It's best to know your legal rights and how to protect yourself before putting your signature down on paper.
Calm and in control, or nervous and unsure. Which phrase describes how you feel when you're signing a livestock marketing or production contract? If you're shooting for control, remember that knowledge is power. The more you know about your legal rights and protection, the more confident you can be that you're signing a contract that best serves your goals.
Livestock contract regulation at the federal level is a good example of limited government. For the most part, states are responsible for enacting legislation that specifically protects pork producers who enter into production or marketing contract relationships.
The federal Perishable Agricultural Commodities Act does provide protection if you haven't been paid. Under PACA, the commodity buyer must hold all the inventory or proceeds from selling perishable commodities in a trust for a producer until he receives full payment.
Another federal statute is the Packers and Stockyards Act. It provides payment protection for livestock sellers by requiring prompt payment, bonding, packer and poultry trusts, and market agency custodial accounts. It addresses unlawful acts such as unfair, deceptive, discriminatory or monopolistic practices in livestock, meat and poultry marketing.
A third federal law, the Agricultural Fair Practices Act, prohibits contractors from knowingly taking actions against individual growers or an association of growers because of their membership in a particular group.
Beyond those three areas, further protection for contract parties is left up to the states. As it turns out, most states don't have laws specifically for livestock contracts. That's mostly because of the limited number of contract relationships and the limited number of complaints about existing contracts.
North Carolina, for example, has long been a leader in contract livestock production but still has no related contract laws for marketing or production.
"There have been some attempts at laws on integrator liability, but they didn't go through," says Walter Cherry, executive secretary of the North Carolina Pork Council. "Our production systems here are patterned after the poultry systems that have been around a long time, most growers contract because they decided to, and there has been no call for new laws."
States that have had more traditional pork production systems but are facing increasing numbers of livestock contracts are the ones implementing contract laws. Here are two examples.
"We're comfortable saying more than 60 percent of all hogs raised in Iowa are on production contracts," says Steve Reno, Iowa assistant attorney general, farm division.
That relatively high percentage has led Iowa to implement more protection for production contract growers. There currently are no state laws regulating marketing contracts specifically, Reno says, although the effects of ledger contracts has triggered discussion on the issue.
Here is a sample of protection that growers have in Iowa:
- Contract Producer Lien Law. As of May 24, farmers raising beef cattle, hogs, sheep or dairy cattle under production contracts for companies have the legal authority to file a one-page lien form within 45 days from the animals' arrival at their facility. The lien, which lasts for a year after the livestock leave the facility, gives the grower priority on the livestock or proceeds from the sold livestock if the contract company files bankruptcy or can't make payments.
"Before, if this occurred, a producer would get 6 percent or 8 percent of his money and that would go to the lawyers," Reno says. "Now, the producer gets 80 percent or more of what he's owed."
- Confidentiality Clause Voided. The new lien law also gives growers the freedom to discuss their contracts with others. If a confidentiality statement is included in a contract today, the Iowa law voids it. Also, no contracts written after May 24 are allowed to include confidentiality clauses.
- Dispute resolution. Persons involved in custom- feeding disputes must participate in mediation prior to filing a lawsuit in court. Mediation involves the producer, the contractor and a neutral third party.
- No processor ownership. You can own hogs that are raised on contract as long as you are not a packer or processor.
Minnesota is another rare exception to the contracting rule. Here's what its laws have to offer.
- Minnesota Corporate Farming Act. This law prohibits corporations or other business entities other than family-controlled entities from engaging in farming or owning agricultural property.
- Minnesota Agricultural Contracts Act. This statute contains several provisions dealing specifically with agricultural contracts.
Any contract for an agricultural commodity must include a provision for mediation or arbitration of any contract disputes.
All agricultural contracts must include an implied statutory promise of good faith. If a court finds there has been a violation of the implied promise of good faith, the court may allow the party to recover damages, including costs and attorney fees.
When a grower is required to make a capital investment in buildings or equipment costing $100,000 or more and that have a useful life of five or more years, the contractor may not cancel or terminate the contract until:
1. The grower has been given written notice of termination at least 180 days prior to the termination date, and;
2. The grower has been reimbursed for damages incurred by the required capital investment.
If the grower breaches a contract requiring the previously outlined capital investment, the contractor must give the grower a 90-day notice before terminating the contract. He also must allow the grower 60 days to correct the breach.
Parent companies of subsidiaries licensed to purchase agricultural commodities are liable to a seller for any unpaid purchase price or any claim based upon a contract if the contractor fails to perform.
- Minnesota Packers and Stockyards Act. It provides limited payment protection for unpaid sellers of livestock, and it requires packers, stockyard owners, market agencies and dealers to disclose certain data.
- Minnesota Agricultural Marketing and Bargaining Act. The statute outlines accreditation requirements for marketing associations.
Even with these federal and state laws, your best protection is knowing and understanding every part of a proposed contract. Have your attorney, farm business consultant, agricultural economist or anyone else you think appropriate review the contents. Then carefully consider your situation and whether the contract matches up. "The key is to know what's available and know what works for you," Iowa's Reno says.
Investigate the Details
There should be no mystery of what to expect from a production contract – that applies to whichever side of the contract you're on.
Understanding the details of a production contract can be "elementary my dear Watson", as Sherlock Holmes might say. The key is in being prepared, knowing your rights and looking out for your interests. When it comes to contracts, the law takes something of a buyer-beware approach.
That doesn't mean you have to start your investigation from scratch. Attorneys, consultants, fellow producers and other experts have compiled questions and checklists for you to use as a guide to analyze your contract. It's up to you, however, to use these guides before you sign anything.
Laura Cheney, assistant professor of agricultural economics at Michigan State University, and others have pulled together some recommended questions, most of which apply to finishing, nursery, wean-to-finish and segregated early weaning contracts. Producers with sow contracts may need to consider additional production issues, specifically related to breeding, she says. Other items presented in the following checklist come from the Iowa Attorney General's Task Force on Production Contracts. There are several other resources available for you to use.
"As soon as you start to consider contracting, you need to ask several questions," says Cheney. Use the checklist as a starting point to ensure your production contract fits your goals, and make sure that you understand the details.
- About the contractor:
Talk to other growers under contract with the company or individual.
Get the contractor's financial statements. Producers often neglect this essential step, Cheney says. "You're going into business with someone when you sign a contract, and you need to check his/her stability," she says.
Evaluate the company representative who will supervise your farm. Do you respect his or her knowledge and experience?
- About the contract:
After reading it through on your own, go through the contract with professionals. The biggest mistake when signing either a production or marketing contract is not sitting down with a professional and checking every section, says Steve Reno, Iowa assistant attorney general, farm division. Make sure you understand the legal, financial and tax implications of the wording.
Crunch the numbers...
- On payment:
Do you fully understand on what basis you will be paid (per pig space, per pig, etc.)? How variable will payments be?
Check cash flow – when are payments received and when are your expenses due?
Who will pay you?
Will the last payment be made before the livestock leave your facilities?
- On bonuses and incentives:
What exactly do you have to do to get incentive payments (such as those based on average daily gain, feed conversion or death loss)? For incentives to be effective, Cheney says, they must be based on factors that you can influence. Check to see that management allows you to do so.
When and how are incentive payments made?
Are you penalized for less than "average" or "standard" productivity?
Are you compared to others or do you compete against yourself?
- On profit:
Know your cost of production so you can determine the true profitability of the proposed contract.
What is the rate of return to labor and management?
Prepare a sample budget for the first year. Then do one for the length of the contract. Producers too often look at contracts through rose-colored glasses, says Greg Andrews, a lawyer in Johnston, Iowa. "They think if they can make money today with the contract, they can make money years down the road," he says. "They need to evaluate the contract to be sure."
Is the length of the contract sufficient for you to recover your investment?
Don't forget the details...
- Involving facilities:
Can you raise other livestock or hogs on your farm?
If you're building a new facility, are there penalties for construction delays?
Who pays for site surveys, engineering, material and construction labor?
Who provides the specifications for construction?
Would the facility still function profitably if you wanted to enter into a different contract in the future?
Are you required to pay for future upgrades in the facility or equipment?
Who pays for insurance on the facility?
Who has access to the facility? Do those with access have to give you advance notice before entering?
- Of the animals:
How many animals are in the agreement? When will they be delivered and when will they be marketed? Is this clearly stated in the contract?
Will the pigs come from a single source? Are there any exceptions to this?
Who will load and unload the animals?
How are feed costs allocated? If you produce grain, will the contractor buy any of it to use as feed?
Who is responsible for dead animal disposal?
Can you reject livestock that are sick?
Who is responsible for state and federal animal health regulations?
Who bears animal health-care costs?
Who pays for insurance on the livestock?
- Of management:
Who sets the feed rations and decides on feed changes due to new technology, season, genetics, and so on?
Who provides labor and management of raising the livestock? Can you delegate or subcontract it?
Who pays for any employee training?
What records are you required to maintain?
Who chooses the veterinary services, and who determines what and when care is needed?
Consider the consequences...
- Of the manure:
Who holds the title to the manure? Are you responsible for its management?
Who files, updates and implements any required manure management plans?
Is it your responsibility to respond to any complaints or alleged violations involving the manure or odor?
Who is responsible for complying with new environmental regulations?
- Of the operational changes:
Who is responsible for getting any governmental permits and zoning approved?
Have you talked with your neighbors about your plans? How will signing the contract affect your relationship with them?
How does this fit in with your long-term goals? "You have to realize you're giving up access to certain unknown opportunities that could occur over the length of the contract," Cheney says. "You have to ask yourself how long you want to be in this type of relationship."
Judge the legal side...
- Of the contract:
First and foremost, everything from the contract to modifications and "understandings" should be put in writing. Do not rely on oral agreements.
Make sure you understand the details about terminating and renewing the contract. How and when can you or the contractor terminate or renew it? Who determines if such conditions have been met? If the contract is terminated, what are your rights for payment of work to that date and the livestock?
How long do you have to accept the contract? Is there a deadline for signing the contract?
- Of parties' responsibilities:
Determine what legal relationship the contract establishes between you and the contractor. A contract that describes the grower as "an independent contractor" will remove the potential for consideration as an employee, partner or part of a joint venture, Cheney says. Your "title" could have tax and legal implications.
Do other parties such as landlords, lenders or spouses have to approve the contract?
Can the contract be assigned or transferred by you or the contractor to others?
If the contractor is from a different state, which state laws apply?
If the contractor is a subsidiary company, does the contract make the parent company responsible for payment if the contractor defaults?
"Most of this is about ironing out how the contract is going to flow. You just don't want to be nanve about it," Cheney says.
Evaluating the contract, your compatibility and the contractor's integrity will make signing a contract "elementary" if you choose to go that route.
Closing the Legal Gaps
Before signing a market contract you not only have to read it, you have to understand it.
The majority of market hogs today are sold under some type of pre-arranged marketing agreement. Some involve contracts with pages of documentation, others are more relaxed arrangements involving a letter of intent or perhaps a simple handshake.
Whatever the case, pre-arranged marketing agreements are a growing part of pork production's future. That's not to say that marketing contracts are good or bad. They're just another way to do business. And as with any business arrangement, it's your responsibility to understand the terms and conditions in a contract, and to look out for your interests.
So, what is a marketing contract? "It's an agreement between a processor and a grower establishing an outlet and price for market hogs to be delivered, often based upon a formula," says attorney Phil Kunkel, Hall & Byers, P.A., St. Cloud, Minn.
These arrangements can help you secure shackle space and income. It also provides the packer with a stable source of quality hogs at a pre-established price. Contracts usually include a delivery schedule and a method for determining the price.
Each contract is unique and every situation is different, and the law provides little specific guidance when it comes to your legal rights.
"A contract is a legally-enforceable agreement between two or more persons which creates an obligation to do or not to do a particular thing," Kunkel says. Remember, not all contracts must be in writing. And, having a written agreement doesn't necessarily mean that you have formed a contract.
In general, contracts can be made for any lawful purpose. If a contract violates the law, it is illegal, but the burden of proof is on the party making the complaint. The law initially presumes a contract is valid because you have the freedom to enter into the arrangement or not.
With all types of contracts, Kunkel notes that it's assumed each person signing a contract understands the terms and conditions. Consequently, you can't escape being bound by the contract's terms simply because you didn't read it carefully or understand the details.
"The law fills the gaps in a contract," he explains. "It also will supplement it with some ground rules. For instance, economic duress is not a defense for breaching a contract."
When it comes to marketing contracts, there are some specific legal issues that you need to address:
- Quantity of livestock. Some contracts require you to provide specific numbers of hogs each week or month to your packer. Others require you to sell all of your hogs to a specific buyer.
- Price determination. A long-term contract will typically outline the payment structure in detail. For instance, the price could be based on corn and soybean meal costs or based on a market-price index.
- Payment conditions. These include grade, weight and condition of the livestock. You may be required to provide nutrition, management and genetic information to the packer. Additional premiums and merit adjustments are usually left to the buyer's discretion.
Also determine whether the packer can change the purchasing matrix at will. That's a lesson many producers learned the hard way.
Amounts to be paid seller. There are about as many ways to come up with a contract price as there are hog operations. Will you receive $2 over the cash price? Is that sufficient protection for you?
Does the contract include a ledger provision? This may guarantee you a minimum price for your hogs regardless of market price at the time of delivery. However, the packer will keep a ledger account reflecting the price difference. You will have to balance out that ledger once hog prices turn higher.
Some contracts use a formula price based on feed costs. You may feel as if you don't have a choice, but this is an area worth negotiating.
Nonpayment by packer. If the buyer breaches your contract, you can:
- Refuse to deliver any additional hogs.
- Terminate your contract.
- Reclaim recently-delivered hogs – for up to 10 days. However, the hogs will likely be slaughtered by then, so you may lose these rights.
- Seek a money judgment against your buyer. This will require you to file a lawsuit.
- You can assert a lien on the hogs you have delivered to your buyer under contract – if you live in Minnesota. Ultimately, this may not provide much protection.
- Assert a Packers and Stockyard Act trust for your unpaid livestock.
- Assignment of marketing contracts. Some contracts may give you, your packer or both the right to assign the contract to another party.
- Confidentiality agreements. Marketing contracts often contain provisions prohibiting you from disclosing certain conditions. However, last fall USDA stated that this is illegal.
- Buyer's bankruptcy. If your packer files bankruptcy, you are not automatically relieved of your market contract obligations. If the buyer defaults on your contract before filing bankruptcy, you are not obligated to abide by the contract unless the buyer corrects its defaults.
- Contract termination. Practically all long-term contracts will deal with termination. In most cases, neither you nor the packer can terminate the contract unless one party defaults on its obligations.
- Alternative remedies. Your contract may include provisions allowing the packer to offset any claims it has against you or money owed to you. This is called a "setoff." Both parties are generally entitled to this even if it's not written in the contract.
- Financing considerations. If you have financed your operation, your lender will want to review your financial strength and that of your packer. Make sure to discuss the contract provisions with your lender before signing. Also make sure your lender understands the long-term implications of a contract to your operation.
- Recovery of capital investment. Few marketing contracts expressly require you to make a capital investment in facilities or equipment. Although, many contractors assume you will have access to these.
Ultimately, no matter how many legal rights you may have, it's your responsibility to read and understand the marketing contract before you sign. Make sure your attorney and lender review what you're signing. If you don't take the time to get your ducks in a row, then who will?
Look for These Red Flags
From the early conversations to the point when you're considering signing a production contract, watch for signals that suggest the need for additional negotiations, investigation and at least a more thorough understanding.
- The contractor tells you that you are not allowed to discuss the contract or contact other growers under contract with the company.
- The contract includes language such as "liens" or "collateral."
- You are unable to understand any part of the contract without an interpreter like a lawyer or banker.
- The words in the contract don't match what the contractor representative is saying.
- Provisions for things like termination of the contract or "emergencies" are outlined for the contractor but not for the grower.
Look for These Red Flags
- When it comes to marketing contracts, the single most important red flag is if your packer won't let you leave the room with the contract before you sign it. This happened to many producers during the past couple of years.
Not only is that absurd, it's now illegal. You have a right to discuss the conditions of a proposed marketing contract with your business consultants as you see fit. Having an attorney review any contract before you sign it is an absolute must.
- cautious of any clause in the contract that gives the contractor the right to change it at will. It will nearly always favor the contractor.
- Make sure that all terms and conditions are clear and not subject to more than one interpretation.
Using Your Resources
If you have questions regarding production or marketing contracts, here are a few resources to help you out:
- National Pork Producers Council Guide to Contracting. NPPC is updating its production contract information and adding a section on market contracts. (515) 223-2600.
- A Farmer's Guide To Production Contracts by Neil Hamilton, law professor, Drake University, Des Moines, Iowa. (515) 271-2947.
- Iowa Livestock Production Contract Checklist. Steve Reno, assistant Iowa attorney general, (515) 281-5443. Also, Reno is soliciting your contracts to use as samples on the attorney general's Web site.
- Check out your state attorney general's office. There is a Web site that can assist you in your effort – go to http://janus.state.me.us/states.htm.
- A Guide to Agricultural Production Contracting in Minnesota. Doug Spanier, Minnesota Department of Agriculture, (612) 296-7166.