACA) that has worked so well for the supply chain over 88 years,” McInerney said.
The 90-day policy would likely prompt lawsuits if Kroger were to fail, said Steve McCarron, attorney with agricultural law firm McCarron & Diess in Washington, D.C. and former attorney with the USDA PACA division.
Produce suppliers have PACA trust language on their invoices, which dictate terms beyond 30 days can’t be extended to buyers.
“What’s going to happen here is that if people do supply to Kroger, under these 90-day terms, is there going to be a question that they have somehow given up their PACA trust rights?” Lawyers could challenge the applicability of the PACA trust protection by pointing out that a supplier was given notice of the 90-day terms in writing and went ahead and sold to Kroger anyway.
“Maybe that won’t make any difference, because I don’t think Kroger is going to go out of business,” McCarron said. “But if something did happen, then there would likely be some sort of a dispute if the produce suppliers weren’t paid in full,” he said. “Then the lender and or Kroger would say, well, ‘They knew what the terms were they were going to be outside the 30 days there would be no trust protection and therefore, that’s their problem.’ ”
McCarron said that scenario would be a “real mess.”
Kroger could reconsider its policy given the push-back it is getting from Western Growers and the produce industry, he said.
“Maybe there’s some way that they could try to resolve this because it’s so far out of balance just doesn’t make any sense,” he said.
An email inquiry to Kroger about the issue did not receive an immediate response on June 21.