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Contact UsEvery successful farming operation requires a number of regular transactions, from the purchase of supplies to the leasing of land to the sale of harvested goods. These transactions are most often covered by state law, although some aspects of agricultural transactions are governed by federal law. In many cases, this law is the Uniform Commercial Code (UCC). This is a model law which has been adopted by many states, although different jurisdictions have modified parts of the UCC. For a better understanding of how your state applies the UCC, you should consult an attorney with experience in business law.
The UCC contains eleven Articles. The most important for agricultural commerce is Article 2, which governs the sale of goods including livestock or crops. Sales require a contract, whether written or verbal. These are agreements that lay out the obligations of the seller and buyer during a transaction. These obligations can also be implied, even where there is no written or verbal requirement. The details vary from state to state, but the UCC defines these obligations and creates implied warranties. That is, the UCC assumes that all goods sold are “merchantable”, or fit for their intended use. Article 2A covers much of the same ground for leases of equipment used in business.
The UCC also regulates cash forward contracts. These contracts set a delivery date. At that time, the farmer is required to deliver a set amount of goods, but the price is set by the contract before delivery. This gives farmers insurance against falling prices, but risks that they will lose the benefit of rising prices for their goods.
Hedging on the futures market is another tool that agricultural companies can use to protect themselves. Like a cash forward contract, hedging allows the producer to avoid falling prices but does not ensure the benefits of rising prices.
An increasing number of farmers avoid the complications of these transactions by moving to a direct marketing system, where they sell their produce directly to consumers through roadside stands or farmers’ markets. These transactions are generally regulated by state and local law.
Perhaps the most important aspect of contract law in agriculture is the production contract. Agricultural production contracts are legal agreements between a producer and a contractor – often, a commodity processor like a slaughterhouse or mill. As well as specifying the amount and quality of product to be delivered, production contracts often identify the practices to be followed during production. These contracts are unique, and governed by state law. Therefore, there are a number of complex legal issues to be settled whenever a production contract is disputed. You should consult an attorney if you are involved in a conflict over a production contract.
One of the main advantages of a production contract is that it reduces risk for farmers and ranchers by setting the price ahead of time. The price may be fixed or variable depending upon the terms of the contract. This stable income increases the likelihood of getting credit. It also provides access to the processor’s advantages, like special equipment, information or technology. The big disadvantage for producers is that since the contract describes practices and methods, they lose a lot of independence. If the contract is terminated, then it leaves the producer open to increased financial loss. The processor can determine whether the producer’s goods meet the criteria of the contract. For processors, production contracts put them at financial risk but gives them control over the production process. The importance of these contracts makes it vital for both parties to understand them.
There are federal and state regulations on production contracts. The most important federal law is the Farm Security and Rural Investment Act of 2002, which nullifies confidentiality clauses and allows producers to discuss production contracts with agencies, advisors, lenders and other interested parties. In 2000, model legislation was drafted by Iowa’s government and adopted by several states called the Producer Protection Act, or PPA. The PPA introduces a number of provisions for production contracts, including the following:
- They must disclose all risks.
- Contracts must be written in simple language.
- Producers have three days to cancel a contract after signing.
- Contracts must be governed by the laws of the state where the producer lives.
- Both parties must agree to mediation before a lawsuit.
- Some production contracts may be structured as sales contracts and governed by the UCC.
Other federal laws, like the Packers and Stockyards Act or the Perishable Agricultural Commodities Act, can protect producers. In addition, the Agricultural Fair Practices Act of 1967 prevents discrimination against producers that join producer associations.
A production contract can make or break a farm. Given the importance of these contracts, you should have an attorney with experience in agricultural law review any production contract before you sign it.