The Rural Advancement Foundation International - USA

FARMERS’ GUIDE TO PEANUT CONTRACTS

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FARMERS’ GUIDE TO

PEANUT CONTRACTS

JANUARY 2007

This booklet is written and published by Rural Advancement Foundation International-USA (RAFI-USA).

It is intended especially for farmers in the United States. This booklet is for educational purposes only. To learn the details about

any certain point, read the current statutes, regulations, and policy notices, which can change frequently. These materials cannot substitute for an experienced lawyer who is up to date on the latest changes in federal,

state, and local laws and regulations.

Contributions from Scott Marlow, Becky Ceartas, and Jess Ana Speier

Edited by John B. Justice Layout by Regina Dean Bridgman

Cover Photograph: John Branham, Jr. by Scott Marlow Photographs on pages 5, 6, and 13 by Rob Amberg

Other photographs by Scott Marlow and RAFI –USA staff

PUBLISHED BY

RURAL ADVANCEMENT FOUNDATION INTERNATIONAL - USA P.O. BOX 640

274 Pittsboro Elementary School Road Pittsboro, NC 27312 TEL: 919-542-1396 FAX: 919-542-0069

www.rafiusa.org

Text © 2007 Rural Advancement Foundation International—USA Anyone has permission to use this material. We appreciate your crediting

RAFI-USA if you reprint any portion of this document.

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FARMERS’ GUIDE TO PEANUT CONTRACTS

Table of Contents

1. INTRODUCTION ......................................................................................................................... 1

2. DYNAMIC CHANGES IN PEANUTS........................................................................................ 2

3. CONTRACT FARMING.............................................................................................................. 3 A. MARKETING CONTRACTS.......................................................................................................................... 3 B. PRODUCTION CONTRACTS……………………………………………………………………………..…3 C. OPTION CONTRACTS……………………………………………………………………………………....3

4. CONTRACT PEANUT FARMING – FARMER CONCERNS................................................ 5 A. GROWING WITHOUT A CONTRACT............................................................................................................ 5 B. TIMING, FAIRNESS AND CORPORATE INTEGRATION ISSUES...................................................................... 6 C. SHORT-TERM COMMITMENTS ................................................................................................................... 7 D. CAPITAL INVESTMENT............................................................................................................................... 7 E. INCREASING CONTRACT REQUIREMENTS .................................................................................................. 7 F. BENEFICIAL INTEREST ISSUES. .................................................................................................................. 7

5. EVALUATING CONTRACT TERMS ....................................................................................... 8 A. COMPENSATION......................................................................................................................................... 9 B. MANAGEMENT, PRODUCTION PRACTICES, AND EQUIPMENT UPGRADES. ............................................... 11 C. DELIVERY AND STORAGE REQUIREMENTS. ............................................................................................. 11 D. INCORPORATION BY REFERENCE AND ENTIRETY/INTEGRATION CLAUSES. ............................................ 12 E. EXCUSE OF PERFORMANCE. ..................................................................................................................... 12 F. RIGHT OF ACCESS. ................................................................................................................................... 13 G. DISPUTES, TERMINATION, DAMAGES AND REMEDIES ............................................................................ 13

6. CONCLUSION ............................................................................................................................ 17

QUICK REFERENCES ............................................................................................................................ 19

1. RESOURCES AND WHERE TO GET MORE INFORMATION......................................... 20

2. RELEVANT GOVERNING LAWS................................................................................................... 21

A. UNIFORM COMMERCIAL CODE (UCC)..................................................................................................... 21 B. PRODUCER PROTECTION ACT AND SIMILAR STATE PROTECTIONS......................................................... 21 C. AGRICULTURAL FAIR PRACTICES ACT (AFPA)....................................................................................... 21

3. BEFORE SIGNING A CONTRACT FARMER CHECKLIST............................................. 22

4. FARMERS'GUIDE TO PEANUT CONTRACTS EVALUATION FORM......................... 23

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1. Introduction

Contracts are serious business. A contract is a legal document with binding obligations and risks. You may be deciding whether to sign a peanut contract. Or, having already signed one, you may want more informa-

tion. Either way, this booklet can help. It doesn’t tell you whether a contract is right for you. That’s your decision and no one else’s. But this guide can help you understand key contract issues, how contracts work and how they fit into the larger picture of current peanut farming. It gives you information to use as you decide if a peanut contract will benefit you and your farm operation. Keep in mind that almost all current peanut contracts are written by companies. And because the company wrote the agreement, it reflects company interests and aims first and foremost. The contract is usually presented to the farmer on a pre-printed form. The farmer is asked to sign on pretty much a take-it-or-leave-it basis, with few or no changes. You don’t have to sign the contract--contracts are voluntary agreements no matter what financial necessities caused you to sign. It’s up to you. You must decide if a particular contract’s risk, obligations and rewards are in your interest. If you do sign, you are legally bound by the con-tract’s terms as written. You promise certain things and other things are promised you. The law has penalties for breaching contract terms. And if things don’t work out, you cannot claim personal circumstances influ-enced your decision to sign.

This book will give you useful general information as well as some references for other resources you can use. However, certain things about contracts are beyond the scope of this guide. You may need an experienced lawyer to help you evaluate specific contracts and to give you details on current statutes, regulations and policy. All are involved in contracts, and all can change frequently. Section 2 - has basic information for new peanut growers on the peanut industry’s history and

recent changes. Section 3 - discusses contract farming in general with a focus on problems faced by contract

farmers. Section 4 - RAFI-USA reports on what we have learned from interviews conducted in 2005 with

contract peanut farmers. Section 5 - lists and describes some of the key terms found in peanut contracts. The guide concludes with some tools for you to use, including a list of helpful resources and a farmer’s checklist to use as you make decisions about signing a new peanut contract or renewing one you already have.

This booklet can help you understand what is in a peanut contract--both risks and rewards--so that you can make a decision that works out for you and your business.

This booklet is pub-lished by the Rural Advancement Founda-tion International-USA (RAFI-USA). It is intended for farm-ers who are considering growing peanuts for the first time and for those who are deciding whether or not to expand their operations and investment in equipment based on contracts in the United States. This booklet is for educational purposes only.

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2. Dynamic Changes in Peanuts The Federal peanut program was radically changed in 2002. This caused major shifts in how and where peanuts are grown and marketed, and peanut markets are still changing to this day. Growers and others continue to sort out the best responses to these changes, and ways to mitigate risk. Since 2002, several trends have become clear1.

1,2, Dohlman, Erik and Janet Livezy, “Peanut Backgrounder” Electronic Outlook Report OCS-051-01, U.S.D.A. Economic research Service, 2005.

Other Sources: Dohlman, Erik, Edwin Young, Linwood Hoffman and William McBride, “U.S. Sector Adapts to Major Policy Changes” in Amber Waves, United States Department of Agriculture Economic Research Service, November 2004.

Farmers are getting lower peanut prices. This resulted from eliminating restrictions on price and do-mestic production inherent in the old quota system. Demand for peanuts has gone up in recent years. However, potential price gains have been offset by increases in acres planted in peanuts, along with per-acre yield increases. Peanuts are being grown in more places. The old program had limits on where a farmer could grow peanuts. That limit is gone, and production has shifted to new areas with conditions right for good yields. Peanut markets are less stable, requiring farmers to find ways to reduce their risk. Current Federal peanut programs resemble those for other commodities. However, other commodities have marketing tools not available for peanuts. An example is the absence of a peanut futures market similar to that for cotton. This elimi-nates futures or time sales as a way for farmers to help stabi-lize prices. In addition, free trade agreements may destabilize peanut markets even more. NAFTA has already agreed to let Mexican peanuts onto the U.S. market as of 2008. Signs point to additional future imports under NAFTA and GATT. On the plus side, peanut farmers do have access to certain risk-management tools. Most farmers receive crop insurance for their peanuts, and according to the Risk Management Agency, in 2005 80% of North Carolina peanut acreage had crop insurance. Policies vary from state to state. While APH crop insurance policies for peanuts are popular, at this time, peanut farmers cannot get income-protection policies such as those available for corn and cotton. Another way to increase the farmer’s options is joining a marketing cooperative; three marketing coops are operating as of now. Research shows that cooperatives provide members more marketing options and stronger bargaining power.

The Farmer’s Challenge Many farmers are using market-ing and production contracts to manage risks, and the number is rising. The domestic use of marketing contracts is a recent development. Although such agreements were common for exports for years, it’s only since 2002 that marketing contracts have been used for domestic food products. Overall, the rise of peanut con-tracts has been lightning-fast. As of 2004, 80% of the peanut crop was produced by marketing and production contracts2. The terms of peanut contracts have changed each year, and are expected to change in the near future.

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3. Contract Farming Trends and forms of farm contracts: U.S. agriculture is following a steady path to increased contract farming. In 1969, 12% of U.S. farm goods were produced under contract. By 1991 the figure had risen to 29%, and in 2003 it was 40%. Both the number of farms and the value of goods produced increased sharply over the last several decades. This section will sketch in the rise of contract farming in general; it will describe three kinds of farm contracts relevant to peanuts; and it will discuss risk/benefits for contract farmers. Everyone understands that a contract is a mutual agreement between two or more parties to carry out certain actions. But it’s necessary for farmers to have a good, solid grasp of the exact legal meaning of farm contracts.

A. Marketing contracts: Contracts that peanut farmers have used for export peanuts are marketing contracts. They differ from production contracts in important ways. First, the grower owns the commodity until it is delivered to the buyer. Second, the farmer makes production decisions. Third, price risks are shared by the farmer and the contracting company. In short, marketing contracts allow growers more independence than production contracts in terms of owning the commodity, managing the farm, and choosing production practices. B. Production contracts: These are contracts under which a farmer agrees to use company-specified production practices to produce a marketable product. The company (integrator) typically keeps ownership of the product and of some inputs. Production contracts aren’t used in peanuts as much as in hogs and poultry, where they are the most common arrangement of production. The track record of production contracts shows some serious questions for farmers:

Contracts usually require farmers to make large, long-term investment, while getting only short-term income security from the in-tegrator. The integrator controls production costs and price for the product. When disputes arise, some contracts have clauses that that force the farmer into mandatory binding arbi-tration, an expensive process that can strip the farmer of the right to settle the dispute in court. C. Option contracts: An option contract for peanuts is pretty much like a marketing contract. The company agrees ahead of time to pay the contracting grower a certain price for a specific quality and amount of peanuts. But the payment is for the option to buy the peanuts out from under loan, rather than for the peanuts them-selves. The price that the farmer receives is the government payment from putting the peanuts under loan, plus the option payment from the company. This helps the company plan ahead, reduces their costs and delays their investment in the peanuts. Later in this guide, we’ll go deeper into specifics of option contracts, including payment.

As a starter, here is how the law generally defines a contract:

A set of promises creating an agreement between two or more parties that is enforceable by law and which can be either written or oral; breaches of the agreement are subject to legal remedy.

There’s more, but that description will do as we look at three basic kinds of farm contracts that

relate to peanut production. They are marketing, production, and option contracts.

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While peanuts are generally grown under marketing and options contracts, it is important to under-stand the difficulties that have arisen under production contracts. Peanut contracts are expected to evolve. The problems found in hog and poultry production contracts can creep into peanut con-tracts. So peanut growers must track contracts over time, as well as analyzing contracts presented at any given moment. Contract incentives for companies and farmers: Contracts help companies make sure they will have a dependable supply of the product they need; this helps them cushion the ill effects of market and production fluctuations. And it’s not just a matter of quantity: Peanut companies are increasingly having contracts stipulate the quality and uniformity of the product. Companies get other benefits from contracting directly with the peanut farmer. Direct contracting eases management problems and lets companies limit their financial risk. And by contracting directly with the grower, the company can stipulate options to buy and other means of managing its risk. The peanut farmer has real incentives to consider a contract. A grower’s nightmare is to end up with no market for the peanuts, having to settle for the loan-rate price. A contract prevents this. The contract provides a buyer. It gives price information that helps the farmer predict income. There is no need for the farmer to risk a season’s economic fate in a market that could send peanut prices plunging low. Farmers with longer-term contracts get the benefit of increased stability to plan ahead. What are the farmers’ risks? The potential benefits are real, and so are the risks. No contract can eliminate 100% of the farmer’s risk. Here are some of the important risks that a farmer must consider along with the benefit of a contracted price and other incen-tives to sign a peanut contract.

The contract price may turn out to be lower than the market price at harvest time.

Weather, disease and pests can damage the

crop and prevent it from meeting the com-pany’s standards.

Input costs can rise and cut into net income.

Contract terms may limit farmers to certain changes, denying farmers the option of adopting

new technologies.

Contracts can force a farmer into paying for and using expensive new equipment and technolo-gies to the detriment of the farmer’s net income.

The company can refuse to renew the contract for following year, even after the farmer has in-

vested in equipment. These and other farmer risks will be discussed in more detail in the sections that follow.

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4. Contract Peanut Farming – Farmer Concerns

The farmers we interviewed were mostly long-time growers who had been growing peanuts for years. Most were growing other crops besides peanuts. All were adjusting peanut opera-tions to changes we discussed earlier in this guide. All were being affected by the end of the old quota system, the rise of contracts, and changes in markets. In general, the farmers we spoke with had serious concerns about their peanut business. Many had invested heavily in equipment specific to peanuts and didn’t see alternative crops that would generate enough income. But, said farmers, the peanut industry presents its own problems. The new reality is that contracts provide the surest way to current markets, so they were producing under contracts. But these farmers felt that they are on shaky ground. Contracting companies seem to hold a lot of the cards: Under the new rules, companies can now grow peanuts anywhere growing conditions allow. "The companies are able to control access to new markets almost completely." There are now relatively few peanut companies for growers to deal with. And farmers worry about the very basic matter of how peanut contracts are awarded.

So it’s fair to say that farmers interviewed for this guide were worried about their peanut contracts on a number of scores. The rest of this section will go into some detail on six major concerns that farmers told us presented significant questions about contracts.

A. Growing Without a Contract.

Farmers who have peanut contracts have a lot to tell us about how contracts work. While preparing this guide, RAFI - USA talked with contract pea-nut farmers in 2005 and 2006 to get their first-hand experience. Their thoughts on the benefits and risks will be especially useful for farmers deciding whether to sign their first peanut contract.

A grower can choose to produce peanuts with-out a contract. We interviewed growers think-ing about doing so. Their hope was that they could sell their crop to shellers needing more peanuts than the option contract supply pro-vided. This option has real risks. The most serious one is the possibility that shellers might have all the peanuts they need, and the grower will have raised a crop with no market other than government marketing loans. One way of reducing risk is joining marketing cooperatives that can negotiate with shellers at harvest. An increasing number of farmers are investigating such associations.

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B. Timing, Fairness, and Corporate Integration Issues

1. Time pressure to sign or not: The way it works now, farmers usually don’t have much time to decide whether to sign an of-fered contract. Companies typically allow the grower only a few days to make a decision. Un-der severe time pressure, the grower must analyze the contract, get legal or other professional advice, and investigate other options. The farmer could wait, hoping that another contract will be offered later on. But by waiting the farmer risks that there will be no additional contracts, that subsequent contracts will be for a lower price or that the company will look elsewhere for growers.

2. Fairness in how peanut contracts are awarded: Farmers are uneasy about the process. They understand there are more farmers than contracts, and that some farmers won’t get a contract. As realists, they accept competition, as long as the competition is fair. The problem is, farmers told us, they can’t tell if the current system is fair or not. They are given a complex contract to study and decide on under great time pressure and often little or no helpful information from the company. In one case even the company’s ware-houseman couldn’t explain how things worked. He knew he had a certain number of contracts to offer for a certain volume of production at a certain price. Beyond that, he couldn’t help farmers much. Would the company offer a higher price if farmers declined the first offer? He couldn’t say. Was there a risk that the company would dump the first group of growers and of-fer the initial contract to a new set of farmers? The warehouseman didn’t know. If growers signed the contract offered for this sea-son, would they get a contract for next year? Who knows? Clearly, this murky process puts farmers in a tough position.

3. Questions of corporate integration: Farmers expressed concern about the way corporate integration can affect awarding of peanut contracts. We iden-tified at least one instance where this came into play: A sheller offered farm-ers contracts on the condition that, if awarded the contract, the farmer would buy peanut chemicals from a company the sheller owned. The farmer might not like this corporate-integration clause--it would legally bind him to using the company’s chemicals whether or not he could get a better price elsewhere, whether or not he, as the farmer, believed the company’s chemi-cals were good for his peanuts. While this was not a universal concern of farmers interviewed, it worried some, and it’s worth keeping an eye on as you analyze a particular peanut contract.

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4. Contract Peanut Farming – Farmer Concerns continued C. Short-term commitments. Competition is stiff for today’s peanut farmers. As we’ve mentioned, the standard contract is for one year only. After that year, the contracting company may or may not offer the grower another contract. The com-pany may offer a new contract with lower price and volume. The grower has no guaran-tees. Farmers are especially concerned about short-term commitments because competition is rising from the growing number of peanut farmers wanting to get a limited number of contracts. Companies can now award con-tracts to farmers anywhere peanuts can be grown. Production is expanding into new areas of traditional peanut states, as well as starting up in entirely new regions. It would seem obvious that long-time, experi-enced, and skilled peanut growers would have a competitive edge over brand-new growers. Not necessarily. "Peanut companies don't require that growers have a lot of experience growing peanuts or how to get the best price for a crop - the company's ideal is a grower who will sign the company's contract as offered." D. Capital Investments. The farmers RAFI-USA talked with shared a fundamental concern of other contract grow-ers: the problem of managing long-term debt along with short-term income security. It costs money to earn money growing pea-nuts. Harvesters and other needs require capital investment. Growers most often get this money through long-term loans. Con-tracts are for one season; loan payments go on for months and years. Clearly, a grower is taking a huge risk if he or she assumes peanut contracts will be offered

for the time required to earn back the capital investment and loan charges. There is abso-lutely no guarantee that a current one-year peanut contract will be renewed at all. We emphasize this point especially for first-time peanut growers who are considering contracts as part of their plans. E. Increasing Contract Requirements. Previous peanut marketing contracts did not require specific production practices and va-rieties, and the peanut program specified qual-ity standards. In recent years, contracts have begun to require specific varieties, and gen-eral requirements of production practices. Farmers we spoke with were concerned that over time peanut contracts will resemble pro-duction contracts, with companies specifying production practices and determining all qual-ity standards. While these concerns are less pressing for farmers considering a specific contract, they are significant when considering investment in equipment or facilities that require long-term financing as discussed above. The greater the investment that a farmer has in crop-specific equipment and facilities, the less able they are to reject future contracts.

F. Beneficial Interest Issues. Farmers are concerned with the unclear bene-ficial interest issues in current option con-tracts. U.S.D.A. requires that beneficial inter-est stay with the farmer in order to get MAL or LDP payments and for the peanuts to re-main under loan. Since the contract requires that the peanuts stay under loan until the company exercises the option to buy them, the risk of loss may stay with the farmer until well after delivery. These liability issues are currently unresolved, and may become more of an issue for farmers in the future.

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5. Evaluating Contract Terms Understand Before You Sign We’re now ready to go into some useful details as you read, evaluate, and decide on a particular contract placed before you. The previous information should help you as background. As you evaluate a contract, please add to this guide’s help any and all expert advice you need on contract questions. Keep this in mind: When you sign a contract, its terms will govern all aspects of your relationship with the company.

We will focus on the most common key terms, the ones you are most likely to come across. Using examples from actual contracts we have reviewed, we will discuss the mean-ing of each term as it affects the contract grower. We will also point to some states that have passed laws to protect growers. All of this is designed to successfully follow the motto we headlined above: Understand be-fore you sign. Before tackling each term in detail, here are a few tips to bear in mind about understanding peanut contracts. Be prepared. Many of the farmers that we spoke with were concerned about the short period of time that they had to evaluate offered contracts. It is best to have a good idea of your situation, in-cluding production and post-harvest costs, price needs and alternative crop opportunities before you anticipate a contract will be of-fered. It is also good to identify professionals that you will call on to help you understand the offered contract before the contract offer is anticipated. The better the information that you have going in to the contract evaluation, the better a decision you can make.

You don’t have to go it alone. In fact, you should count on getting some ex-pert help. Contracts are legal documents written by attorneys and, when disputes arise, interpreted by attorneys and judges. So please give some thought to enlisting some experts on your side. An experienced lawyer can be a good friend to have. So can Cooperative Ex-tension agents, growers’ associations, farm advocates, and knowledgeable farm commu-nity leaders. They are the kinds of support people who can help you with common and complex items like confidentiality clauses, beneficial interest terms, state law governing contracts, financial technicalities, and more. We’ve mentioned before that your resource team needs to be identified before the moment when you’re sitting down and having your first look at the contract. You won’t have a lot of time to decide in most cases, so prepa-ration is well worth the time and effort. Look for contract obligations. Review the entire contract. See what the company is obliged to do for you. Contracts often begin with statements of the company’s obligations, or duties, to the contracting farmer. Be aware that the company’s position is that its obligations to you are only those written into the contract. So you must iden-tify and understand what the contract says about the company’s duties toward you. In most contracts, you will find a statement that the company accepts an obligation to pay you to deliver product that meets standards given in the contract. Find out if there’s a cooling off period. You may sign a contract and decide, for whatever reason, that you don’t want to fulfill it. Some (but not all) states protect growers by allowing them to cancel a contract within a specified time. Before you sign, see if your state has this cooling off period. If so, this gives you a safety valve. You can use the pe-riod--three days is fairly common--to study the contract with great care, get any needed expert help, and reassess contract peanuts as part of your overall business plan.

The main goal in this section is to suggest a way that can help you study and make sense of a particular contract. Contracts vary from company to com-pany and area to area, and this guide cannot cover everything.

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Contract Terms

Understanding a contract depends on understanding the terms clearly and fully. This section will go into detail on contract terms. All are common and important and we’ve done our best to be clear. Still, you will probably have questions about the content of this section. Also, it’s very possible you will be reviewing a contract with terms that are not included here. This brings us back to the necessity for you to enlist lawyers, farmers, extension agents and/or advocates, to answer your questions. Also, you may have some questions best asked of the company or lenders.

A. Compensation. If you’re like most farmers, your eye will go straight to the price a contract is offering. Which is well and good--your goal is a contract enabling you to make some money from peanuts. However, the price is only a part of understanding how and how much you will be paid. It is important to fully understand how payments will be calculated. Some contracts stipulate that the price is dependent on grading, or is for only a portion of the farmer’s production. Pricing conditions may reduce the overall price for the crop. Costs. Check the contract for all costs of eve-ry thing the contract obligates you to do. While most farmers have a good understand-ing of their production costs, the contract may have other requirements that increase your costs. The contract may require you to dry, handle or transport the peanuts in a certain way. Keep in mind the risks of potential costs that are out of your control. A rise in fuel cost is a common example. Few contracts mention this important point. Before you sign, understand what happens if unavoidable factors greatly increase your production costs during the growing season. And if you do negotiate contract changes, they must be writ-ten and signed by you and the company. Payment Schedule: You need to understand what the contract says about how and when you will be paid, including how the company calculates the price, and when the company promises to pay you. Payment information may not be in the basic contract. It is often given in a price schedule that the contract refers to. Review these terms before you sign. Find out if the contract al-lows either price or payment schedule to be changed.

Determine if your payment is due on the date the company accepts your peanuts, and if the contract includes interest payments for the grower if payment is late. You want to avoid becoming the company’s creditor, which would likely leave you holding an unsecured debt. Payment timing and calculations may be es-pecially complicated in options contracts. Because these contracts are for the option to purchase peanuts from the government loan program and require farmers to put their pea-nuts under loan, farmers receive a portion of their payment from the government and part from the company. These should be carefully reviewed for terms about when and how much the grower will be paid. Here’s an example from an option to purchase we reviewed for this guide:

There have been some concerns that contracts may allow for payment when the company buys the peanuts from under loan, which may be months later.

“The option price will be paid as follows: $1.00 per net ton will be paid at signing of this Option and $94.00 per net ton basis grade will be paid at the time of inspection of the Peanuts.”

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Crop grading: Contracts often specify the quality standards for the peanuts, and not meeting these standards can affect price. Standards may be caused by factors outside of the farmer’s control, such as weather conditions during harvest. Consider what happens to your compensation if you do not get the expected grade for you peanuts. Also, consider any possible quality benefits that the con-tract may provide. Right of First Refusal: Most option contracts for peanut production reviewed for this article con-tained terms giving the shellers the right of first refusal for any crop produced beyond what was contracted for in the option. The following is an example of one such provision.

Right of First Refusal. Producer hereby gives Buyer the right of first refusal with respect to the purchase of all or any portion of the farmers stock peanuts produced on all Producer’s farms for the 2005 Crop Year except those peanuts which are subject to a presently existing contract with Buyer or another bona fide commercial sheller of peanuts for the 2005 crop. Pursuant to this paragraph, Producer shall not sell any peanuts to a buyer at a price not greater and upon terms and conditions not less favorable than the terms and conditions offered in writing and in good faith by such buyer for such peanuts. The terms and condi-tions of Producer’s offer of first refusal to Buyer shall be in writing. Buyer shall have a period of 72 hours in which to accept Producer’s offer. Should Buyer fail to accept Producer’s offer within such time, Producer may proceed to sell such peanuts to the other buyer on the basis of the same price, terms and condi-tions offered by Buyer.

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Contract Terms continued B. Management, Production Practices,

and Equipment Upgrades. The peanut contracts we reviewed for this publication are options to purchase. They pretty much leave management and produc-tion decisions in the hands of growers. How-ever, as the peanut industry continues to evolve contracts can change. Some farmers we interviewed expressed concern that contracting companies may begin dictating that growers grow a certain variety with specific production practices. One grower reported that shellers are dictating where growers should buy their peanut chemicals. Here is an example from a peanut option contract:

Companies have legitimate needs for equipment and other changes to realize company objectives. Their requirements may be company-specific or industry-wide. The concern here is that company requirements may increase your costs, reducing your profit, or may tie you to debt that reduces your ability to negoti-ate the contract and adversely affects your long-term financial prospects. Once again, crop-specific expenses that require long term financing, such as spe-cific equipment or handling facilities, should be evaluated very carefully with a short term contract.

C. Delivery and Storage Requirements. These are very important in almost all peanut option contracts. A delivery date is of course a key item to check. Late delivery can have serious consequences. For example, one option contract we reviewed states that the buyer “... at its sole discretion may reject delivery of the Peanuts” if the contract’s deadline date is not met. But delivering on time is just one element. A delay between harvest and delivery can cause shrinkage in the peanuts, which reduces the farmer’s income. Contracts can require a grower to put the crop under loan and transport the peanuts to a storage facility sometimes chosen by the company. With warehouses scarce in new peanut growing areas, transportation to existing warehouse facilities could be costly. It is important to think through all of the post-harvest costs, and to be sure that you include all of the costs that you are responsible for in your financial calculations. These delivery-related items require careful thought. Before you sign, you want to be sure not only that you can fulfill these terms, but that complying with these and other contract duties makes good economic sense for you.

Producer agrees not to apply or use any chemicals not specifically approved and labeled for use on peanuts or any chemi-cals which Buyer from time to time noti-fies Producer are not approved by Buyer to be used in connection with peanuts.

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D. Incorporation by Reference and Entirety/Integration Clauses

Most peanut contracts refer to outside docu-ments with specified terms that are as binding as anything in the basic contract document itself. Usually, the contract will have a list of such documents. You may see a provision like this one:

Make sure your review includes all contract materials. Generally, the law presumes that anything that is not included, or referred to, in the contract, will not be considered part of the contract. This is tremendously important. What’s in the contract is all that matters. Conversations don’t matter. Promises may have been made--if they’re not written into the contract, they count for nothing. Other documents are to-tally irrelevant. This point is so critical that most contracts have specific clauses to underscore it. They can be called entirety clauses, integration clauses, or merger clauses. They can differ in wording, but their objectives are exactly the same: to establish the written contract as the final and complete legal record of an agree-ment between grower and company. Here are a couple examples from option con-tracts we reviewed for this guide:

Note the last sentence of the second example--beginning with “Producer acknowledges that...” Boiled down, this says the grower is agreeing to the written contract and only that. You see the company’s reason: If things go wrong after the contract is signed, the grower can’t claim that the company promised him or her anything that isn’t written in the contract. [This is not to say you and the company couldn’t make a verbal agreement to something and then put it into writing as part of the contract.] E. Excuse of Performance Contracts are strict about performance. The general rule is that a farmer is liable for non-performance unless the contract excuses non-performance for cer-tain reasons. Even if a flood or tornado ruins your crop, you can still be held responsible for fulfilling the contract--unless your contract contains a natural-disaster clause of some sort. As you review a contract, see if it has some-thing called a force majeure clause. This is a clause protecting from liability growers unable to fulfill their contracted duties due to factors the grower couldn’t control. “Acts of God” generally qualify, as do profound events such as riots and war. [These clauses apply only if the grower uses due care to try to avoid the catastrophe. That is, if you drove a truckload of peanuts into a riot area and rioters set fire to your crops, you’re probably liable.]

“The terms and conditions set forth on this reverse side of the agreement are an inte-gral part of this agreement.”

Merger. This writing constitutes the entire Agreement between Producer and Buyer, terminating and superseding any prior dis-cussions or agreements between Producer and Buyer with respect to the subject mat-ter hereof. Buyer and Producer agree to execute any and all other documents nec-essary to comply with applicable federal law or regulations or state law or regula-tions. Producer acknowledges that Buyers and its agents made no representations to induce Producer to enter into this Agree-ment, except for such representations as may expressly appear herein.

Entire Agreement: This Agreement super-sedes all prior discussions and agreements between the parties and may not be modi-fied or amended except in writing by both parties. The failure or delay in exercising any right hereunder shall not constitute any waiver of such right, and the waiver or any breach of this Agreement shall not constitute a waiver of any later breach of this Agreement.

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Contract Terms continued Here’s is an example from an agreement for peanut production.

Note: Suppose you reach a point where you think you won’t be able to deliver what you contracted for. In that case, immediately write the company and tell them. This in-cludes natural disasters, if that has caused your problem. Prompt written notification can help the company adjust and curb its re-sulting damages

F. Right of Access: Many contracts give the company the right to go onto the farmer’s land to inspect the peanut crop. You will want to see if this is true of the contract you are evaluating. You may have to search care-fully: Right of access may be given in a sepa-rate section under a clear title or it may fall under another heading, such as this contract language under “Warranties”:

Notice that this clause does not spell out the situation required for the company to take plant samples. In some situations in other commodities, farmers have had problems with companies taking samples without their knowledge, and then being presented with results after harvest when the farmer has no way to take their own samples or refute the results. Crop inspection and plant sampling are certainly legitimate requirements from the company, but the farmer should be careful to match any sampling with his/her own. G. Disputes, Termination, and Damages and Remedies (1). Dispute Resolution: Most people downplay the possibility of fu-ture disagreements when entering into a busi-ness contract, but dispute resolution options have become a critical issue in agricultural contracts. The peanut contracts that we re-viewed for this publication do not lay out a specific process for handling disagreements. However, in commodities with a longer his-tory of contract-based markets - particularly poultry and pork - many company contracts have evolved over time to include specific dispute resolution language that can stack the deck against the farmer.

Acts of God, No Allocation: The Seller shall not be excused from its obligations set forth in this Agreement for failure to deliver the full amount of Peanuts con-tracted hereunder unless the actual pro-duction of Peanuts on the farm specified above is less than the contracted amount because of physical loss of production re-sulting solely from external sources such as fire, lightning, inherent explosion, windstorm, drought, tornado, flood, or other acts of God. If Seller is unable to deliver the full amount of Peanuts con-tracted herein because of such reason, the Seller agrees to deliver and sell to Sheller the full amount of Peanuts actually pro-duced from the above specified farm, and this obligation of the Seller shall not be subject to excuse or allocation pursuant to Section 2-615 of the Uniform Commer-cial Code.

Should Buyer request it, Producer agrees to permit Buyer access to inspect Pro-ducer’s crop during the growing season and to take a reasonable number of plant samples for chemical analysis.

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When a farmer signs a contract with a binding mandatory arbitra-tion clause, he or she is waiving the right to use the American public court system to settle any future dispute with the company. The rules and procedures shaping the arbitration are generally determined by whoever writes the contract. Arbitration can be struc-tured to be prohibitively expensive for the individual farmer and is lacking the same protective legal procedures of the public court system. Some alternative dispute resolution options can be beneficial3. For example, mediation is a structured process that relies on a neutral third party to help negotiate differences and is typically very affordable. The decision relies on voluntary implementation. Agreeing to mediate does not eliminate either party’s other legal options. Dispute resolution options are an issue to fol-low as peanut contracts evolve from year to year. For any dispute resolution option that is included in the contract the farmer should seek clarification and understand the associ-ated costs, governing procedures and whether the decision can be appealed to a court of law. (2). Contract termination, exercise of option and termination of option: Terms defining the duration of the contract will be set out in all contracts. Some will be explicitly titled, but others may not be as ob-vious. Most contracts being offered today are for one growing season. 3 For additional information on dispute resolution, mediation, and arbitration issues in production con-tracts see “I’ll See you In Court– or Will I?” Assessing the Impact of Integrator Practices on Contract Poultry Growers (December 2001), pp 4 – 123, http://www.flaginc.org/topics/pubs/poultry/poultrypt6.pdf

A peanut producer should know and under-stand how the contract can be terminated and when it can be terminated. A farmer should know under what circumstances, including at whose discretion, their peanut contract can be terminated before the end date on the con-tract. As discussed throughout this booklet, if it isn’t actually included in the written contract, it should not be relied upon. This goes for any comments a company representative or warehouseman may make to you regarding a contract for the next season. Unless you have signed a contract, you should not rely on any of those conversations since it is unlikely that they could be enforced. You and the contract-ing company are bound by the duration of the contract defined in the written and signed agreement. In an options contract, there are different sections of a contract, often with similar lan-guage, that spell out conditions for the termi-nation of the option to buy, for the termina-tion of the contract itself, and the term or du-ration of the contract. It is important to know which situation terms are talking about. Contracts use different language to talk about the company exercising its option to buy the peanuts. This is the point at which the com-pany uses its option to buy, pays for the pea-nuts and takes possession. The date the com-pany exercises its option can affect the date the grower gets paid, so it’s important.

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Contract Terms continued Here are a couple examples of contract lan-guage on exercising the option.

The following is a section of a contract outlin-ing the term and termination of the option agreement itself. Note that “Term and Ter-mination” is about exercising the option, although it’s not mentioned in the title.

(3). Damages/Remedies: Suppose either the company or the grower fails to carry out their contract duties. The contract has been broken, and someone may be owed compensation, either in money or compensatory actions. What happens next? This brings us to breach of contract, a complex and technical thing best studied with access to an attorney or experienced farm advocate. We will give you some basics to help you evaluate your contract in terms of what happens when things go wrong. Some contracts contain language stating allowable damages for a breach of terms; some don’t. Some states have laws governing damages for breach of contract. The Uniform Commercial Code may apply; it gives both parties options in certain cases, depending on who breached the contract. Both parties will be able to seek recourse for a breach of contract if that claim is made within the applicable statute of limitations. Companies have several options if they believe a farmer has breached a contract. The company may:

• Get the grower to pay back any money already received from the company.

• Buy peanuts from someone else, and then get the contracting farmer to pay for the costs of the substitute goods.

• Seek to have the farmer pay damages for failing to deliver the crop as specified by the contract.

• The company also may try something called “specific performance.” This means getting the farmer to repair the breach by doing what the contract called for. For example, if a farmer’s own crop failed, the company may ask that the farmer get substitute goods of the specified quality and deliver them to the company.

Notice of Exercise. Buyer may exercise this Option by either (i) giving written no-tice of its exercise to Producer either in person, via fax or by U.S. Mail with proper postage affixed and addressed to Producer at the address set out above, or (ii) by re-paying Producer’s marketing assistance loan (MAL). If exercise is under (i), the date and time Buyer exercises this Option shall be deemed to be the date and time of the notice of exercise. If exercise is under (ii), the exercise shall be effective upon Buyer’s repaying the MAL on Producer behalf. Option Payment Date: Sheller shall pay the Seller the Option Payment on the latter of the date that this Option has been exe-cuted by the parties hereto or the date that the Power of Attorney, appointing the Sheller as attorney in fact to act for the Seller with respect to certain FCIC, FSA and/or CCC programs, is approved by FSA. Upon receiving an approved Power of Attorney from FSA, Sheller shall have no obligation to notify the Seller of its inten-tion to exercise or the actual exercising of this Option.

Term and Termination. A. Buyer may exercise this Option at anytime during a period beginning on the date of this Agreement and ending on October 31, 2006.

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The following is a specific performance pro-vision from a current option contract.

A company may also request specific per-formance, requiring a remedy such as the farmer acquiring substitute goods to fulfill their obligation under the contract.3 It is con-ceivable that a farmer could buy the peanuts elsewhere to deliver the required poundage.

On the farmer’s side, a couple of main options exist when it’s the company that has breached the contract.

• The farmer may sue for the full price of the goods under the contract.

• The farmer can also sell the peanuts to an-other company and, if the price is lower than the contract price, seek to recover the difference from the original contracting company. Note: This second option is a long shot. These days, peanut companies are all contracting to fill their needs; so they are unlikely to need peanuts offered mid-season or later.

3 There may be a potential conflict with a specific performance remedy if the contract has conflicting language stating the contracting company will only accept peanuts produced on specific land - the contracting farmer’s land.

Specific Performance. Producer and Buyer agree that they have executed and delivered this Agreement in contemplation of the limited source or market of peanuts. Producer acknowledges that Buyer has entered or will enter into commitments with other parties in reliance upon Pro-ducer’s performance hereunder. In rec-ognition of the foregoing and the unique characteristics and sources under this Agreement or otherwise, the remedy of specific performance of Producer’s obli-gations under this Agreement, and breach or threatened breach of this Agreement shall entitle Buyer to a temporary or per-manent restraining order or injunction.

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6. Conclusion

In the short term it is reasonable to assume the peanut production contracts will look similar to the contracts that are being presented today. However, the poultry and hog production industries teach us that in the long term the con-tracts will change to give companies tremendous control over production, man-agement, and the future of family farming businesses. It is important for every farmer who is considering a peanut contract to follow the checklist attached to this article to ensure that they are prepared for the duties and risks associated with a proposed contract.

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1. RESOURCES AND WHERE TO GET MORE INFORMATION For more information on a range of farming issues: RAFI-USA Rural Advancement Foundation International – USA PO Box 640 Pittsboro, NC 27312 Phone: 919-542-1396 www.rafiusa.org Farmers’ Legal Action Group, Inc. 360 North Robert Street, Suite 500 St. Paul, MN 55101 Phone: 651-223-5400 lawyers@flaginc.org www.flaginc.org For more information on production contracts and contracts generally: A Farmer’s Legal Guide to Production Contracts, Neil D. Hamilton, Top Producer, Jan. 1995 Livestock Production Contracts, Commodity Marketing Agreements, and Forward Con-tracts: Legal Risks and Protections for Family Farmers, Jill E. Krueger, March 12, 2004 available at www.flaginc.org Agricultural Production Contracts: Drafting Considerations, Christopher R. Kelley, 18 Hamline L. Rev. 397 (1995) Assessing the Impact of Integrator Practices on Contract Poultry Growers, Farmers’ Legal Action Group and others, September 2001, available at www.flaginc.org/pubs/poultry.htm Grain Production Contract Checklist, Livestock Production Contract Checklist, Iowa Attorney General, available at www.state.ia.us/government/ag/working_for_farmers/contracts.html. (sample contracts also available) Contracting in Agriculture: Making the Right Decision, USDA, available at www.ams.usda.gov/contracting/contracting.htm

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2. RELEVANT GOVERNING LAWS Peanut products and production are regulated in many different ways, from local environmental per-mitting of production, to monitoring pesticide residue under the Federal Insecticide, Fungicide, and Rodenticide Act, to labeling the product for consumers. This booklet was not intended to go into the details of all the relevant governing laws for peanut production. Rather, it highlights many state and federal laws and regulations that could affect contracting for peanut production. With that narrow fo-cus and context in mind, a few additional topics need to be highlighted because of their relevancy to the operation of your peanut production contract. Below is a list, although not exhaustive, of state and federal laws and regulations which may be relevant to the operation of your peanut marketing contract. A. Uniform Commercial Code (UCC) Contracts are generally governed by common law; also know as judge-made law or case law, applica-ble in a particular jurisdiction usually a particular state. This would be true except to the extent en-acted legislation has codified, changed, or added to it. Contracts for the “sale of goods,” moveable tangible items, are governed by the Uniform Commercial Code, or UCC. The UCC was developed to do exactly what it says, provide uniformity to commercial transactions. Most other contracts are gov-erned by states provision which can vary widely and the interstate nature of commercial transactions warranted uniformity. Article Two of the UCC applies to contracts for the sale of goods involving $500 or more. This would be generally applicable to most peanut contracts. The UCC is probably most relevant, for purposes of this booklet, when discussing a breach of contract and damages related to that breach. An attorney admitted to practice in your state can provide more detailed information on how your state’s UCC impacts your contract. B. Producer Protection Act and Similar State Protections The Producer Protection Act was a model state statue proposed by 17 state Attorneys General in 2000 as a means to assist agricultural contract producers and provide uniform protections for producers.4 The proposed legislation was a result of the experiences of farmers, attorneys, and legislators in the broiler industry. In response to that situation, the state model protections included requirements for disclosure, transparency, and readability as well as economic liability limits. The proposed law did not, however, equalize bargaining power, guarantee a fair price, or mandate that contracting companies provide different contract options to their producers. A few states have provisions similar to or based on the Producer Protection Act many of those have been highlighted throughout this article from Min-nesota, Illinois, North Carolina, Kansas, and Georgia. Illinois has since enacted an Agricultural Pro-duction Contract Code for the farmers of Illinois.5 The Illinois law is a great example of producer pro-tections for farmers involved in a variety of agricultural contracts. It is mentioned throughout this arti-cle. Farmers working to have state laws governing agricultural contract issues should take a look at the Illinois law. C. Agricultural Fair Practices Act (AFPA) Many farmers have a fear of retaliation from a contracting company if they join an organization advo-cating for the interests of peanut farmers. The right for a farmer to form or join an association for ne-gotiating contract terms is protected under the federal Agricultural Fair Practice Act, 7 USC §§2301-2306. This Act forbids unfair interference by contractors into producers associations, but it does not require companies to negotiate with such associations.

4 The model language of the Act is available at http://www.state.ia.us/government/ag/agcontractingexplanation.htm.

5 Illinois Public Act 93-0522, codified at § 505 ILCS 17/1-99.

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3. FARMER CHECKLIST Before signing a contract…

Be Prepared. Contract offers often allow little time for consideration before signing. It is best to know your situation and what you need to make producing peanuts profitable BEFORE you expect a contract offer.

Read the whole contract. This is the time to use as much information as possible so you can

make informed decisions about your future. The starting point for all your decisions should be the actual contract AS WRITTEN.

Understand the terms of the contract. You need to understand the terms of the ENTIRE con-

tract, because the contract, IN ITS ENTIRETY, will govern all aspects of your relationship with the company. The contracting company wrote the contract to protect ITS interests. You need to protect yours.

Get the help you need. If you have any difficulty understanding the terms of the contract, you

should consult an attorney, or someone who has a great deal of knowledge or experience with similar contracts such as an experienced member of your community, a farm advocate, or a growers association.

Identify your obligations and risks under the contract. In exchange for a contract price for

your peanuts, a farmer committed under a contract faces significant risks and obligations. Some may be obvious, others may not, but ALL must be fulfilled. Determine if you can meet your production obligations under the contract including the required inputs, equipment and fa-cilities, quality, and harvesting requirements. Know what is expected of you and how your costs and income can be affected. Analyzing risk is an area where expert help can be vital.

Determine the contract’s economic impact. Figure up your likely production costs, income,

and variables. Don’t calculate only the best-case scenario with the highest profit. Run the numbers on a range of outcomes. What would bad weather, plant disease, or an outright disas-ter do to your net return? Calculate the effect of increased production costs or changes in mar-ket prices. Analyze the bottom-line impact of the way your crop is graded. Look for contract language about penalties if you don’t deliver the quality products the contract specifies at the right time.

Keep a written record of everything. Write down all your dealings with the contracting com-

pany. This is important. Make sure that any changes to the contract are put into writing and signed and dated by both parties. In some cases, this is required by law--in any case it’s good business. Also for your own protection, keep a written record of your contract performance, such things as planting, harvesting, fertilizing, and delivery.

Know your payment and delivery details. Know how much you will be paid for your pea-

nuts. Just as important, know when you’ll get paid and by whom. Know when, where and how you will be required to deliver the peanuts, and if there are additional costs involved.

Know how disputes are resolved. Understand what happens if things go wrong. Review the

contract to see what it says about grading disputes in particular and about general disputes.

Know how the contract can be terminated. Know when and how the contract can be termi-nated by you and/or the contracting company.

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“Farmers’ Guide to Peanut Contracts”

Evaluation Form

We are always interested in hearing from readers. Please fill out the form below and send it to: RAFI-USA, PO Box 640, Pittsboro, NC 27312

1. How did you use this guide? Check any that apply:

as general background on peanut contracts and the industry as a tool you referenced in the process of making a decision related to entering a peanut (or

other) contract as a tool you referenced for more information on your rights as a contract peanut grower other: __________________________________________________________________

2. What information did you find the most helpful or interesting?

3.

example, are you going to talk to more farmers or revise your cash flow projections?)

4. After reading “Farmers’ Guide to Peanut Contracts” do you have additional questions or

types of information you wish we had included?

Name ______________________________________________________________ Address ____________________________________________________________ City _________________________ State _______________ Zip_______________ Phone ___________________________ Email______________________________ Organization / Business ________________________________________________

Thank You!

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If you read “Farmers’ Guide to Peanut Contracts” because you are considering getting into the contract peanut business or other contract-based agricultural enterprise, has the guide caused you to do anything differently than you were previously planning? (For

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