Production contracts steer
change for Iowa farmers

Mention agricultural production contracts at a coffee shop or grain elevator these days and you're liable to get an earful.

Production contracts and a guaranteed price when markets collapse may be the only things keeping some farmers in business. Production contracts also may be driving others off the farm if contracts limit competition and lead to corporate consolidation and ownership. Then again, signing a contract to grow something for another company is no big deal for producers who began custom farming years ago when contract production wasn't such a controversial issue.

One thing is certain-more Iowa farmers are operating under production contracts. At least 60 percent of all livestock raised in Iowa is by contract, a trend rapidly expanding into grain production, especially with the uncertainty surrounding genetically modified (GMO) crops.

A livestock production contract can be defined as an agreement under which a producer agrees to feed and care for livestock owned by a contractor in return for a payment. A grain production contract is an agreement under which a producer raises a crop for a contract company in return for a premium paid at harvest. Production contracts should be distinguished from marketing agreements, cash forward contracts, and futures contracts, which involve the sale of commodities produced and owned by the farmer.

Production contracts may involve many types of contract companies, including large corporations, farmer-owned cooperatives, and individuals. Historically, the most common type of production contract in Iowa was with a company to grow corn or soybeans under specified conditions for the following year's seed. In recent years, however, production contracts have taken on a variety of sizes and shapes.

"Our farm is unique and so is the mindset," says Dunphy. "Some of it is because we are so visible, located right along Highway 34 outside of town, and what we do or don't do gets a lot of interest. I grew high-oil corn the first year it was available to plant. My contract was with DuPont."

Dunphy grows other specialty crops including white corn, non-GMO soybeans for a local cooperative, and experimental varieties. The premiums he receives for his crops have remained relatively constant over the years, an additional 40 to 60 cents per bushel above market prices. He said he is fortunate, however, to have numerous storage structures so he can separate various crops.

Dunphy says it's important to have confidence in the contract company. He suggests that farmers talk to crop consultants, extension specialists, their attorney and "others whose opinions you respect" before signing new production contracts. "Always look at the downside before you sign anything," he added, which for him could include delivery of the crop at inconvenient times.

Keith Sexton farms 1,000 acres in a corn-soybean rotation near Rockwell City in north central Iowa. For the past four years, he has raised food-grade soybeans for a private company that ships the grain to Japan where it is made into tofu. The contract accounts for 15 to 20 percent of his total soybean production.

"It sounds like there's a lot more interest in growing specialty crops but that's always in proportion to commodity prices," Sexton says. "If prices rebound to 25 percent above where they are now, the interest in contract production will go down. It takes a lot of work to identity-preserve grain during and after production."

"Having diversified my operation with contract feeding is what keeps me on the farm, otherwise I would have to supplement my income by keeping a job in town," he said. "If I owned all my own hogs, the way the market has been the last year, I probably would be bankrupt by now."

Miller began farming in 1992 after working 10 years for a construction company, the last four as superintendent. With very little start-up capital, he saw hog production contracting as one way to diversify his operation in pork production.

Harlan Grau of Newell buys 5,000 head of hogs every year from Land O' Lakes. He advises producers to gather as much information as they can before signing a contract.

"The more information the producer has to work with, the better," he says. "But I wonder how these contracts will affect the open market. Contract feeding doesn't cause elimination of the open market, but it fuels concentration in an industry."

Jim is a third-generation farmer who until December raised hogs and grew corn on an 800-acre farm near Latimer. At one point, their $1.5 million operation produced 12,000 hogs annually. Refusing to sign contracts with large hog processors that guaranteed a set price regardless of market fluctuations, they decided to get out of hog production when market prices began to fall in 1998. The last of their herd was sold in December. Both now work with Friends of Rural America, a lobbying group they helped found in 1995. "A lot of independent producers are bitter toward contract feeders, thinking they are the enemy," explains Pamela, who is secretary of the group. "Decisions about whether or not to feed on contract, however, can be agonizing. Often it's the last resort."

Jim Braun would like to see the Iowa contract law changed even more. He said he doesn't think producers should be totally liable for present and future environmental damage; that responsibility should be shared with the contracting company.

He said he would like to see contract growers talking to one another and organizing for their own interests. "I can't condemn my neighbor contract grower," he added. "But I really don't want them to get into a contract bind that could lead to them losing their land."