An agriculture production contract is an agreement where a producer agrees to raise a commodity in a manner established by the contractor and to deliver the commodity to the contractor while the contractor agrees to pay the producer in return. A commodity can include livestock, raw milk, and crops. Livestock may include beef cattle, dairy cattle, sheep, and swine, while crops can be plants used for food, animal feed, fiber, or oil.
There are three types of production contracts:
Sales Contract: Often used for the sale of crops where the producer owns the crop until it is sold to the contractor.
Personal Service Contract: In this case, the producer provides a service rather than supplying a commodity. The contractor supplies the commodity and retains full ownership during the length of the contract.
Bailment: Producer has possession of the commodity, but the contractor retains title to the commodity and any resulting crop. Typically used in seed production contracts.
There are potential advantages and disadvantages for both producers and contractors in these types of agreements. For producers there is income stability protecting them from price swings in the market, improved efficiency along with expertise, and it makes it easier for producers to expand into new markets by entering into a contract with an already established contractor. For the contractor, the contract establishes production and quality control, allows management of supply based on market demands, and allows contractor to increase business volume and expand to more diverse markets.
The disadvantages on the other hand where a production contract limits a producer’s freedom to explore alternative practices. Both parties also have to consider risks associated with contracts, including who will bear responsibility for losses, including those caused by natural disasters. Additionally, since contractors design production contracts to create uniformity and control production, they may also thwart diversity and lead to product homogeneity.
In addition to knowing the different types of production contracts and advantages and disadvantages, it is important that the contracts comply with state regulations. Rincker Law, PLLC is prepared to help you navigate production contracts that meet the legislation requirements set out by specific state.
Want more information on contracts for the food and agriculture industry? Check out my first book that I co-authored with Pat Dillon, an Iowa agriculture lawyer titled “Field Manual: Legal Guide for New York Farmers and Food Entrepreneurs” available on CreateSpace, Amazon, Kindle and iBooks. You can find out more about this book here. Furthermore, you can check out this extensive outline on common agriculture contracts on my JD Supra page prepared for this Lawline.com presentation.