Drake University Agricultural Law Center Agricultural Contracting: A U.S. Perspective Prof. Neil D....

Drake University Agricultural Law Center

Agricultural Contracting: A U.S. Perspective

Prof. Neil D. Hamilton, Dwight D. Opperman Chair of Law and Director,

Agricultural Law Center, Drake University Law School


Issues and Lessons for India to Consider from the U.S. Experience with Contracting

Does the nation want to regulate the development and use of production contracts to protect growers and address the unequal bargaining power of the parties?

If so it will be necessary to determine what level of government, federal or state authorities, are best equipped to develop, implement and enforce contracting rules.



How do existing laws, such as the common law of contracts or other commercial rules, apply to contracting, e.g. what baseline protections exist?

How do possible issues of constitutional relations and federalism affect the ability of states or local governments to develop production contract laws?

[There is a growing concern U.S. Supreme Court rulings on the dormant commerce clause may threaten state contracting laws.]



What is the desired nature of the relation between the contractors and farmers - independent contractor, employment or some other status?

Are there existing sources of state or federal agricultural regulations, such licensing for markets or payment protections for growers, which might serve as the source for new contract regulations?

What issues or conflicts might shape contracting relations in India: payment terms, dispute resolution, requiring growers to fund improvements?


Opportunities for India in Developing Contracting Laws

India can learn from the U.S. experience and work to avoid the use of potentially exploitive contracts and help insure the risks and returns to producers are equitable, i.e. make contracts risk sharing not risk shifting

If contracting is still in a formative period India has time to put in place guidelines for contracting practices, such as: risk disclosure, protection for grower investments, fair dispute resolution procedures, and clear payment terms.


Opportunities for India in Developing Contracting Laws

There is an opportunity to determine at which level of government contracting rules should be set and who is best positioned to do any necessary regulation.

Courts are not the best forum for resolving contracting disputes because they only respond to conflict, but judicial precedents can be valuable in setting the standards for the conduct. Forcing contract disputes into arbitration can avoid the development of fair and just precedents.


Why consider the importance of production contracts in agriculture?

Production contracts are an exciting legal development which can have many important impacts for farmers.

The increased use of production contracts means more farmers will be faced with deciding whether to enter such agreements.

The sources of information about the subject are still limited. Most production agreements involve an inherent imbalance of power

and information between the parties. Farmers are typically asked to sign a printed form contract with little or no opportunity to negotiate different terms.

Such imbalances can create the opportunity for unfair advantage and increase the need for possible regulation.


What farmers should consider before entering a production contract

Farmers should have four primary goals when deciding to enter a production contract:

a) making sure you know what you are getting into,

b) insuring you get paid for what you sell or the services you perform,

c) guarding to be sure you don't accept unknown or new legal or financial risks, and

d) trying to guarantee the relation you are entering is informed and fair.


The value of good information and education.

One key role of government is to educate and inform the parties involved in using production contracts. By providing good information to all parties it may be possible to minimize the misunderstandings or disputes, and in some instances even improve the contract terms.


Defining the term "Production Contract":

There is no definition of "production contract" in the dictionary. But it is possible to develop one based on how the contracts work. The following is a legal definition, which covers most relations involving production agreements.


An agricultural production contract is:

a legally binding agreement of a fixed term, entered before production begins, under which a producer, either agrees to sell or deliver all of a specifically designated crop raised on identified acres in a manner set in the agreement, to the contractor, and is paid according to a price or payment method, and at a time, determined in advance; or agrees to feed and care for livestock or poultry owned by the contractor until such time as the animals are removed, in exchange for a payment based on the performance of the animals. Under the agreement, the producer may have no legal title to the crop or livestock but is a bailee, and the producer is declared to be an independent contractor and not an employee or joint venturer with the contractor.


Elements of a Production Contract

By considering how production contracting relations operate, the definition can be divided into several main elements:

1) a legally binding agreement between two parties, the producer and contractor;

2) the agreement is for a fixed term, either one crop year or so many production cycles;

3) the agreement is signed or entered into before production begins



4) the contract calls for either the production of a crop or the care and feeding of animals, on land owned or controlled by the producer;

5) all the animals or all of the crop from a designated number of acres, which may be specifically identified, will be delivered or sold to the contractor;

6) the crops or livestock must be produced or cared for according to the terms of the agreement, to be acceptable;



7) the producer will be paid an amount and at a time according to the agreed to schedule or term, which may include premiums or deductions for quality or performance;

8) the producer generally has no legal title to the crop or livestock but is considered to be in a bailment relation with the contractor; and

9) the producer is described as an independent contractor rather than an employee, partner, or other joint venturer with the contractor.


History of Production Contracts – Freedom to Contract

Production contracts have been in existence in the U.S. for over sixty years. In 1946, Cleo Bauldry an Iowa hog farmer signed a contract with Farmers Hybrid Seed Corn Company to raise hybrid hogs on contract. One year later he filed for bankruptcy and claimed a personal exemption for all the hogs he owned under 6 months of age. But the Federal District Court ultimately decided he did not own any of the pigs instead they were owned by Farmers Hybrid. The Iowa court had to consider the nature of the relationship between the parties and ruled:


Freedom of Contracts

"It is well settled that unless prohibited by statute or by rules of law parties are free to enter into any type or form of contract that they wish and to have it contain such provisions as they wish." In re Bauldry, 78 F. Supp 412, 416 (N. D. Iowa 1948).


Distinguishing Production Contracts from other Contracts

Production contracts are a unique type of legal agreement which creates a different relation between the parties and involve a much greater sharing of both control and risks, than do most traditional marketing tools. Other contracts used in agriculture include:


Distinguishing Production Contracts from other Contracts

a) forward contracts - the sale of a fixed amount of the actual commodity at a set price, at some point in the future;

b) marketing agreements - in which a farmer agrees to sell all of a particular commodity produced through an organization such as a cooperative; and

c) futures contracts - the sale or purchase of a standardized quantity of a commodity for future delivery on a regulated commodity exchange.


What is Behind the Trend Toward Contract Production?

Many factors fuel the increased use of production contracts, including access to: improved genetic materials, new technologies, and profitable markets. Another factor in modern agriculture is the issue of risk management. All parties in agriculture, from small farmers to the largest processors are looking for ways to reduce or manage their financial risks.


What is Behind the Trend Toward Contract Production?

Production contracts have traditionally been used for seed production and for many vegetable and horticultural crops. In the last forty years most poultry production in the U.S. has been reorganized around production contracts by large vertically integrated operations. Today over 90% of broilers produced in the U.S. are raised under contract, with the remaining share owned directly by processors who are vertically integrated, owning the bird from the time it is hatched until it is sold to the consumer. A similar shift is underway with swine production in the U.S.


Relation of Contract Production to the Industrialization of Agriculture

The use of contracting is part of the ongoing industrialization of agriculture. Tom Urban, former president of Pioneer Hi-Bred International, Inc., describes industrialization as the process whereby the production of goods is restructured under the pressure of increasing levels of capital and technology in a manner which allows for a management system to integrate "each step in the economic process to achieve increasing efficiencies in the use of capital, labor, and technology."


Trends in Grain and Livestock Production

Several economic and agronomic forces are increasing contract production of grains and livestock. These include:

1. Identity preservation. This term means crops for which the identity and thus unique characteristics are preserved from the time of production through marketing to processing and consumption. Identity preserved is most commonly used in connection with grains, such as uniquely altered genetics which give higher values, for example as better animal feed. In order to preserve the identity of the product, and its unique traits, identity preservation requires that significant steps must be made during production, harvesting, storage and processing to segregate the crop from other varieties.


2. Specialty crop production. This term may relate to producing non-traditional varieties of grain such as waxy corn, white corn, or food grade soybeans or may refer to raising identity preserved crops. In either case, the attraction of specialty grain production is the ability to enter a new or niche market which will offer a price premium above that available in the public marketplace. Entry into the specialty crop market may depend on the producer's ability to find a buyer who is willing to pay a higher price to guarantee a supply for the alternative use.


3. End use tailored varieties. This term is another way of describing the process of identity preservation, but here the focus is on the work of plant breeders or genetic engineers in specifically designing a crop to express a trait which can result in added value. The development of high-oil corn which has a higher value as an animal feed component is an example of an end use tailored variety.


4. Vertical Integration in Meat Production - the most significant factor driving the expansion of contract production has been the trend toward vertical integration by processors and marketers. Vertical integration can happen in either of two primary methods. First, companies may begin as in-put suppliers, such as feed companies, but expand into production, either through direct ownership of facilities or through contracting with others to care and feed company owned animals. Second, a company which began as a processor or marketer of the commodity, may decide to integrate downstream to control the actual production of the animals. This model has been used extensively in the broiler industry and by some beef packers.


Legal Significance of the Changes in Production

Changes in the methods of producing and marketing grains and livestock are important developments for agriculture. It may result in new markets, higher prices, price premiums and even new ways of pricing and marketing commodities for farmers. But while the economic benefits may be real, there are also potential concerns with contracting. Important issues, such as access to contracting opportunities and their role in spurring concentration of production, are real.


The trend toward increased contract production raises challenging new legal issues for both the farming community and agricultural lawyers. Questions about the fairness of the contracts and the economic effect of vertical integration will trigger public debate and legislative proposals. Critics charge contracting can reduce farmers to low wage employees who assume most financial risks, without little potential for increased returns. Others say it is not contracting which is bad, it is bad contracts which are the concern.


Reasons Why Agricultural Companies Will

Use Production Contracts

1. Quality Control - Contracts provide control over the production methods and inputs used, and help insure uniformity and quality making the commodity more suitable for preparing standardized consumer products.

2. Assuring Adequate Supply - Contracts offer a mechanism to control the quantity of crops produced and how they are marketed to processors and consumers, helping increase the price premiums obtained and prevent over-supplies which may decrease demand.


Reasons Why Agricultural Companies Will Use Production Contracts

3. Supply Management - Contracts lock in a guaranteed supply to meet potential needs but do so using pricing arrangements limiting the risk of having to acquire more than is needed. "Passed acres" clauses, common in vegetable contracts, allow the company to not harvest or purchase the crop, even if it meets contract standards. The producer is paid a portion of the contract price from a pool of funds established by a charge on all growers.

4. Marketing Related Technology - Use of contracts may require use of related technologies or production methods, also marketed by the company. This means contracting may provide opportunities for economic linkages, such as offering "packages" of seeds, chemicals, and marketing opportunities.



5. Intellectual Property Protections - Contracts allow control over the release of the specialized crop and animal genetics creating the added-value trait, meaning the contracts serve as an additional form of intellectual property protection to control the unauthorized reproduction or sale of the crop.

6. Market Protection - Contracts protect confidentiality of the pricing and marketing arrangements for the commodity and of the identity of the end-user or purchaser. Buyer contacts can be very important in the specialty crop sector and protecting the identity of the end-user prevents producers from contacting the purchaser directly.



7. Pricing Confidentiality - Contracts using non-public pricing and marketing conceal the true magnitude of any price premium gained for the special trait. This allows the company to obtain higher profits and limit the knowledge or ability of producers to bargain or negotiate for a larger share of the "added value."

8. Reduced Risks and Higher Profits- Contracts give companies investing in value added crop breeding and genetic engineering, a mechanism to project the companies financial interests, and thus potential returns, farther down the production process of the crop, without having to own the land or production facilities. The company can become involved directly in crop production without risking investments in farmland or buildings.



To a skeptic, the use of production contracts may illustrate the attitude, why own the farm if you can own the farmer and the crop. But to most agricultural economists the use of contracting is just one factor in the continuing evolution of the food production and marketing sector in the U.S. In their view contracting is how companies increase the efficiency of production and communicate market risks to producers


Benefits of Production Contracts: A Form of Risk Management

Many farm economists portray the use of production contracts in agriculture as a form of risk management. The argument is contracts provide farmers with the opportunity to reduce the financial risks normally associated with traditional production and marketing by contracting with other entities in the food processing and marketing system. There are several obvious ways in which production contracts can be used as a form of risk management.


1. Reducing financial risk - contracts can reduce financial risks by providing a guaranteed source of cash flow and reduce the need to borrow money. By raising hogs on contract a young producer does not have to finance purchasing the stock but instead can utilize available labor and feed caring for someone else's animals. Under the contract the producer is assured of a steady source of income in the form of contract payments, which may be at stable or predictable amounts. By insulating the producer from price swings in the market, the contract may provide more stable income.


2. Access to capital - contracts can help make the producer a more attractive borrower. Because a contract may offer a steady source of cash a bank may be more willing to lend money, such as for constructing a new facility. Some of the companies involved in production contracting, have sources to offer financing for their producers.


3. Access to new technologies - If a person is interested in raising a new form of grain, such as high-oil corn, the only way to access the seed may be to enter a production contract with the company owning the patent. Under some contracts the seed may be provided at no cost. By signing the contract a farmer may have access not just to the new technology and advice of the company but also to the higher value markets.


4. Access to new markets - contracts can offer new sources of demand or higher prices. If a grower wants to produce and market food grade soybeans for export it may be difficult to personally make the contacts and arrangements for such sales. Instead, the most likely way to do so will be to sign a production contract with a company developing the market.


5. Higher prices - contracts can provide higher prices or price premiums for raising new crops or for using certain production methods. A producer who wants to market organic produce or pesticide free grain may find it easier to do so is by entering a production contract. Linkages such as these make production contracts attractive to companies marketing specialty crops.


New Risks Contracting Might Present: Risk Sharing or Risk Shifting?

Most producers decide to use production contracts to increase income or marketing returns. Contracts can lead to higher returns and serve as a form of risk sharing, but this is not always true. In some situations, the language of the contract can make it more a form of risk shifting than risk sharing, with the producer assuming unexpected or new burdens. One rule to keep in mind is if the farmer is earning higher returns or gaining a benefit under a contract it is in exchange for something. Farmers earn the benefits they receive.


Considering the Economic Returns Offered by Contracts

When considering a contract, farmers should consider why the increased economic returns are being offered. Depending on the crop involved and the contract, the required action - in contractual terms - the "consideration" - from the producer, could be:


- increased production costs associated with complying with contract requirements;- reduced flexibility in how to farm;- loss of control over pricing and marketing;- compensation for lower yields, known as the "production penalty," which can result if the specialized crop is less productive than traditional varieties;

- compensation for the reduction in the quantity marketed due to the quality standards, i.e. not all the crop will be marketable at the price premium; or- higher priced inputs, for example special seeds, required under the contract.The key with evaluating any production contract opportunity is penciling out the costs and expected returns and then determining if the extra trouble is worth the possible returns.


Considering the Legal Risks for Farmers in Contracting

Only by examining the language of the contract being signed, the legal issues and obligations established, and the nature of the relation created, is it possible to decide if a production contract is risk sharing or risk shifting. Consider these common examples of how production contracts may shift additional risks to producers. All have been the subject of U.S. court cases


1. Long term investments, short term contracts - Under swine and poultry production contracts it is common for producers to build a new facility to company specifications. This usually requires borrowing significant amounts of money and placing a mortgage on the farmland. However, most contracts provide a much shorter contract period than the term of the financing. For example, most broiler contracts are for only one flock of birds. A short term contract can create serious risks if it is terminated before the building is paid off. This risk is especially real in areas where the contractor may be the only party marketing livestock or poultry in the area, so there is no one else with which to contract.


2. Acquisition of specialized equipment - The production of some specialty crops, such as tomatoes, is done primarily under contract and may require expensive new equipment such as tomato harvesters. Producers buy equipment based on the expectation of raising the crop long enough to pay for the machines. But most vegetable production agreements are for one year, subject to renewal at the company's discretion meaning it is possible no new contract will be offered, leaving the farmer with no use for the expensive technology.


3. Flexible quality terms - Production contracts often include very detailed terms on the quality of the crop or the methods for its production. Whether the crop meets these standards is usually determined solely to the discretion of the company. The company can vary the rigor with which such provisions are applied depending on the need for the production and the market price conditions. A producer may raise what appears to be a bumper crop only to have the price reduced for "quality reasons" or worse yet, have the company not buy it. There may be few alternative uses or markets for the crop.


4. Risk of not being paid - Production contracts are a new form of marketing and the producer depends on the company to pay for the crop. The contract may provide for a significant portion of the payment to be made long after the crop is harvested and delivered to the company. Even though the legal title has passed, until the producer is paid, he is an unsecured creditor now financing the company. If a crop is sold in normal channels the producer may be protected by a public licensing system in case the company goes bankrupt. But under production contracts the producer may have no such protection.


5. Risk of loss in performance - Under many production contracts, the producer does not have any legal right or title to the crop being raised. This protects the financial interest of the company from claims by the farmer’s creditor. The producer is in reality performing the service of growing a crop for the company rather than selling the crop. However, most contracts provide the risk of loss of the crop, such as by weather or disease, rests with the producer. If you raise a crop the company owns it but if it is lost you own it and no compensation is earned. This is a classic example of contracting as a form of risk shifting, guaranteeing the company's right to the crop if it is produced but not exposing the company to any risks of production.


Production contracts can be a useful tool or a risky proposition. The answer depends on the relationship between the parties, the language of the contract, and the performance of the agreement. It is correct to assume the company offering a contract has every intention of performing the agreement and has no interest in a legal dispute. But you can also assume the company received legal advice when drafting the contract and protected itself from risks.


Hamilton's Twelve Basic Rules of Contracting

Each experience with an agricultural production contract will be unique and depend on the relation between the parties, the terms of the contract, and their bargaining position. However, there are a number of common principles to keep in mind.



1. Remember the first rule of contracts -- whoever wrote the contract took care of themselves. There is no reason to assume the contract being offered is either fair or that your interests are protected. Even though you may trust the company you are dealing with, production contracts are arms-length business transactions and must be considered in this light. This rule is especially important because in most contracting situations you will be offered written contracts on a take it or leave it basis and given no real opportunity to negotiate or alter the terms.



2. Read and understand any contract before signing it. Contract terms play a fundamental role in determining the rights and duties of the parties. A good example is the difference between a bushel contract, which commits to delivering a fixed amount regardless of the crop actually raised, and an acreage contract, which promises delivery of whatever amount is raised on a designated number of acres. If the terms of a contract are not clear you need to ask questions until you understand it. You should consider having your attorney review the contract, especially if it involves a sizable portion of your production or involves a long term relationship or investment. Legal advice is an investment not a cost when it resolves confusion and helps your avoid unfavorable economic consequences.



3. Compliance with contract terms is required before the contract is performed. The price premiums you are expecting won't be paid unless the terms of the contract are satisfied. Failure to comply with the contract may subject you not just to lower returns, but also to claims for damages to the other party, penalties for breach and other legal remedies. It is important to understand the contract provisions relating to default or breach of the agreement. Producers who, because of bad weather, are unable to satisfy a contract requiring delivery of a fixed number of bushels, might be surprised to learn they have to enter the market and buy higher priced commodities to satisfy the contract.



4. Never assume failure to perform the contract will be excused. Circumstances may arise in which you think it is reasonable to assume the other party will not require you to perform the agreement. You should never make this assumption, especially if your failure to perform can be expected to cause the other party damages. If you do not think you will be able to perform or if you would like to try to amend the terms of the agreement, communicate with the other party rather than surprising them.



5. Know the contracting party, their financial situation, and their performance history. This knowledge is essential in helping insure you will be paid for any crops you deliver. It is especially important if the contract calls for passing legal title when the commodity is delivered or when payment is delayed. Then you become the creditor of the other party, and in most situations your claim is unsecured other than by the contractual promise to pay. What happens if the buyer goes out of business or doesn't pay you should always be questions you consider before signing?



6. Weigh the advantages of the contract in terms of higher prices against any increased costs or risks. While a proposed production incentive, such as $2.00 per bushel premium for growing a specialty crop, may appear attractive, it is important to calculate the real costs and risks presented by complying with the contract. Remember the additional revenue is in exchange for something. Perhaps the unique variety of grain being raised has a significant yield penalty



7. Proposed contracts are always subject to negotiation. While most production contracts will be printed or typed forms offered to you on a "take it or leave it basis" you do have the freedom to negotiate. Just because a term is in writing doesn't mean it can't be changed if both parties agree to do so. Your ability to obtain more favorable terms will depend on whether you have market power to negotiate with the company or whether there are other growers willing to sign the contract.



8. If changes are made in the agreement make sure they are in writing and separately signed by the company representative. Just because you believe a contract was amended it may not be true. Most contracts specifically provide the only terms enforceable are what is in writing. So, if you rely on changes you think were agreed, get them in writing.



9. Do not rely on oral communications made by the company either before the contract is signed or during performance. If what is being communicated is important to the relation be sure it is reduced to writing, signed by both parties, and incorporated as an amendment to the contract. If you can not get it in writing be sure and keep copies of any documents, such as letters, payment sheets, checks, etc., which you can use to show what was agreed.



10. Keep good records of your performance. It is always a good idea to keep good records especially in the performance of production contracts. Keep a record of all communication with the contractor and keep a record of your actions in producing the commodity. It is also wise to keep samples of what was produced, if possible, and the results of independent quality tests. These records may come in very handy in a later dispute over your satisfaction of the contract terms.



11. Don't hesitate to ask questions if you don't understand what is happening.

Remember you are committing to perform under the terms of the written agreement. If you have questions about what the language means or about how the procedure will operate do not hesitate to ask questions. The questions should be directed to the company representative or to your own advisors.



12. Stay in communication with the other party to the contract. Communication can be very important in resolving uncertainty and in preventing misunderstandings from arising. By communicating with the other side as to your performance, questions, or concerns, you can help build a smooth productive relation. When long periods of time pass without communication it is possible for circumstances to have changed which put performance of the agreement in a much different light.


Introduction: Why Consider Legislation to Regulate Contracting

Do you want farmers to have the freedom to consider any sort of production contract a company may offer or should the state protect farmers from bad deals?

Should companies be required to give farmers notice and reasons before terminating agreements?

If farmers make long-term investments in facilities or equipment should the contract be of any equal length?

These are the questions many state legislatures in the U.S. have tried to answer in recent years.

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Issues to Consider about Regulating Contracting

When considering how agricultural contracts may be subject to legal regulation there are several basic issues to consider:

First, the arrangements are subject to existing contract and commercial laws - such as common law contract principles and any special legislation on commercial activity, such as the Uniform Commercial Code. In the U.S. issues of contract law are state law questions. There is not a federal law of contracting. This means state law - and state courts - are the primary sources of legal guidance on contracting.



Second, the arrangements may be subject to special laws enacted to address particular issues in the use of production contracts. This outline addresses examples of state laws enacted for this purpose.

Third, one important legal issue in determining which law may apply - and in drafting remedial legislation - is the question of how to classify the parties’ relation. Agreements commonly are described as “contracts” and classify the farmer as an “independent contractor”. However the legal relations may be viewed in other ways, such as: employment agreements, agencies, or even franchises. The status of the parties will determine their legal relation and their rights and obligations under the agreement.



Fourth, while contract law is primarily an issue of state law, there are ways the regulation of agricultural contracting can become a federal matter. The central question in application of federal law is existence of some form of regulatory jurisdiction over either the parties or the commodity being produced. For example, the Congress and USDA have long been involved in regulating the marketing of poultry and livestock, which is one avenue for potential federal regulation of contracting.

Fifth, efforts to regulate contracting can implicate questions of federalism and state’s rights - as well as raise constitutional issues, such as the application of the dormant commerce clause.

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State Regulation of Contracting

Several states, such as Arkansas, Illinois, Iowa, Minnesota, Wisconsin and Kansas have enacted laws regulating some uses of production contracts.

While legislatures in many Southern states have chosen not to adopt laws designed to protect poultry growers, in 2005 Arkansas did adopt the “Livestock and Poultry Contract Protection Act” - at section 2-32-201 of the Arkansas Code.

Legislation to regulate contracting is a controversial issue which will help determine the future of agriculture. The type of laws proposed and enacted have a strong influence on what type of production contract relations are developed and even where the practice is used.

For an excellent review of these laws, see “State Regulation of Production Contracts” by Alison Peck, May 2006, A National Agricultural Law Center Research Publication, available at www.NationalAgLawCenter.org

http://www.NationalAgLawCenter.org/




State Contracting Laws

In the U.S., state laws on contracting can be divided into two categories: a) laws which create substantive rights for producers which can be enforced by private court actions and

b) laws designed to regulate contract formation and performance with the goal of equalizing the barging power for the parties.


Direct regulation of contract production

There are several different approaches states have considered.

1. Direct Prohibitions - this approach, found in Iowa's restriction on packer feeding of livestock or contracting for swine, attempted to ban the use of contract production by certain parties. It was struck down in federal court as an unconstitutional interference with interstate commerce.


2. Regulating Contracting Methods - this approach establishes minimum requirements for parties who engage in contracting and may require including certain terms in contracts being used. There are several approaches states follow:

A. Standardized contract - this approach establishes a standardized form for all production contracts used in a state. For example in 1990 the Iowa House of Representatives adopted a bill requiring the state to develop model livestock production contracts. Under the law, which was not enacted by the full legislature, the producer was to receive the model contract and be given 24 hours before signing the other contract being offered by contractor. If the producer was not given the model then the other contract was voidable. However, the law did not require companies to adopt any provisions of the model contract. The model contract was to be developed by the lawyers in the farm division of the Iowa Department of Justice. The bill provided that:


Proposed Iowa Model Contract

Each model contract shall provide terms expressing alternative methods of structuring an agreement, including but not limited to methods of compensation. A model contract shall not state a price to be paid under the contract. It shall provide for the division of expenses and losses. A contract shall include provisions relating to the following.


The required provisions included:1. exchange of financial information, including any perfected security interests

in the livestock. The contractor could grant the grower a security interest to secure the contractor's performance.

2. party responsible for insurance.3. delivery of livestock to the feeder, including terms on notice, delays, and

compensation for delays. 4. grower's right to refuse livestock when delivered, if it was in less than

"normal" condition.5. information on the payment of expenses related to feeding and sheltering

the livestock.6. term on the use of veterinary care.7. any requirements relating to construction of capital improvements required.


Terms in Model Iowa Contract

8. term on death or loss of the livestock and who bears the risk. The law provided a shifting presumption related to timing of death from the date of arrival. The cost of disposal was to be shared.

9. procedures for contract termination, including: • a) the actions which can result in termination, but the contractor couldn't

remove livestock merely due to a grower's refusal to agree to changes in the contract;

• b) grounds for termination couldn't be based on a subjective evaluation of feeder's husbandry practices unless done by a person other than owner. The provision required a method for notice of termination and a minimum period of notice. Terms for automatic renewals were also to be provided.

10. compensation paid to the feeder, including the manner of compensation and when it is due. If the contract included profit sharing then information on the sale of the animals was required to be given to the feeder.

11. mediation or arbitration requirement for resolving disputes.


B. Regulating the contract relation - this approach establishes requirements for contract production relations. Minnesota was the first state to enact a law setting mandatory terms for inclusion in contracts and for interpreting the agreements. The Minnesota law is described below.


C. Mandatory dispute resolution – A state may not want to regulate the terms of production contracts, but still require any legal disputes involving contracting to be submitted to mediation prior to filing a court action. Iowa enacted this law in 1990.

D. Required Contract Terms – The most common state law regulating contracting is to mandate inclusion of certain provisions – such risk disclosure, methods of termination, and payment terms.


3. Registration of contractors - Another approach to regulating use of contracts is a system to register or certify entities engaged in the practice. Licensing would provide a mechanism to more directly control use of certain practices or to require use of standardized contracts, and could be the source of information through regular reports.


Indirect Regulation of Contract Production

Another approach is to establish indirect methods to control use of contracts or to protect the producers who sign contracts.

1. Producer bargaining protections - increased use of contract production raises concerns about the ability of contract producers to organize to bargain for more favorable contract terms. Several states, including Maine and Washington, have enacted state "Agricultural Marketing and Fair Practices" acts to protect the interests of producers who form associations to bargain for better contract terms. [See, Washington: Wash. Rev. Code Ann. §§ 15.83,005 - ,905; and Maine: Me. Rev. Stat. Ann. tit. 13 §1953, et seq.]


2. Using contracts to impose environmental requirements - when Arkansas considered proposed regulations on the disposal of waste from poultry houses in 1992, a proposal was made by the integrators to include in their production contracts a requirement growers comply with all state environmental rules. The provision was criticized by growers who perceived it as a way for integrators to claim compliance with state environmental rules while shifting responsibility and costs for compliance to the growers. In 1994 Kansas enacted such a provision for swine contracts.


Minnesota Contracting Law

In 1990 Minnesota was the first state to enact a law setting mandatory terms for inclusion in contracts and for interpreting the agreements.

[Minn. Stat. Ann §§17.90-.98 and §514.945 (1993)]

The legislation was the result of a report prepared by the "Agricultural Contracts Task Force" created by the legislature in 1988 to explore the subject. The task force met fifteen times in preparing its final report which included a series of legislative proposals. The laws enacted as a result of the task force effort established a number of requirements for all "agricultural contracts.”



These include:

a) dispute resolution - The law requires a "contract for an agricultural commodity between a contractor and a producer must contain language providing for resolution of contract disputes by either mediation or arbitration."

b) recovery of investments - When a producer is required by a contract "to make a capital investment in buildings or equipment that cost $100,000 or more and have a useful life of five or more years," the contractor must not cancel or terminate the contract until:



1. "the producer has been given written notice of the intention to terminate or cancel the contract for at least 180 days notice before the effective date of the termination or cancellation" ... [except when the producer abandons the contract or is convicted of an offense related to the contract business], and

2. "the producer has been reimbursed for damages incurred by an investment in buildings or equipment that was made for the purposes of meeting minimum requirements of the contract."



c) right to cure - If the producer breaches the contract the contractor must still give the producer 90 days notice before terminating the agreement and must give the producer 60 days to correct the breach.

d) parent company liability - Parent companies of subsidiaries licensed to purchase agricultural commodities are "liable to a seller for the amount of any unpaid claim or contract performance claim if the contractor fails to pay or perform according to the terms of the contract."

e) implied promise of good faith - All agricultural contracts must be interpreted by the Minnesota courts as including an "implied promise of good faith." If the court finds there has been a violation of the implied promise of good faith, the court may allow the party to recover "good faith damages, court costs, and attorney fees."

(f) return of prepayments - If a producer makes prepayments "for agricultural production inputs that include but are not limited to seed, feed, fertilizer, or fuel for future delivery, the producer may demand a letter of credit or bank guarantee from the provider of the inputs to ensure reimbursement if delivery does not occur."



3. Mandatory dispute resolution – A state may not want to regulate the terms of production contracts, but still require any legal disputes involving contracting to be submitted to mediation prior to filing a court action. Iowa enacted this law in 1990.

4. Required Contract Terms – One of the most common forms of state law regulating contracting is to mandate the inclusion of certain provisions – such as risk disclosure, methods of termination, and clearn payment terms.


“Improved” Minnesota Law - Required Risk Disclosure

In 2000 the Minnesota law was amended to include several important new requirements, including:

- the contract be drafted in plain language using “words and grammar that are understandable by a person of average intelligence, education and experience with the industry.” Minn. State. §17.943, subd.1., and

- All contracts entered after Jan. 1, 2001, be accompanied by a risk disclosure statement, which among other provisions must describe the material risks in the agreement and allow a three day right to cancel the contract once it is signed.


Indirect Regulation of Contract Production

Another approach to regulating contracting is to use indirect methods of controlling their use or for protecting producers who sign contracts.

1. Producer bargaining protections - increased use of contract production can raise concerns about the ability of contract producers to organize to bargain for more favorable contract terms. Several states, including Maine and Washington, have enacted state "Agricultural Marketing and Fair Practices" acts to protect the interests of producers who form associations to bargain for better contract terms. [See, Washington: Wash. Rev. Code Ann. §§ 15.83,005 - ,905; and Maine: Me. Rev. Stat. Ann. tit. 13 §1953, et seq.]


Federal Involvement in Contract Regulation

Agricultural Fair Practices Protections

Federal and state laws have been enacted to protect the rights of producer to organize and bargain in marketing commodities. The laws, in particular the Agricultural Fair Practices Act of 1967, have been used by poultry producers to challenge the manner in which contracts were terminated. Congress passed the AFPA to protect the right of farmers and ranchers to join with other growers to form associations to bargain for better prices and terms with handlers and processors. The Act sets out a number of prohibited practices for handlers, which is defined to include persons engaged in "contracting ... with .. producers .... with respect to production or marketing of any agricultural product ... ." The act focuses on prohibiting handlers from discriminating against or intimidating producers because of membership in or exercise of the right to organize.


Application of Packer and Stockyards Act

The Packers and Stockyards Act of 1921, 7 U.S.C. §192, lists a number of "unlawful practices" for any packer or live poultry dealer or handler, including:

• (a) Engage in or use any unfair, unjustly discriminatory, or deceptive practice or device; or ....

• (e) Engage in any course of business or do any act for the purpose or with the effect of manipulating or controlling prices, or of creating a monopoly in the acquisition of , buying, selling, or dealing in, any article, or of restraining commerce; or

• (f) Conspire, combine, agree, or arrange with any other person (1) to apportion territory for carrying on business or (2) to apportion purchases or sales of any article or (3) to manipulate or control prices;

For these provisions to have any effect in connection with the use of contract feeding, federal officials would have to determine use of the practice caused a violation of the Act. Such a determination could either come in a specific complaint, or if the practice were widespread, the USDA could undertake rulemaking on the subject.


Information Sources on Production Contracts

National Center for Agricultural Law – Production Contracts Reading Room

http://www.nationalaglawcenter.org/readingrooms/productioncontracts

Iowa Attorney General’s Office - Contract Data Base

http://www.iowaattorneygeneral.org/working_for_farmers/contracts/index.html

National Contract Poultry Growers Association

http://www.ncpga.info/index.htm

Farmer Legal Action Group (FLAG) - Publication list

http://flaginc.org/topics/pubs/index.php


















Drake University Agricultural Law Center Agricultural Contracting: A U.S. Perspective Prof. Neil D....

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