Due to the pork industry’s current financial problems, many producers have been forced to deal with default and termination of swine marketing or production contracts.
So, thinking about entering into a new contract may be the last thing on anyone’s mind, especially if the producer has experienced a contract default and/or termination. However, as the saying goes, when one door closes, another opens.
Anyone who is considering entering into a new contract or amending a current one must be aware of new requirements established by the 2008 Farm Bill under the Packers and Stockyards Act for swine and other livestock contracts. These requirements actually went into effect on June 18, 2008, along with a directive for USDA to develop contracting rules. Even though the changes went into effect more than a year ago, many producers remain unaware of them because they’ve received little attention as the rules are still being developed. However, the requirements discussed in this article are in effect and must be followed to avoid violating federal law.
Reviewing several background issues will help understand the new requirements.
First, some of the requirements apply to production contracts (where a farmer feeds and cares for, in his own facilities, livestock owned by someone else), others apply to both production and marketing contracts (contracts with a packer or other livestock processor), and one provision applies to all livestock contracts.
Second, some of the provisions apply only to contracts entered into, amended or renewed after June 18, 2008. Other provisions appear to apply to contracts in place before that date. Thus, it is important to read carefully each section of the law as explained in this article to fully understand how the law applies.
Finally, the law’s “gray areas,” such as the effective date of the requirements for existing contracts, will hopefully be clarified in rules and other information that USDA will issue.
For production contracts*
Contract Producer’s Right to Cancel:A swine contract grower may cancel a production contract by mailing a cancellation notice to the contractor not later than three business days after the contract was executed or any cancellation date stated in the contract, whichever is later. The contract must clearly disclose the grower’s right to cancel, the method by which the grower may cancel
the contract and the deadline for cancelling the contract.
A few notes about this requirement:
Although not specified in the law, the best practice for both contractors and contract producers would be for the contract to require that the notice be sent by certified mail.
The law states that the three-business-day period begins when the contract is executed. It appears that the producer’s three-day right to cancel, if that is the option in the contract, would begin when the contract producer signs the contract.
Although not expressly stated in the law, as a practical matter, this right to cancel could only apply to contracts executed or amended after June 18, 2008.
Disclosure of Additional Capital Investments: All swine production contracts must have a disclosure statement on the first page of the contract conspicuously stating that additional large capital investments may be required of the contract producer. Also this disclosure statement must have the heading: “Additional Capital Investments Disclosure Statement.”
The law expressly states that this requirement applies to any swine production contract “entered into, amended, altered, modified, renewed or extended” after June 18, 2008.
For swine production or marketingcontracts*
Choice of Law and Venue: The venue is the legal forum for resolving any dispute between the parties of a swine production or marketing contract, and it must be located in the federal judicial district in which the principal part of the contract performance takes place.
As for the “choice of law,” a swine production or marketing contract may specify which state law applies to issues governed by state law in any contract dispute, unless doing so is prohibited by the state’s law where the principal part of the performance takes place.
The law does not expressly state that this requirement applies only to contracts entered into, modified or extended after June 18, 2008. Therefore, it appears to apply to contracts prior to that date.
For all livestock or poultry contracts
Arbitration: A livestock or poultry contract that requires any controversy under the contract to be resolved by arbitration must contain a provision allowing the producer, before entering the contract, to decline to be bound by the arbitration provision. The contract must conspicuously disclose the producer’s right to decline arbitration. A producer who declines arbitration may still use it when a dispute arises if both contract parties agree in writing to use arbitration. Any action by a contractor, packer or live-poultry dealer that violates this right to decline arbitration is an unlawful practice under the PSA. USDA is to adopt rules to establish criteria to determine whether a contract’s arbitration process provides a meaningful opportunity for the producer to participate fully in the arbitration process.
Read literally, this requirement applies to all livestock or poultry contracts. Under PSA’s general definition, livestock includes cattle, sheep, swine, horses, mules and goats. All contracts would include not only production and marketing contracts but all other livestock contracts such as weaned-pig and feeder-pig sales agreements.
The law expressly states that this requirement applies to “any contract entered into, amended, altered, modified, renewed or extended” after June 18, 2008.
To be developed by USDA
By June 18, 2010 (two years after the 2008 Farm Bill), USDA must issue regulations on the following:
Marketing and production contracts: Whether an undue or unreasonable preference or advantage has occurred in violation of PSA regarding marketing or production contracts.
Production Contracts: When a requirement of additional capital investment over the life of the contract constitutes a violation of PSA.
Whether a live-poultry dealer or swine contractor has provided a contract producer a reasonable period to remedy a breach of contract that could lead to contract termination.
PSA is to publish proposed rules for interested parties to provide comments. Stay in touch with your state and national pork producer organization for information and guidance in reviewing the proposed rule and submitting comments to USDA.
* These factors also apply to poultry production contracts.
Eldon McAffee is an attorney with Beving, Swanson & Forest, P.C.