Lawline: Overview of Common Agriculture Contracts

Overview of Common Agriculture Contracts

Lawline.com

Live Webcast: July 28, 2016By Cari B. Rincker, Esq.

Who I Am• Principal Attorney at Rincker

Law, PLLC• Food and agriculture attorney

– Principal office in Midtown Manhattan

– Satellite office in Champaign, IL

• Licensed in New York, New Jersey, Connecticut, District of Columbia and Illinois

My Background• Grew up on a beef cattle farm in

Central Illinois• Past-Chair of the American Bar

Association, General Practice, Solo & Small Firm Division’s Agriculture Law Committee

• My food and agriculture client base– Farmers to ranchers– Small to mid-size agri-business– Food entrepreneurs

Overview

Agriculture Production Contracts

Purchase Agreements

Leases

Specialized Contracts

Partnership Agreements

Agriculture Production Contracts

3 Types of Agriculture Production Contracts

Sales Contract

Personal Service

Contract Bailment

Sales Contracts

• Often used for the sale of crops.

• Producer owns crop until it is sold to the contractor.

• Generally subject to the Uniform Commercial Code (“UCC”).

Personal Service Contract• Producer provides service

rather than supplying a commodity.

• Contractor supplies commodity and retains full ownership interest in the commodity throughout the duration of the contract.

• Generally subject to applicable state common law vs. UCC.

Bailment• Producer has possession of

the commodity, but the contractor retains title and any resulting crop from the commodity.

• Often used in seed production contracts and grain storage arrangements.

• Generally subject to UCC.

Advantages of Agricultural Production Contracts

For Producers• Income stability• Improved efficiency

and expertise• Greater access to

capital• New market access

For Contractors• Production and

quality control• Supply management• Expansion and

diversification• Intellectual property

protection

Potential Disadvantages of Agricultural Production Contracts

For Producers

• Loss of entrepreneurial independence

• Assignment of risks• Concentrated production• Limited natural disaster

relief

State Regulations: Arkansas

Only for livestock and poultry contracts, not crops.

Readability and disclosure requirements for production

contracts, including disclosure of a list of “material risks” such as contract duration,

termination provisions, and provisions affecting calculation

of a grower’s compensation.

Prohibition of any terms that would inhibit growers from associating and comparing contract terms and seeking

professional, legal, financial, or agricultural advice.

See Arkansas Livestock and Poultry Contract Protection Act, Arkansas Code § 2-32-201

State Regulations: Georgia

Only for poultry contracts

Requires that grower be permitted to

review the contract with advisors for

three days prior to execution.

Right for growers to be present during

weighing that affects compensation under

the contract.

See Georgia Code §2-22-1 – §2-22-5

State Regulations: Illinois

For grain, seed, livestock, and other commodity production contracts.

Readability and indexing of the contract to ensure equal understanding of the contract’s terms by

producers and contractors.

Requires complete disclosure and

explanations of special provisions, such as

disease protocols or grain identity preservation, to ensure that producer is

aware of terms and requirement to adhere to

them.

Prohibits contract terms that allow contractor to

unilaterally terminate the contract.

See Agricultural Production Control Code, § 505-17-1 – § 505-17-99

State Regulations: Iowa

Use of confidentiality clauses prohibited in contracts for the production of livestock, raw

milk, or a crop.

An agricultural lien is created for producers of livestock, raw

milk, or crops under a production contract.

Provides for a mediation process for disputes arising

out of livestock care and feeding contracts. Mediation

is mandatory before a producer may file suit in court.

See Iowa Code, Chapters 202, 579B, 654B

State Regulations: KansasSwine production contracts

• Contractors must “pay a fair price” and “make all payments promptly.”

• Contract must provide for disputes to be submitted to mediation or arbitration.

• See Kansas Statutes §16-1501 – §16-1506

Poultry production contracts

• Expressly protects contractors from disclosure of trade secrets.

• Prohibits contractors from terminating contractors with producers that have performed all of their obligations under the contract.

• Prohibits denying producer ability to address a dispute in court (binding arbitration).

• See Kansas Statutes §16-1701

State Regulations: Minnesota

Applies to crops, livestock, & poultry.

Provides for mandatory cover sheet to all contracts alerting

producers of potential legal rights and

obligations associated with the contract and

indexing its provisions.

Contract must contain written disclosures of

risks to producers.

Provides for a process by which Commissioner of Agriculture reviews

the contract.

See Minnesota Statutes § 17.90 – § 17.98

State Regulations: Wisconsin

Applies to vegetable procurement contracts and livestock, including poultry.

Contract must be in writing with a 72-hour cancellation

period for producers and clear & conspicuous

disclosure of terms, including payment amounts and

formulas.

Prohibits charging producers more than fair market value

of seeds or services and charging producers for

defective seeds for which the contractor has been

reimbursed.

See Wisconsin Administrative Code § 101.01 – § 101.07; § 100.04

New York Agricultural Production Contracts

Production contracts are used by a limited number of farms in New York.

The 2012 US Census revealed that of the 914 farms in New York that sold broilers and other meat-type chickens, only two farms raised and delivered them under production contracts.

NY Agricultural Production ContractsCommodity 2012 2007

Farms Numbers Farms NumbersBroilers and other meat-type chickens 2 No data 5 541,800

Eggs, chicken (dozens) 7 2,313,000 4 No data

Layers 6 71,200 N/A N/APullets for laying flock replacement 4 228,200 5 286,030Custom fed cattle shipped directly for slaughter 1 No data 1 No data

Hogs and pigs 11 8,457 12 5,845

Replacement dairy heifers 16 219,380 23 268,020

Other cattle, sheep, livestock, or poultry 241 53,956 N/A N/A

Grains and oilseeds 43 N/A N/A N/A

Vegetables, melons, and potatoes 2 N/A 3 N/A

Other crops 15 N/A 39 N/A

2012 Census of Agriculture

Illinois Agricultural Production Contracts

Illinois does not have a large use of production contracts on its farms.

Of the nearly $17 billion in value of commodities from farms in Illinois, only $715,000 accounts for commodities related to production contracts.

IL Agricultural Production ContractsCommodity 2012 2007

Farms Numbers Farms NumbersBroilers and other meat-type chickens 7 142,829 4 No data

Eggs, chicken (dozens) 8 2,464,937 5 2,000,000

Layers 7 123,100 N/A N/APullets for laying flock replacement 2 No data N/A N/ACustom fed cattle shipped directly for slaughter 22 1,680,558 32 1,746,118

Hogs and pigs 39 42,702 74 71,290

Replacement dairy heifers 387 3,437,664 424 3,819,982

Other cattle, sheep, livestock, or poultry 80 17,561 N/A N/A

Grains and oilseeds 12 N/A N/A N/A

Vegetables, melons, and potatoes 123 N/A 133 N/A

Other crops 52 N/A 61 N/A


United States Stats for Agriculture Production Contracts

In 2008, agricultural contracts covered 39% of U.S. agricultural production.

More than 90% of broiler, sugar beet, and tobacco production is through contracts whereas less than 30% is used for corn, soybean, and wheat production.


Purchase Agreements

Purchase Agreements

Farm/Ranch (Land)

Livestock (Animals)

Farm Machinery

(Equipment)

Land Purchase Agreements

Land Purchase Agreements:Inspecting the Property

PotentialIssues

Boundaries of property

Zoning

Ownership search

Water rights of property

Buildings

Terrain

Previous use of land

Environmental contamination

Land Purchase Agreements: TermsContract Considerations

Description of property

Payment methods and terms

Title insurance

Property taxes

Changes to property, i.e. limiting them

Condition of property, i.e. “as is”

Easements/access

Water rights

Mineral Rights

Livestock Purchase Agreements

Livestock Purchase Agreements: Terms

Contract Issues

Description of animals

Health of animals

Payment method and terms

Delivery

Inspection of animals upon delivery

Insurance

Confidentiality Clause

Seedstock Livestock Purchase Agreements: “Suggested Sale Terms”

Contractually, the terms of an agreement for seedstock livestock are not binding unless the parties decide to make them so. If the parties do not make them binding, these are considered “suggested sale terms.”

Suggested sale terms include choice of law, health requirements, registration, identification, pedigree, guarantees for fertility/breeding, embryo transfer history, disclosure of genetic defects and other material information.

Seedstock Livestock Purchase Agreements

• Both parties must agree to the terms to make them legally binding.

• UCC Statute of Frauds applies to sales over $500, therefore the agreement must be in writing.


• Seller should have copy of suggested terms by breed association available for all potential buyers, if he or she would like to abide by those terms.

• Seller should be clear in sale catalog about sale abiding by suggested terms.

• Think about having Seller agreeing to suggested terms and any other terms in writing upon registration at sale.


• Buyers should pay attention to what is not included in the suggested terms.– For example, the ASA

Suggested Sale Terms and Condition are silent about a guarantee for the bull’s semen’s ability to freeze.

“Cow Selife” with my Father

Farm Machinery Purchase Agreements

Farm Machinery/Equipment Types of Purchase Agreement

Outright Sale • Ownership transferred to buyer and seller is paid in full at one time.

Installment Sale • Buyer obtains immediate possession and use of machinery while seller

obtains payment on a set schedule.

Gradual Sale • Line of machinery is sold one or two items at a time.

Lease with Option to Buy • Allows a party to lease equipment for a set term and then purchase upon

completion of lease.

Farm Machinery/EquipmentTypes of Purchase Agreements

Lease with Gradual Sale • For parties that are leasing multiple pieces of equipment

and wish to purchase them upon the termination of the lease.

Rollover Purchase • Allows purchaser to acquire new or nearly new equipment

each year or couple of years where purchaser pays difference between price of new model and the trade-in value of old model.

Benefits of Purchasing Farm Equipment Over Leasing

Owner has more control over how much the machine is used and for how long (leases have a set number of hours the machine can be used).

Owning farm machinery builds equity for farmers because the machinery holds its value for many years and serve as collateral to obtain funds for other ventures.

Farm Machinery Purchase AgreementsTerms of Agreement

Contract Terms

Description of machinery, including make, model, and serial numbers

Delivery

Title – when does it transfer to buyer

Maintenance and repair

Insurance

Default by buyer (for installment contracts)

Leases

Types of Leases

Farm/Ranch Leases (Land)

Bull/ Station Leases

(Animals)

Farm Machinery

Lease (Equipment)

Farm/Ranch Leases

Farm Leases: Type of Leases

Cash-Rent Lease • Tenant usually pays a fixed dollar amount in rent on a per acre

or whole farm basis.

Crop-Share Lease• The landlord will share input costs (seed, fertilizer, fuel) while

the tenant provides the labor and remaining input costs.

Hybrid Leases• The landlord will receive a minimum fixed rent while sharing in

some of the profits, losses, and decision making.

Farm LeaseTerms of Agreement

Contract Terms

Parties

Purpose

Property description

Lease term

Renewal terms

Lease price & payment terms

Duties and prohibitions

Rights to natural resources

Farm LeaseTerms of Agreement

Contract Terms

Reporting requirements

Default

Ability to assign or sublease

Notice

Termination

Indemnity clause or hold-harmless agreement

Choice of law/choice of forum

Alternative Dispute Resolution

Confidentiality Clause

Severability Clause

Termination of Farm Lease

Proper notice

required as per terms

of the lease

Important to comply with state

laws

Liability for Tenant Activities

For nuisances, such as with a tenant who spreads manure or uses pesticides, everyone who creates the nuisance or participates in maintaining the nuisance is liable, including the landowner.

When creating a farm lease, keep an eye out for indemnification and hold harmless clauses/agreements.

Grazing Leases• Grazing lease is an

agreement in which a landowner allows a tenant to graze livestock on the landowner’s property.

• The livestock can be of any species (cattle, sheep, goats) and of any class (dairy, beef, breeding).

Grazing LeasesTerms of Agreement

Contract Terms

Parties

Term

Description of land

Record keeping

Services provided by landowner

Water supply

Grazing LeasesDetermining Lease Rate

The Market Value Approach • Lease rate is based on local

rental rates for grazing. Rate is increased or decreased based on size of land, forage quality, availability of stock water, presence of poisonous plants, and responsibility of making or maintaining improvements.

Grazing LeasesDetermining Lease Rate

The Anticipated Income Approach – This approach looks at the expected returns for landowner and tenant.• Landowner: Wants to cover property taxes, opportunity cost of

the land (what income it would have generated if used for another purpose), depreciation of improvements and operating costs.

• Tenant: Wants to be assured of reasonable economic return for grazing, which takes into consideration livestock production costs and expected price of livestock.

Grazing LeasesDetermining Lease Rates

The Alternative Feed Approach – Estimates the value of the grazing land by comparing it to an alternative feed source, such as hay or stubble aftermath.• Alternative feed source that is compared to price of grazing

should provide livestock with similar nutritive value.• Price of the alternative feed should be compared at the local

level.

Grazing LeasesExpressing Lease Rates

Per Acre • Will vary based on productivity of grazing resource and lease

conditions.

Per Whole Tract • For leasing a block of land or ranch for a specified annual fee.

Per Animal Unit Mouth (AUM) • Allows for multiple types of livestock to graze land. Requires

calculating stocking rate for each type of animal that will graze land.

Grazing LeasesExpressing Lease Rate

Per Head or Per Pair • Usually charged per month or season & varies based on

animal.Per Share of Gain • Applies to seasonally grazed, weight gaining animals, where

price is charged per pound gained by animal during season.

Variable Lease • Use a base rate that is fixed for term of lease and variable rate

that allows lease rate to vary annually based on livestock prices.

Grazing LeasesAdditional Terms of Agreement

Contract Terms

Stocking limitations

Care of livestock

Maintenance and improvement responsibilities

Insurance

Security deposit

Landowner’s Rights to Property

Vehicles

Termination Terms

Liability and Indemnification

Choice of law

Dispute Resolution

Livestock Leases

Bull Leases

Stallion

Leases

Ram Leases

Boar Leases

Bull Leases

Bull LeasesTerms of Agreement

Contract Terms

Term

Number of bulls

Payment

Bull owner representations

Bull’s health, body condition score, fertility, breed, registration, pedigree, structural soundness, libido, genetic DNA markers, strength with Expected Progeny Differences.


Contract Terms

Lessee Representations on Cow Herd

Herd health, fertility, number of cows that bulls can breed with, nutrition programs that cows follow.

Health

Delivery of bull to cow herd

Movement of bull from lessee’s farm

Death, injury or illness of the bull

Injuries to people


Contract Terms

Insurance

Performance

Management

Feed and nutrition

Right of inspection

Ownership of bull

Option to purchase

Title of progeny


Contract Terms

Relationship of the parties

Termination

Confidentiality

Choice of law

Dispute resolution

Horse Leases

Horse LeasesTerms of Agreement

Contract Terms

Payment for shoeing, including horse’s farrier or training expenses.

Lessee does not have right to sub-lease the horse and no other riders are authorized to ride horse.

Care of horse, including hoof care and where horse shall be kept.

Insurance, including mortality, major medical, or loss of use insurance.

Clause indicating lessor not responsible for injuries due to elements of nature that scare horse.

If horse used for horseback riding, lessor may be responsible for injuries resulting from irregular footing on particularly rough terrain.

Ram Leases

Ram LeasesTerms of Agreement

Contract Terms

Description of rams

Guarantees of animal health

Feeding

Housing

Ownership

Boar Leases

Boar LeasesTerms of Agreement

Contract Terms

Term and pricing

Description of boar

Health warranties

Care of boar

Delivery

Title/ownership

Insurance

Assignment of agreement

Farm Machinery Leases

Farm Machinery Leases

• 16% of farmers lease farm machinery compared to 32% in other industries.

• Benefits of leases:– Tax deductibility of payment– Cash flow– Keeping up with latest technology– Not clouding balance sheet with another asset and liability

• Best for farm operations who need equipment for short term, or when farmer has ability to deduct cost of purchase, or equipment will have low residual value.

Farm Machinery LeaseTerms of Agreement

Contract Terms

Parties

Description of machinery

Rental terms

Repairs

Insurance

Dispute resolution

Farm Machinery LeasesLease-to-Own Contracts

If, at end of lease term, machinery can be bought for little to no cost or can be bought for a set price, it may be treated

as a disguised sale by the IRS.

Other warning signs include having a lease term that is longer than 75% of

the useful life of the machinery.

20/20 Test – To determine if lease is truly a sale, the machinery should have 20% value remaining in it and 20% of

the useful life of the equipment remaining.



Custom Feeding Arrangements

Embryo Transfer Contracts

Non-Disclosure Agreements

Custom Feeding Arrangements

Custom Feeding ArrangementsTerms of Agreement

Contract Terms

Identification of livestock – Type, weight, sex, breed/coloring

Feeding and nutrition – Feeding regime, expenses

Division of profit or loss

Marketing of livestock

Delivery

Shrink

Custom Feeding ArrangementsTerms of Agreement

Contract Terms

Management practices

Repossession of livestock

Manure handling

Veterinary care

Risk of loss

Custom Feeding ArrangementsFeeding Specifications

Feedlot should provide ration composition report which includes the amounts of each feedstuff and

note the total ration’s energy, protein, and major vitamins and

minerals.

Cost of feed charged by feedlot may be marked up to cover overhead

costs or may charge a yardage fee.

Custom Feeding ArrangementsMoney Considerations

Yardage fee • Usually charged on a dollar/head/day basis.

Cost of arrival• Treatments required for vaccination, dewormer, implants.

Labor costs• May be included in yardage fee.

Billings • Should reflect ration ingredient cost and if financed through a feedlot, look for statement of

interest on bill.

Taxes• Consult tax preparer for deductions related to paying feed bills in advance.

Embryo Transfer Agreements

Embryo Transfer ContractsRecipient Agreement

Where the cattle producer is selling a bred embryo transfer recipient cow to another cattle producer.

Terms to include:

• Purchase/lease price of Recipient Cow• Payment terms, including late payment penalties• Instructions for receipt or shipment of frozen embryos• Embryo transfer fees for open cows• Dates/procedures/costs for pregnancy checks• Duration recipient cow stays under care of owner• Limitation of liability for congenital birth defects or reasonable birthing difficulties• Security on embryo transfer progeny• Fee for genetic testing

Embryo Transfer ContractsBreeder Agreement

Cattle breeder can have agreement that may or may not be implemented into Recipient Agreement.

Terms to include:

• Shift burden to Recipient Owner to ensure cow is healthy with necessary vaccinations, within appropriate age range, has acceptable body condition score, certain breed/color, and structurally sound.

• Breeder can include clause holding recipient liable for gross negligence or intentional misconduct relating to care of recipient cow and progeny.

• Breeder may want to list special management terms if recipient owner will be raising progeny until weaning and retaining ownership of recipient.

Embryo Transfer ContractsFlush Agreement

• This type of agreement is used if a cattle producer is purchasing an embryo transfer flush from another cattle owner

Provisions for Purchaser to Consider• Minimum number of

transferable embryos• Grade of the embryos• Date/procedures for receipt

of frozen embryo• Guarantee that flush is

what was ordered

Provisions for Seller to Consider• Payment terms, including

shipping expenses• Does not bear

responsibility for transfer of embryos to Recipient Cow or for birthing problems

Stocker Cattle Contracts

Stocker Cattle ContractsFor when a cattle producer hires someone to feed out the progeny through weaning.

In addition to payment terms, agreement should specify:• Feed and nutrition• Animal health• Control of pests• Promises regarding average daily gain

Non-Disclosure Agreements

Non-Disclosure Agreements (“NDA”)Types of NDAs

Mutual or Bilateral • Where both parties will be supplying

information that is intended to remain secret.

One-sided or Unilateral• Where one party wants to disclose

information to another party and needs that information to stay secret.

Non-Disclosure AgreementsTerms of Agreement

NDA Terms

Parties exchanging information, i.e. both or one

Purposes for exchanging information

Identification of confidential information

Exceptions to confidential information

How information will be used and by whom

Methods for maintaining confidence

Length of agreement

Ownership of confidential information

Consequences of breach



A partnership arises when two or more people agree to share profits and losses in a business.

Types of partnerships:

• General Partnership• Limited Partnership• Limited Liability Partnership

Partnership AgreementsGeneral Partnership Agreements

Contract Issues

Names and addresses of the partners

Name of the partnership

Purpose of the partnership

Term of the partnership

Initial contribution of each partner

Additional contribution requirement

Assets of partnership

Liability of partnership

Allocation of profits and losses

Distribution of profits

Duties of partners

Partnership AgreementsGeneral Partnership Agreements

Contract Issues

Confidentiality

Salaries and other benefits of the partners

Expenses of partnership

Management of the business

Effect of a default

Amendments to partnership agreement

Partner changes

Assignability

Alternative Dispute Resolution (“ADR”)

Forum Selection

Choice of Law

Attorneys’ Fees

Dissolution and Winding Up

Partnership AgreementsLimited Partnership Agreements

• In most states, a limited partnership agreement must be executed along with a Certificate of Limited Partnership

• Terms to include:– Name of partnership– Rights and responsibilities of

limited partners– Additional limited partners– Other forms of compensation

Partnership AgreementsLimited Liability Partnership Agreements

• In some states, including New York, California, Oregon, and Nevada, limited liability partnerships are only available to professionals.

• Terms to include:– Name – Must contain one of the

following:• Registered Limited Liability Company• Limited Liability Company• RLLP• LLP

Oh, P.S. – I Wrote a Book!

Cari B. Rincker & Patrick B. Dillon, “Field Manual: Legal Guide for New York Farmers & Food Entrepreneurs” (2013)

Available on Amazon, Kindle and iBooks

www.newyorkagriculturelaw.com

Questions on Being an Agriculture Lawyer

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