Diamond typically enters into exclusive agreements with nut growers where Diamond agrees to purchase the grower's entire production and the grower agrees to only sell to Diamond.
The agreement is for multiple years. The entire production is delivered at the end of the growing season. Diamond pays the grower over a period of 12 months after the product is delivered and Diamond determines the price it pays to the grower.
Not a bad deal for Diamond. Diamond is a solid company with a near term pimple.
Not very complicated.
Some growers may have sellers remorse if the price of nuts rise significantly. (which they have). But, a contract is a contract.
In many contracts in agriculture the contract covers not only the agreed upon price but also certain covenants governing how the crop is grown such as fertilizer and crop protection management.
Going forward Diamond will amend the terms of the contract to pay the growers closer to the domestic wholesale prices for their walnuts, and they'll raise prices on their products sold to consumers to make up for the extra costs. Planters and fisher are raising prices as well
EXCERPT FROM REUTERS BLOG FROM 9/27 REFERS TO COMMENTS FROM IR PERSON AT DIAMOND REGARDING MOMENTUM PAYMENTS.
Stranger still was a substantial follow-up payment by Diamond to walnut growers just two days after its Aug. 31 outlay. Diamond called this a “momentum payment,” a term new to growers, who say they’re not sure whether the extra check means they’re getting a better price for last year’s crop or that cashing it obligates them to deliver walnuts for the coming year. Diamond’s IR chief says the period to which the September payment applies is “somewhat of a blur” because the company sees it in the context of its three, five and 10-year contracts with growers.
Say you are a 3 million lb. walnut grower... Your neighbor is also... He sells his nuts for $1.20/lb. and receives $3,600,000 for his crop... You, great guy you are sell to Diamond, and receive $.85/lb. and gross $2,550,000. Who cares about the contract, you walk!