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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
2012 Census of Agriculture
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.
2012 Census of Agriculture
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.
Seedstock Livestock Purchase Agreements
• 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.
Seedstock Livestock Purchase Agreements
• 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.
Bull LeasesTerms of Agreement
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
Bull LeasesTerms of Agreement
Contract Terms
Insurance
Performance
Management
Feed and nutrition
Right of inspection
Ownership of bull
Option to purchase
Title of progeny
Bull LeasesTerms of Agreement
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.
Specialized Contracts
Specialized Contracts
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
Partnership Agreements
Partnership Agreements
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
Fridays with Cari Skype Calls– First Friday of the
month at 2pm ET– RSVP to
[email protected]– No charge
Contact Me
535 Fifth Avenue, 4th Floor, New York, NY 10017(212) 427-2049 [email protected] Twitter: @CariRincker @RinckerLawSnapchat + Periscope + IG: @CariRinckerFB: www.facebook.com/rinckerlaw