What to look for in an ag contract

EDITOR'S NOTE: This information comes from a presentation available to groups upon request from the Environmental and Agricultural Law Division of the Iowa Attorney General's Office.

The biggest issue is whether the contract is a good marketing decision. Producers must compare their estimated returns under a given production contract with expected returns under other production contracts and with returns under traditional grower-owned and controlled production. This decision must be considered in the time frame of the agreement, since some production contracts can be for terms as long as 10 to 15 years.

Producers also need to consider the amount of risk they are assigned in a production contract. Risk is a given, especially in agriculture, but it shifts under contract production. Producers need to make sure their portion of risk under any production contract reasonably relates to their potential for economic return under that agreement. Usually the greater amount of risk, the greater potential for return.

Other legal issues often addressed in the "fine print" of a contract:

• Cancellation: Under what conditions can the contractor terminate the contract? Who determines whether those conditions are met? Are there objective standards or is termination at the discretion of the contractor?
• Quality: What is the protocol for measuring the quality of the commodity? Whose machine is used to make that determination and when?
• Delivery: Where is the commodity to be delivered? Who pays the transportation cost?
• Dispute resolution: How are disputes resolved? Where will the process take place? Who will decide who wins? In Iowa, disputes under livestock production contracts must first go through mediation before anything can be filed in district court.

In 1996, Attorney General Tom Miller formed a Production Contracts Task Force that developed the Livestock Production Checklist, an information sheet to guide farmers in contract production decisions. In addition to the bulleted points above, the checklist asks producers to also look at facility requirements (construction, approval, access, financing), operational issues (feed, health, manure management, record-keeping, and insurance), payment terms and incentives, credentials of the contracting company, contract renewal, and how the contract might affect a producer's long-term goals or relationships with neighbors and cooperatives.

The task force also has developed a Grain Production Contract Checklist. Both checklists and samples of actual contracts are available at the web site of the Environmental and Agricultural Law Division of the Iowa Attorney General's Office, http://www.state.ia.us/government/ag/farm.html or by calling the office at (515) 281-5351.