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Agricultural Contracting: A U.S. Perspective

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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 – PowerPoint PPT presentation

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Title: Agricultural Contracting: A U.S. Perspective


1
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

2
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.

3
Issues and Lessons for India to Consider from the
U.S. Experience with Contracting
  • 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.

4
Issues and Lessons for India to Consider from the
U.S. Experience with Contracting
  • 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?

5
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.

6
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.

7
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.

8
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.

9
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.

10
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.

11
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.

12
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

13
Elements of a Production Contract
  • 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

14
Elements of a Production Contract
  • 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.

15
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

16
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).

17
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

18
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.

19
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.

20
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.

21
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."

22
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.

23
  • 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.

24
  • 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.

25
  • 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.

26
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.

27
  • 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.

28
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.

29
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.

30
Reasons Why Agricultural Companies Will Use
Production Contracts
  • 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.

31
Reasons Why Agricultural Companies Will Use
Production Contracts
  • 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.

32
Reasons Why Agricultural Companies Will Use
Production Contracts
  • 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

33
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.

34
  • 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.

35
  • 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.

36
  • 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.

37
  • 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.

38
  • 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.

39
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.

40
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

41
  • - 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.

42
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

43
  • 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.

44
  • 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.

45
  • 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.

46
  • 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.

47
  • 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 farmers 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.

48
  • 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.

49
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.

50
Hamilton's Twelve Basic Rules of Contracting
  • 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.

51
Hamilton's Twelve Basic Rules of Contracting
  • 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.

52
Hamilton's Twelve Basic Rules of Contracting
  • 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.

53
Hamilton's Twelve Basic Rules of Contracting
  • 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.

54
Hamilton's Twelve Basic Rules of Contracting
  • 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?

55
Hamilton's Twelve Basic Rules of Contracting
  • 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

56
Hamilton's Twelve Basic Rules of Contracting
  • 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.

57
Hamilton's Twelve Basic Rules of Contracting
  • 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.

58
Hamilton's Twelve Basic Rules of Contracting
  • 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.

59
Hamilton's Twelve Basic Rules of Contracting
  • 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.

60
Hamilton's Twelve Basic Rules of Contracting
  • 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.

61
Hamilton's Twelve Basic Rules of Contracting
  • 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.

62
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.
  • oduction contracts

63
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.

64
Issues to Consider about Regulating 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.

65
Issues to Consider about Regulating Contracting
  • 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 states
    rights - as well as raise constitutional issues,
    such as the application of the dormant commerce
    clause.

ed
66
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

67
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.

68
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.

69
  • 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

70
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.

71
  • 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.

72
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.

73
  • 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.

74
  • 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.

75
  • 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.

76
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.

77
  • 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.

78
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.

79
Minnesota Contracting Law
  • 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

80
Minnesota Contracting Law
  • "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."

81
Minnesota Contracting Law
  • 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."

82
Minnesota Contracting Law
  • 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.

83
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.

84
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.

85
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.

86
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.

87
Information Sources on Production Contracts
  • National Center for Agricultural Law Production
    Contracts Reading Room
  • http//www.nationalaglawcenter.org/readingrooms/pr
    oductioncontracts
  • Iowa Attorney Generals Office - Contract Data
    Base
  • http//www.iowaattorneygeneral.org/working_for_far
    mers/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
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