Contracting in
Agriculture:
Making the
Right Decision
Information for Farmers from USDA
Introduction
Production Contracts—A Different Type of Business Decision
for Farmers
Why Do More Companies Want to Use Contracts?
How Do You Benet from Production Contracts?
What Do You Give Up in Contracting?
Pencil It Out and Compare
Contracting Can Create New Risks
Ten Legal Rules About Production Contracts for Farmers to
Consider
Critical Issues in Contracting—and the Questions to
Consider
How Do You Recognize a Good Contract?
If You Have Concerns
For More Information
Table of Contents
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Introduction
Today, a signicant portion of livestock, poultry and other crops are being raised
under production contracts, also known as grower agreements. Contracting has
changed the shape of American agriculture. In the future, you may consider signing
a contract to raise a crop under detailed specications or to care for livestock or
poultry owned by someone else. USDA cannot tell you whether or not to sign a
production contract. Each farmer and every farm business is different and there are
many different types of contracts available.
Making the important decision to enter a production contract should only be made
after you consider how contracting may affect the future of your farm business.
This guide is designed to help you understand production contracts – and to help
identify the questions you should consider as you decide whether contracting is right
for you. At the end of this guide you will nd a list of other sources of information
about contracting, including the USDA website, which may help you decide whether
contracting makes sense for you and your business.
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Why Do Companies Want to Use Production Contracts?
Basically, an agricultural production contract is an agreement
– you agree to produce and deliver a specic agricultural
commodity for the contractor, under the terms of a legal
agreement signed before any seeds are planted or livestock are
delivered. The contract might be a simple 1-page agreement
or it may be many pages with detailed legal provisions. In any
case, the contract creates a unique relationship and requires
you to follow its terms in the production and delivery of the
commodity involved. There are many reasons companies
involved in agriculture use production contracts:
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Production Contracts – A Different Type of Business
Decision for Farmers
Farming is a business. You already know this. Marketing what
you raise on your farm involves entering into many types of
business transactions. In many cases, these transactions involve
people you know – friends, neighbors – and often begin with
just a handshake. Deciding to sign a production contract is
also a business decision but it is much different than traditional
marketing. The key to understanding a production contract
is that you are no longer selling or marketing production you
own, instead you are being paid for your services in caring
for animals owned by another party or for raising their crop.
Often times, with a production contract, you may be dealing
with people you don’t know or who don’t live nearby. The
agreement will not be a simple handshake but will require
signing a detailed binding legal agreement. In most cases, you
will be offered the business arrangement on a “take it or leave
it” basis with little opportunity to negotiate different terms.
A contract creates expectations and obligations between you
and the contractor, for example, the company providing the
swine or poultry you agree to raise . You expect to be paid for
what you do and expect the contract will run for the agreed
time period. The contractor expects you to meet the terms
of the contract and to perform the services such as caring
for livestock – in the manner described in the agreement.
Signing a contract is a business decision – one that brings
opportunities and challenges.
Quality Control – Contracts can provide control over the
genetic technology, production methods, and inputs used, and
help ensure uniformity and quality of the commodity produced.
Assuring Adequate Supply – Contracts offer a way to manage
the quantity acquired to ensure an adequate supply.
Supply Management – Contracting can help lock in supplies
for the contractor, but contracts may include terms limiting the
amount the contractor actually is required to accept.
Marketing-Related Technology – Contracts can promote the
use of related technologies, such as “packages” of seeds and
chemicals. In other words, you agree to use the seeds and the
chemicals provided by the contractor to produce the
nal product.
Intellectual Property Protections – Contracts can control access
to new technologies, thus serving as a form of intellectual
property protection.
Condential Arrangements – Contracts offer a way for
companies to preserve the condentiality of their marketing
arrangements and even the identity of end-users.
Pricing Condentiality – Contracts often use non-public
pricing which conceals the premium earned for any special trait
or the amount paid for performing services. This can create
higher prots for the contractor and may limit the ability of
producers to bargain for higher payments.
Lower Risks and Higher Prots – Contracts offer companies
a way to invest in technologies like improved breeding and
extend operations into production without having to own
farmland or production facilities. This can be important in
states with laws prohibiting corporate ownership of farmland.
Move Capital Requirements from the Company to Farmers
– Contracts allow companies to move the nancial risk of
building barns and buying equipment from their balance sheet
to that of farmers. This reduces their nancial risk in case
market conditions call for reduced production: a loan must still
be paid even if the building or equipment is not in use.
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How Do You Benet from Production Contracts?
A second question you might have is – why even consider
entering into a production contract? Most farmers consider
signing a contract to reduce exposure to risk or to make more
money. Indeed, some contracts can lead to higher returns and
serve as a form of risk sharing. For example, contracts can
insulate growers from some market price uctuations. The
following are some ways production contracts may help you in
your business operation:
Lower your Financial Risk – Contracts can reduce nancial
risks by providing a guaranteed source of cash ow while
reducing your need for capital. For example, by raising hogs on
contract, you will not need to purchase the animals but instead
can use your labor and facilities to care for the contractor’s
animals. The contract will provide regular payments if contract
requirements are met, and by not owning animals you may
be protected from market price uctuations if the contract
provides for a guaranteed price.
Access to Credit– If you need to borrow, contracts may make
you a more attractive borrower. In fact, some lenders may
require contracts as a condition for a loan. By providing a
steady source of revenue and reducing marketing risks, a
contract may make banks more willing to lend you money to
construct facilities. Some contractors may even offer direct
nancing for producers if new buildings are required.
Access to New Technologies – Contracts can provide you
with access to new technologies such as improved livestock
What Do You Give Up in Contracting?
Every business decision has pros and cons associated with
it, and the decision to enter into an agricultural production
contract is no different. While contracts may offer ways to
reduce your risks, they can also create new risks. In addition,
you lose some of the independence you have as the sole
decision maker in your business.
As you evaluate the terms of a contract, a good rule to keep in
mind is if you expect higher returns or to gain a benet under
a contract, it will be in exchange for something you do. In
contract law this is known as the “consideration.” Depending
on the commodity and the contract terms, the required action –
your “consideration” – can take several forms:
• You might have higher production costs in order to comply
with contract terms, for example, because you must use
higher priced inputs or special equipment;
• You might need to invest large amounts, often secured by
your land, in special-purpose buildings or equipment, of
little use if you no longer have the contract;
• You may have less exibility in how you farm if the contract
provides guidelines on what practices must be followed.
• You may have less control over marketing decisions; in
fact you may not really be marketing anything other than
your labor and capital (money used for buildings and
equipment).
• The crop being grown under contract may have lower
yields than your traditional crop; although your contract
may offer a higher potential price per unit (e.g., bushel)
your total yield may result in lower revenue for the
contracted crop;
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Lower Environmental Risk – Contracts allow companies to
ensure the responsibility for manure and other waste, such as
dead animals, remains with the farmer. Disposal of waste can
be subject to local, state, and federal law.
Together these factors explain why many businesses, such as
seed and chemical companies and meat and poultry processors,
are contracting with farmers to produce commodities.
Contracting offers them stable nancial returns and supplies
and reduces their risks.
genetics. Entering into a contract may be the only way to
acquire some technologies. By contracting you may get access
to the technology and technical support from the company.
Access to New Markets and Higher Prices – Contracts can
provide an opportunity to receive higher returns or price
premiums for raising new crops or using certain production
methods. It may only be possible to raise specialty crops by
growing under contract with a processor.
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Pencil It Out and Compare
To determine if a contract is a good economic opportunity,
you should take these three steps. First, you need to “pencil
it out.” Try to gure what your economic return will be under
the contract. Be honest with yourself. Don’t just use the
highest yield or the best performance, or the highest price and
premiums you could earn. Of course this could happen, but
you should also try to gure out the return based on average
performance and occasional below average results. Above all,
know what your break-even price is, evaluate the contract in
that context, and don’t rely on optimistic estimates
from salespeople.
Second, you should also estimate the worst-case scenario – if
a disaster does happen, such as a storm destroying the crop,
the animals getting sick, an unexpected delay in delivery of
animals, or physical structures being destroyed. Once you
have determined your range of possible returns, you should
consider any other costs or risks associated with the contract,
such as any lengthy delays in payment or the cost of complying
with necessary environmental requirements.
The third step is to compare the returns possible under the
contract to your alternative marketing and production options.
For example you might consider working with other farmers to
form a cooperative to market or process your own production.
USDA has the Value-Added Producer Grant program, which
can help people explore alternative marketing options. The
point is – don’t consider the contract in a vacuum. Compare
it to current markets for the commodity you produce and to
Contracting Can Create New Risks
Only by considering the terms of the contract, your legal
obligations, and the relation the contract creates between you
and the contractor, can you decide if the contract is a justiable
risk for you to take. Consider these examples of how contracts
can result in new risks for producers:
A Long-Term Investment but a Short-Term Contract – Most
livestock growing contracts require you to build one or more
new facilities to the company’s specications, which may
require borrowing money and even mortgaging your land.
However, some contracts may be for a shorter period than the
length of the loan and many don’t even guarantee delivery of
animals on any schedule. This can create a serious risk if your
contract ends before buildings or equipment are paid off. This
risk is especially serious if the contractor is the only company
contracting for livestock or poultry in your area so you can’t
easily nd another company.
Similarly, many specialty crops are produced under 1-year
contracts and may require access to expensive harvesting
equipment. If you buy equipment expecting to continue raising
the crop long enough to pay it off, serious problems can arise if
the contract isn’t renewed.
Quality of the Output is Set by the Contractor – Contracts
often contain detailed terms for the quality of the crop or the
methods of production desired. In most cases, the contractor
alone decides whether the crop or your performance satises
the contract. Experience shows market conditions can
inuence how strictly contract provisions are applied. Many
court cases on contracts have involved claims that a farmer’s
crops did not meet the contract standards. Courts have often
found the products to be in compliance, but instead the real
disagreement arose because the market price had fallen and
the contractor was obliged to pay a price higher than the
current market price. Of course, these disputes can happen
both ways. In some court cases farmers have refused to deliver
• You might receive less for the production you raise if it
does not meet quality standards specied by your contract.
Remember, not all of what you produce may be eligible for
the contract price;
• There is a risk you may end up nancing the contractor
for the time between when you deliver the production and
when you are paid for your services.
The key to evaluating the economics of any agricultural
contract opportunity is to pencil out the costs and expected
returns and determine if the extra costs or risks are worth it.
your current costs of production and returns. If this is a new
business venture, consider the alternative returns you could
earn on money you will invest or borrow under the contract.
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“Know Your Risk: Read the Contract”
When an Iowa seed company experienced nancial dif-
culty and led bankruptcy, many farmers who had grown
and delivered soybeans to the company under contract
were surprised to learn they weren’t going to be paid.
Worse yet, when the producers applied for payments from
the Iowa grain bonding and indemnity funds, they were
not eligible for several reasons. The contractor had never
purchased a grain dealer’s license as required. Further, be-
cause the production contract delayed payment until well
after delivery, the state ruled the contracts were “deferred
pricing” arrangements not covered by law under the in-
demnity fund. This news came as a surprise to the growers
but if they had read the contract closely, it shouldn’t have.
Right at the bottom of the second page was the following
statement in bold print: “Notice to Seller of Financial Risk.
This Contract Constitutes a Voluntary Extension of Credit.
This Contract is Not Covered by Any Grain Buyer’s Bond.”
This situation illustrates how contracting can introduce
new risks of payment and how the nancial health of your
contractor can affect you. It also shows how important it is
to read and understand the contract.
commodities produced under contracts when market prices
rose. It is important to recognize that one of the purposes of a
contract is to x the price or premium to be paid. As a result,
contracting reduces the exibility the parties have to take
advantage of price changes in the market.
Risk of Not Being Paid – Production contracts are a form of
raising commodities and marketing services – and producers
depend on contractors to be paid under the agreements. If a
contract provides for a signicant delay in payment after the
crop is delivered or the service is provided, you are at risk.
Until you are paid, you are an unsecured creditor essentially
nancing the contractor, meaning someone owes you money,
but they have not put up any property as collateral. When
poultry, livestock, or grain are sold in normal marketing
channels to a warehouse, dealer, or packer, you are protected
by federal and state laws which regulate buyers and which
protect your right to be paid for the crops delivered. However,
under most contracts you will have no such protection. While
some states, such as Iowa, have enacted producer lien laws
to allow growers to le legal claims in order to receive their
agreed payment, the procedures are often cumbersome and
rarely used.
Risk of Loss Because you Don’t Own the Livestock or Crop –
Under most common forms of production contracts, you do
not have any legal title to the crop or animals being raised. This
protects the contractor from claims by you or your creditors.
But the contract may also state the risk of loss of the crop,
such as by weather or disease, is yours. In other words, if you
raise a crop, the contractor owns it; but if the crop is lost or the
animals die, you own them and no compensation may be earned
for your services.
Ten Legal Rules About Production Contracts for Farmers
To Consider
Most farmers are not lawyers – although sometimes you may
feel like you need to be. To read and sign a contract you don’t
need to be a lawyer but you do need to understand how the
law might apply to your contract. It is always a good idea to get
your lawyer’s advice on major business decisions you make on
your farm – and signing a production contract is no exception.
Even if you decide not to consult your attorney – there are
basic rules of contract law you should understand.
Here are 10 important rules to keep in mind -- before and after
you sign the contract:
1. Remember the rst rule of contracts: whoever writes the
contract benets most. Don’t assume a contract protects
you. It might, but you shouldn’t assume so. The contractor
who wrote the contract protected its interests. You have to
protect your own. Contracts are “arms-length” transactions
in which both sides try to maximize their advantages. The less
bargaining power you have, the less “advantage” you have.
The reality is most production contracts are one sided--the
company controls the information and has much more power
than any grower or producer.
2. Read and understand a contract before signing it. Contract
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terms determine your rights and responsibilities. Once you
sign a contract it creates binding legal obligations. That is why
it is critical to understand what you are agreeing to do and to
get good legal advice. Do not assume the courts will protect
you if something goes wrong. Courts have resolved many cases
involving production contract disputes and are likely to enforce
the agreements made under the contract, rejecting growers’
claims that the terms were unfair or poorly communicated.
3. If you do not understand the contract, ask questions
and obtain legal advice. This is especially important if the
investment or action involved is signicant or if the contract
creates a long-term relationship. Several states, including
Illinois and Arkansas, have passed laws requiring production
contracts to be “readable” or easier to understand for growers.
These laws require contracts to disclose material risks, such as
the potential need to make additional investments.
4. You will be required to fulll the terms of the contract before
you are paid. Because you have signed a contract to obtain
an economic advantage, you will have to perform whatever
obligations are required before you can receive the benets.
5. Never assume not performing an agreement will be excused.
Some contract terms may be more important than others but all
have legal effect. If something happens to make you unable to
fulll the contract – like bad weather or illness – the contractor
might excuse your unnished work, but not always. In some
situations, like a crop failure due to weather, state law may
even provide an excuse. But if the failure to perform is your
fault, even when caused by conditions beyond your control, the
contractor might choose to enforce the contract. If you believe
you may have to default on or breach a contract, consider
alerting the other side and negotiating a resolution.
6. Be aware of the contractor’s (or whomever the contract
says will pay you) nancial situation. The biggest risk with
contracting is not being paid once you have performed.
You can minimize the risk by investigating the contractor’s
nances, by requesting nancial guarantees, and by dealing
only with those covered by public laws ensuring farmers get
paid for crops or services.
7. Remember, any proposed contract is subject to negotiation.
Even though most contracts are printed, they can still be
amended, if both parties agree. If you don’t like a certain term,
ask that it be changed. Remember – you will never have more
bargaining power in a contract than just before you sign. The
reverse is also true – once you sign, it will be difcult, though
not impossible, to alter a contract. In addition, once you enter
into a production contract relation – and invest substantial
sums, such as for new buildings – you may have even less
bargaining ability in future negotiations. Remember to save
documentation of any changes made to a printed contract.
8. Be sure any changes to a contract are made in writing. Never
rely on oral communications to amend an agreement. Just
because you believe a contract was changed by a conversation
with the contractor or its representative, doesn’t make it
true. If you and the other party agree to amend the terms of a
contract, get the new terms in writing and have the other party
sign them. Be sure to determine whether the other person has
legal authority to make the change. Most contracts include
what are known as ‘entirety’ clauses, which state that only
written terms are binding and “oral modications” are not
allowed -- unless reduced to writing. It is important to keep
letters or other documents showing what was agreed to. Courts
may allow oral testimony to alter contracts, but the burden of
proof will be on you to prove the changes were made.
9. Keep good records of your performance under the contract.
It is very helpful to keep records and documents concerning
your performance --such as amounts you delivered and
when payments were made. Also, keep notes about any
communications with the contractor. If a dispute arises, your
records may provide the answers a court will need in order to
resolve it.
10. Stay in touch with the other party. Good communication
between parties to a contract is important for resolving
uncertainties and preventing problems. Do not hesitate to ask
questions if you don’t understand what is happening, such
as why a payment is late. The other party may be unaware of
the problem. Good communication is especially important
when conditions – such as price changes or weather – make
upholding the contract difcult.
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Critical Issues in Contracting and the Questions
to Consider
When you sign a contract, everything in it is part of your
agreement. But experience shows some issues are more critical
to the success of a contract. The following discussion concerns
the most critical issues in contracting and can be used as a
checklist of questions to consider about your contract.
Getting paid — The most important reason you sign an
agreement is to gain an economic advantage:
• Do you understand how your payment will be calculated
and what factors impact the amount?
• Do you know when you will be paid and who will pay you?
• Are there special rules relating to bankruptcy, or for ling
a lien or security interest to protect your right to be paid if
the contractor experiences nancial difculty?
Understanding your obligations
— Every contract involves an
agreement for you to perform some action. It is important to
consider what risks might arise in satisfying the contract terms
and how you are affected:
• What risks are associated with the crop you are agreeing to
produce? For example, how are you affected in the event of
sick or dead animals, bad feed, or poor weather?
• Do you know what you are agreeing to do? For example,
does your contract provide for delivery of a xed quantity
of the crop produced on identied acres? Under an “acres
contract” you are delivering production from certain elds,
but under a “bushels contract” the agreement is to deliver
a certain quantity regardless of where it is produced.
• Does the contract create any open-ended obligations such
as the contractor requiring you to make new investments in
equipment or imposing conditions you didn’t anticipate or
feel are unnecessary?
• Who sets the standards for how your actions are evaluated
and are the standards and expectations clear? Will there
be a company employee reviewing your actions on a
regular basis?
Control and independence issues — By entering into a
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contract you agree to meet the obligations set by the other
party. This means you agree to give up some independence
in how you produce the crop or raise the livestock. Some
contracts are more detailed in specifying your expected
performance. Questions to consider:
• How much independence or exibility in decision-making
will be left to you?
• Do you have any right to appeal if you don’t agree with a
decision or action by the contractor?
Length and termination of the contract (and protection
of investments) — Most contracts run for a length of time
specied in the agreement. The length of the contract
determines how long you will have access to the contract
opportunity and how long you will be bound by the
contract requirements:
How Will You Be Paid?
As growers and contractors have more experience with
production contracts and each other, the business
arrangements will evolve and should improve. For example,
in recent years many contractors involved in swine
feeding have adopted contracts making payments based
on pig space and paying bonuses for better performance.
Payments under these arrangements are easier to calculate
and understand than payments based on performance
factors relating to feed conversion, death loss, and animal
health. Experience shows most serious disputes between
contractors and producers often relate to distrust over
how performance and payments are determined. In the
broiler industry, the difculty of growers to measure their
performance and predict their payments creates tension
and has led to litigation between growers and contractors.
Because performance is often tied to factors beyond
growers’ control – such as feed quality and the health of
the animals when delivered – payments based on building
space or other objective and predictable measures may be
less likely to lead to misunderstandings.
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Read the Terms Carefully!
When drought cut his white corn crop in half, a
Kentucky farmer assumed he could deliver 18,000
bushels he raised instead of the 35,000 bushels called
for in the production contract. But the drought had
pushed the price of white corn up from the contract
price of $3.70 to over $5.50 a bushel. When the
company sued for damages based on what it had to
pay to replace his corn, the farmer argued the drought
was an “Act of God” that made it impossible to deliver
the amount he had promised. But the court ruled the
contract did not specify the grain had to come from his
farm and held the farmer liable for replacing the full
amount at the higher price. The case was an expensive
lesson in the difference between an acre contract –
which is tied to production from specic land and
generally includes an excuse for nonperformance due
to crop failure – and a bushel contract that does not.
• How long does the agreement run and can it be renewed?
• What are the conditions for terminating a contract and
who can terminate it? If the contract is terminated early,
what happens to any long-term investments you make
in buildings or equipment?
• If the contract runs for a given time, does it mean you
will actually be earning income? For example, can your
livestock or poultry facility stand empty for long periods
between animal deliveries, leaving you without payments?
Most production contracts provide the company with
complete control over the timing and frequency of
providing livestock or poultry. This could mean you will
go weeks or months without the opportunity to earn a
paycheck, and the number of animals you receive may fall
well below what was originally projected.
Default and problems in performance — People sign
contracts expecting everything to go as planned. State contract
law generally requires contract parties to act in good faith. But
experience and human nature show this doesn’t always happen.
Most production contracts contain a provision relating to
“default” or what happens if either party breaks the agreement.
Defaulting on a contract, which can give rise to a claim for
damages by the other side, raises the following questions:
• Who decides when the contract has been broken? Does
it go to a court or does the contractor reserve the right to
make this decision?
• What happens if something goes wrong such as a crop
failure or a disease outbreak? Are you excused if forces
beyond your control prevent you from performing?
Liability and responsibility – A production contract involves
a promise to produce a crop or care for animals but it may also
establish other responsibilities you must meet. Contracts to
raise livestock require growers to dispose of manure and dead
animals pursuant to state and local laws. Production contracts
typically provide that growers are “independent contractors,”
meaning the contractor has no liability for your actions.
Identifying the potential liabilities in a contract raises these
questions:
• What legal exposure or possible liability does the
contract create?
Nature of the Legal Relation: Independent
Contractor
It is important to understand the legal relation between
the parties in a production contract. Typically,
production contracts will describe the grower as an
“independent contractor”. This means the relation
is not that of an employee, agent, partner or some
other business relation. Instead, it means you are
legally responsible for all your own decisions and
actions, even though the contract may involve detailed
guidelines. Companies use independent contractor
status to shield them from claims of liability, such as
if you or your employee get hurt, or when there is a
violation of public health (dead animal disposal) or
environmental laws (animal waste disposal). While
there are exceptions, most courts that have considered
this issue have upheld this approach.
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How Do You Recognize a Good or Bad Contract?
The success of any production contract relation depends on the
people involved as well as the agreement used. Contracts are
written to address varying circumstances and as a result need to
have some exibility in their terms. Certain contract provisions
can create more balance between the parties; however, other
terms can create uncertainty. For example, when you see
open-ended phrases such as: “At all reasonable times”; “Any
other actions as required”; or “Reserve the right to … at the
producers’ expense,” you should consider how those terms
might be applied to alter your expected obligations.
Because contracts are written for individual situations, it
is hard to predict if a contract will turn out to be a fair deal.
But there are basic rules to keep in mind. Remember the old
saying, “if it sounds too good to be true, then it probably is”
when thinking about a contract. You should be realistic – both
about the nancial opportunities and about why someone
wants you to sign a contract.
Contracts more likely to result in problems often have these
problematic features:
Little detail – The contract is written in very general terms that
may allow the contractor to impose or avoid obligations as it
feels necessary.
Delays in payment – Anytime a contract allows a signicant
delay in when you are paid, it raises the risk of never being paid
and adds to your costs.
Lack of clear language explaining how your pay will be
determined -- Many contracts use a variety of “performance”
factors to determine how much you will earn. Many of the
performance evaluations will be based on factors over which
you have no control, such as the health or weight of the animals
or the quality of the feed provided. While these factors may be
a convenient way to evaluate your work, they make it difcult to
predict whether a contract will be a good economic opportunity
for you.
• Does the contract require you to obtain insurance to meet
your responsibilities?
• Does the contract provide you are an “independent
contractor” and if so, what is the effect?
Legal protections – The increasing use of production
contracts has led several states to enact laws protecting rights
of farmers. Some federal and state marketing protection laws
also apply to contracting:
• Is your contract subject to state or federal rules
establishing additional rights or protections for you?
• Does state or federal law require certain terms be disclosed
or included in your contract?
Legal issues – Most production contracts contain provisions
relating to the rules of law governing the agreements.
These provisions determine which state law applies and the
procedures to follow if disputes arise. These “choice of law”
and venue provisions raise the following questions:
• Which state’s law applies to your contract? (It may not be
the state where you reside!)
• Where will any disputes be resolved? Will it be in state or
federal court? How will disputes be resolved? For example,
is alternative dispute resolution, such as mediation,
required or allowed? Under Iowa law, disputes involving
contracts for care and feeding of livestock must go to
mediation, meaning a neutral third party works with the
parties to resolve the dispute.
• Does the contract include a clause requiring disputes to
go to arbitration? Arbitration usually involves a panel of
industry experts who hear the facts and enter a binding
decision, which typically cannot be appealed to a court
of law. In the 2008 Farm Bill, Congress included an
amendment that if a livestock or poultry production
contract includes an arbitration clause, the contract must
inform growers and give them the option to choose not to
use arbitration.
• Do any special “trade” rules apply, such as those
established for members of the grain industry? If special
rules apply, do you know what these rules mean for your
rights and obligations?
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Federal Protections for Production Contracts
Issues concerning the operation of production contracts
were addressed in both the 2002 and 2008 Farm Bills. In
the 2002 Farm Bill, Congress amended the Packers and
Stockyards Act to include swine production contracts.
The bill also included a new provision which protects the
ability of producers to share production contracts with
lawyers, nancial advisors, and family members. The
effect is to prohibit condentiality clauses limiting the
ability of growers to get input on contracts.
Congress also addressed production contracts in the
2008 Farm Bill, which added provisions to federal law
concerning swine production contracts and poultry
growing arrangements. The law now requires:
• Growers be given 3 days to cancel a contract once it is
signed and be notied of this right
• The potential for “large” capital investments under
the contract must be disclosed
• The venue for legal disputes is in federal court in the
state where the principle performance occurs (most
likely where the animals are located)
• The choice of state law used for disputes can be
chosen by the contractor
• If an arbitration clause is included it must be disclosed
to the grower and the grower must be given a chance
to opt out of arbitration. The contractor cannot act to
inhibit growers in this choice
In 2008, Congress considered adding other contract
protections including: denitions of “capital
investments,” “contractor,” “contract producer,”
“production contract,” and “investment required,” but
these additions did not make it into the nal bill. Nor did a
requirement that growers be given 90 days to correct any
breach of an agreement.
The law did give the Secretary of Agriculture authority to
develop more regulations in relation to various production
contracting issues. The development of these GIPSA rules
has been a lengthy process which continues today.
Condentiality provisions – Some contracts contain
provisions prohibiting farmers from revealing the contract
terms to anyone. Some pricing terms may be market
sensitive, but no one should be able to stop you from getting
legal and business advice about a contract. This is why some
states, such as Iowa and Minnesota, make condentiality
provisions illegal. It is also why Congress included an
amendment in the 2002 Farm Bill to prohibit the use of such
condentiality provisions in production contracts involving
livestock and poultry, and to allow growers to share their
contracts with advisors and family members.
Contracts giving you little authority to make decisions –
If the contract says you can only act on direct orders of the
contractor, then you will have little exibility in managing
your farm.
Provisions shifting risks to you -- Contracts are often
used to shift responsibility between parties. If your contract
appears to make you responsible for anything that might go
wrong – for example, bad weather, sick pigs, environmental
problems, worker protections – and does not provide you
with any compensation for taking these risks, you should
be concerned.
Provisions making it hard to seek relief – Contracts with
provisions giving courts in a far-away state jurisdiction over
your dispute or that apply special trade rules you are not
familiar with may make it difcult or impossible for you to
seek relief.
Contracts that are more likely to operate smoothly often
have provisions opposite of those described above. Grower
friendlier contracts typically feature:
Clear payment terms that make it easier to know when
you will be paid and to predict how much you will earn or
which set a minimum payment, and include terms making it
possible to verify the accuracy of payments you receive.
Jurisdiction in the local courts and under the laws of
your state.
11
The contract runs for a sufcient period to provide a return
on your investments.
Understandable legal obligations which help you know
exactly what is required of you.
The opportunity to appeal decisions that impose costs on
you or reduce your payments.
The ability to use third parties to supervise or review actions
such as quality determinations.
If You Have Concerns
If you have considered this information and asked yourself the
questions identied, you will be in a better position to make an
informed decision about whether signing a production contract
is the right business choice for you. If you still have questions
or doubts about the contract, consider the following steps:
Slow down — Don’t be in a hurry to sign a contract. This is a
major decision and no one should pressure you into signing
until all your concerns are addressed, and you fully understand
all of the terms of the contract. In fact, Congress included an
amendment in the 2008 Farm Bill giving producers a three
day-period in which to cancel any newly signed production
contract for livestock or poultry.
Ask questions of the person offering the contract — The
contractor should be able to answer your questions and if they
won’t or can’t, this is reason for caution.
Talk with your attorney -- Have your attorney review
the contract and get advice about its legal effect and tax
implications. Remember, contracts are always negotiable and
you will never have more bargaining power than just before
you sign.
Talk with other producers – Visit with other farmers
who have experience with production contracts, especially
producers who have worked with the contractor you are
considering, and ask about their experience and if they would
do it again.
Talk with other advisors – Visit with your banker or others
who have experience with contracting and see what they think
about the contract you are reviewing.
Pencil it out – Work through the checklist of issues and do the
calculations to see if the contract will benet your farm.
Visit the website of the USDA Grain Inspection, Packers
and Stockyards Administration (GIPSA) to learn more
about contracting and compare your contract to other
agreements (see address below).
Talk with ofcials from USDA or your local Extension
agent – More people within federal and state agencies are
gaining experience with agricultural contracts. Contact them
for advice.
Consider your options – For some commodities, production
contracts are increasingly necessary. But for other crops, there
are many options for production and marketing. For example,
it may be possible to join with other producers in a cooperative
or bargaining association. Determining which option works
best for your farm is the key.
Remember, no one can force you to sign -- You must decide
whether or not to sign a contract, but remember once you do
so, you have accepted binding legal and nancial obligations
and risks which may run for many years.
For More Information
Check out the website used to address contracting issues at
GIPSA in USDA: http://www.usda.gov/gipsa/.
This site includes Frequently Asked Questions (FAQ’s) on
the Swine Production Contracts Provisions of the Packers
and Stockyards Act, information about Livestock and Poultry
Contracts and about the Swine Contract Provision of the 2002
Farm Bill.
This material is based upon work supported
by the U.S. Department of Agriculture,
Farm Service Agency, under Federal Award
Identication No. FA-DAFP-6-024.
With respect to any opinions, ndings,
conclusions, or recommendations expressed
herein, neither the United States Government
nor The National Sustainable Agriculture
Coalition makes any warranty, express or
implied, or assumes any legal liability or
responsibility for the accuracy, completeness,
or usefulness of any information, apparatus,
product, or process disclosed, or represents
that its use would not infringe privately owned
rights. Users bear the sole responsibility for
decisions affecting program participation and
may want to consult other resources.
All photos credit: USDA
