Grain Production Contracts Checklist
A. Trend Towards Production Contracting/Definitions. There is a new era of grain production on the rise in Iowa and across the nation. Traditional patterns of grain production are giving way to new growing arrangements. Many of these arrangements involve grain production contracts.
A grain production contract can be defined as an agreement under which a producer agrees to raise a crop in a manner established by the contractor, deliver the crop to the contractor and, in return, receive a payment from the contractor. Production contracts should be distinguished from marketing agreements, cash forward contracts, and futures contracts which involve the sale of grain produced and owned by the producer.
B. Use of Checklist. This checklist has been prepared by Attorney General Tom Miller's Task Force on Production Contracts (the members are listed on page 10). It was developed as an educational tool for producers considering a production contract involving grain. The producer is encouraged to ask the type of questions posed in the checklist before signing a contract. No checklist can raise every relevant question, and, conversely, this checklist may raise questions that are not relevant to each producer.
C. References in Checklist. Note that the term "you" as used in this checklist refers to the producer or grower involved. The term "contractor" refers to the other party to the contract.
GRAIN CONTRACT CHECKLIST
A. Consult Experts. Before committing yourself to this contractual obligation, be absolutely sure you understand the entire document.
If you do not fully and completely understand the legal terms in the contract or the legal consequences of the contract, then you should consult an attorney.
2. Financial and technical experts.
If you do not fully understand the financial or tax consequences of the contract, then you should consult your lender, a tax professional, the Extension Service, agricultural consultant or others.
3. Other producers.
Talk to other producers who have had experience with contracts. They may be a good source of advice.
B. Production Issues.
1. Facilities and Equipment.
Does the contract require you to make investments in equipment or facilities?
Is special drying, storage, irrigation, or other handling equipment needed? Does this equipment require extra management, fuel, utilities, or repair?
Is the duration of the contract adequate to recover your investment? Can the contract be terminated before your investment is fully recovered?
Does the contract require your facilities or equipment to be approved or certified? Is special calibration needed?
If identity-preserved grains are involved, then will you need special storage facilities?
Will required segregation of each grain variety create storage problems?
2. Production Costs.
Do you know your costs of production for the crop involved? If not, then you should consult the Extension Service or others for estimated costs of production.
Do the requirements of the contract increase the production costs above those normally expected?
Are you required to use inputs or techniques that are more expensive than normal?
Are you required to buy inputs from a certain source?
3. Yield/Production Penalty.
What is the expected yield of the crop involved?
If specialty grains are involved, then is the projected yield less than one would normally expect?
Do you receive compensation for this yield reduction?
4. Growing Obligations.
Are you able to comply with the growing obligations in the contract? Are you willing to comply with these obligations and give up certain decision-making freedom on how, when, and where to grow crops?
Is a specific pest control program required?
Is the hybrid involved herbicide susceptible or resistant? Is the hybrid involved insect susceptible or resistant?
Is a particular fertility program required?
Do you need to maintain a distance from other crops to prevent cross pollination or other adverse effects?
How much crop residue is left from this crop and how does that impact your conservation compliance plan?
What authority does the contractor have to enforce growing obligations? Can the contractor enter your land and do work on the crops? If so, who is responsible for any damage?
C. Payment and Delivery Issues.
1. Payment Terms.
How are you being paid? Are the terms of payment clear?
If you are being paid on the price of the grain, then how is that price established? Is it established basis Chicago Board of Trade or is there a different pricing method?
When is the grain priced? Can the grain be forward priced?
Who, in fact, markets the grain?
Are corn or soybean check-off funds collected on the grain?
Is the schedule of payments firmly set? Does this schedule satisfy your cash flow?
If there are premiums or bonuses involved, then how are they calculated and when are they paid?
Can you examine the calculations used to determine these premiums or bonuses?
3. Condition of Crop.
What does the contract require as to the condition of the grain such as moisture, foreign material, test weight, oil content, protein content, etc.?
Has the Federal Grain Inspection Service established quality standards for this grain and these factors? If not, then what standards are used? Can you achieve those standards?
What about aflatoxin and other mycotoxins? Is this grain mycotoxin resistant or susceptible? What are the mycotoxin limits under the contract?
Who conducts the quality tests and when?
If you disagree with the test results, then can you get a third-party, independent test? How are conflicting test result disputes resolved?
What are the penalties for quality non-compliance? How is the amount of the penalty determined? Is it set in the contract language itself or is it determined at the time of harvest?
Are you penalized if the quality non-compliance was caused by adverse weather conditions or other factors out of your control?
Who bears extra costs incurred to achieve quality compliance (such as extra drying to achieve test weight)?
Does quality non-compliance on a portion of the crop result in penalties on all of the crop involved in the contract?
If the grain is rejected as a specialty grain, then can it be sold in the open market as regular grain?
4. Amount of Production.
Are you required to deliver a set amount of grain under the contract?
What is the penalty for failing to deliver this amount?
Do you have to find substitute supplies to fulfill the contract if you have a shortfall?
Are you responsible if the shortfall is due to an "Act of God", such as weather, insects, plant disease?
If the weather prevents planting, then can you make adjustments in the number or location of acres? Are there trigger dates for these adjustments?
Are you responsible if the shortfall is due to production decisions you did not make (such as fertility or pest programs)?
Under Iowa's Uniform Commercial Code, it is easier to be excused for a breach of contract because of impracticability (such as bad weather) if the contract involves the output of particular tracts of the land. Does this contract list the fields on which the crops are to be grown?
5. Delivery Site/Delivery Date.
Where is the crop to be delivered?
Are there any special handling procedures?
Who pays for the delivery to the site?
When is the crop to be delivered?
Is the date set in the contract? If not, then who sets the date?
What is the penalty for late delivery? Early delivery?
What if late delivery is due to circumstances beyond your control?
6. Payment Date.
When are you entitled to receive payment?
If payment may be made after delivery, then what guarantee of payment do you have?
7. Ownership of Crop/Risk of Loss.
Who owns the crop?
Usually the party with title of ownership bears the risk of loss. Does the contract modify this rule?
Who bears the risk of loss of the crop in the field, in storage, or in transport?
8. Grain Dealer Status/Grain Indemnity Fund.
Iowa law establishes an indemnity fund to compensate unpaid sellers of grain if: (a) the buyer was a licensed grain dealer, (b) the transaction was considered a sale of grain, and (c) the sale was not a credit sale contract. (A credit sale contract is a contract under which payment for the grain is made more than 30 days after delivery of the grain). Are you covered by the indemnity fund?
Is the contractor here a licensed grain dealer?
Is this contract a sale of grain? Or is it a contract to pay you for services?
Is payment to be made 30 days after delivery making this a credit sales contract?
9. Liens, including Contract Producer Lien effective 5/24/99.
Note: Iowa has passed the first-in-the-nation contract producer lien law, Iowa Code Chapter 579B, whereby farmers raising crops under production contracts for companies have the legal authority to file a one-page lien form with the Iowa Secretary of State within 45 days from the time the crop is planted. The lien is the first priority lien on the growing crops, or the proceeds of the crop if they have been sold. The lien exists for a period of one year after the corp leaves the authority of the producer.
Does the contract prohibit you from granting liens or security interests on the crop to a third party such as a landlord, lender, or supplier?
Does the contract prohibit you from discussing your contract with others? (This type of statement, commonly referred to as a "confidentiality clause", is unenforceable in contracts executed before 5/24/99, and void in contracts executed after 5/24/99. Iowa Code section 8E.3).
Does the contract request or require you to "waive" statutory provisions in order to be accepted by the contractor? (Waiver clauses eliminating protection are now void and unenforceable, per Iowa Code section 579B.6).
When can you file a contract producer lien?
What are the legal requirements for preserving the lien?
10. Contractor Credentials.
If you have concerns about getting paid under the contract, then will the contractor provide you with a financial statement? A list of producers the contractor has contracted with in the past?
Is the contractor bonded for this type of obligation?
Does it appear that the contractor is committed to contracting in the region? Has the contractor made investments in fixed assets or relocated management to the region? Is contracting the contractor's core business?
11. Your Credentials.
If the contractor has questions about your ability to perform the contract, then are you willing and able to give the contractor a financial statement and names of individuals who will verify your financial stability and management abilities?
12. Parent Company Responsibility.
If the contractor is a subsidiary company, then does the contract make the parent company responsible for payment if the contractor defaults?
13. Genetically Modified Organisms (GMO's).
Does the contract require you to plant GMO seed?
Has the GMO Seed identified in the contract been approved for use in foreign markets, including the European Union(EU)?
What is your delivery point's (local elevator or co-op) position with regard to taking fall delivery of GMO products? On what terms will your delivery point take delivery of GMO products? Will your local delivery point commit in writing to take delivery and the terms under which it will take delivery of GMO products?
If the contract requires you to plant non-approved GMO products, what ability do you have to look to the contracting company for any kind of contribution should you incur economic losses as a result of planting that seed?
Who pays testing cost?
What is the possibility that you certify that the product you deliver be either non-GMO or approved GMO as part of the terms of delivery?
Does the certification include language that places responsibility on the farmer for any potential liability resulting from the detection of non-approved GMO products later down the line?
Is there potential for development of a two-tiered market or price structure?
What is the possibility that foreign countries other than the EU may address the GMO issues in the future?
What is the possibility that users other than the grain processing industry may take a position in the future concerning the use of GMO grain?
D. Other Legal Issues.
1. Dispute Resolution.
Does the contract provide for alternative dispute resolution such as mediation or arbitration before the parties can take a dispute to court? Alternative dispute resolution often is far less costly and disruptive than litigation.
Mediation is negotiation between you and the contractor facilitated by a neutral third party.
Arbitration is a process where a third party arbitrator hears the dispute like a judge and renders a decision, usually binding on the parties.
2. Termination of Contract.
Under what conditions can the contractor terminate the contract?
Who determines whether those conditions are met? Are there objective standards or is it in the discretion of the contractor? For example, can the contractor terminate the contract if the contractor determines you have not complied with quality provisions? Or, does the contractor have to verify the quality problems with independent testing?
Can the contractor terminate the contract for minor breaches of the contract?
How much notice does the contractor have to give prior to termination?
Are you given an opportunity to cure a problem before termination? How much time are you given for this?
What are your rights after termination by a contractor?
Can you sell or use the crop not purchased under the contract?
Under what conditions may you terminate the contract?
What if you get sick, disabled, or die? What if you go bankrupt?
3. Renewal of Contract.
Under what conditions can the contract be renewed?
Again, are there standards or is it up to the contractor?
4. Legal Relationship of Parties.
What legal relationship does the contract create between you and the contractor? Is it a landlord/tenant relationship, employer/employee relationship, independent contractor, partnership, joint venture, agency?
Does the contract refer to a bailment?
The legal relationship involved will determine your rights and duties under the contract and will have important tax consequences.
5. Approval of Others/Assignment.
Do other parties have to approve the contract, such as your landlord, lender, or spouse?
Can the contract be assigned or transferred by you or by the contractor to other parties? This may have important tax consequences.
6. Farm programs.
How will the contract affect your eligibility for farm program payments?
To be eligible for USDA programs, you must have a "beneficial interest" in the commodity. This is determined by looking at the contractual terms regarding title, risk of loss, and payment.
Is the crop considered a program crop for purposes of payment or base retention? How will this affect your established farm program yield?
Are you required to buy multi-peril, hail, or other crop insurance? Liability insurance (for risks such as pesticide drift)?
Can you get Federal Crop Insurance for the crops involved? If so, then can you use your actual production history or will other yield determinations be used?
8. Protection of Intellectual Property.
Are you required to take any special steps to protect the contractor's property interests in the grain's germ plasm (genetic material)?
Are you responsible for the security of germ plasm?
Who owns the germ plasm? Does the contract limit your ability to save seed to plant on your own farm in future years?
9. Choice of Law/Venue/Change of Law.
If the contractor is from another state, then does the contract specify the state law that governs? Is this choice of law fair?
Does the contract set a venue (location) for any lawsuit that might be filed? Is this location fair?
Does the contract permit renegotiation or nullification of the contract if the laws governing production contracts are changed?
10. Duration of Offer.
How long do you have to accept the contract? Is there an expiration date for signing?
11. Put It in Writing.
You should not rely on oral agreements or interpretations of the contract. Reduce all understandings or modifications to writing.
OTHER SOURCES OF INFORMATION
There are several other excellent sources of information on grain production contracting. The sources include:
Hamilton, Neil D., A Farmers' Legal Guide to Production Contracts, Farm Journal, Inc., Philadelphia, Penn., 1995. (For copies, call (515) 271-2947.)
Hamilton, Neil D., Iowa Crop Producer's Environmental Law Guide, Drake University Agricultural Law Center, Des Moines, Ia., 1992.
Nutrient Content and Feeding Value of Iowa Corn, Iowa State University Extension, Publication AS 598, 1991. (For other ISU Extension publications, call (515) 294-5247.)
The World of Corn, National Corn Growers Association and National Corn Development Foundation, St. Louis, Mo., 1995.
You may also want to contact the following organizations for information:
Iowa Corn Growers Association, 1200 35th Street, West Des Moines, IA 50266. (515) 225-9242.
Iowa Department of Agriculture and Land Stewardship, Grain Warehouse Bureau, Wallace Building, Des Moines, IA 50319. (515) 281-5987.
Iowa Farm Bureau Federation, 5400 University Avenue West Des Moines, IA 50265. (515) 225-5400.
Iowa Farmers Union, P.O. Box 8988, Ames, IA 50010.
1-(800)-775-5227. E-Mail address: IAFU@isunet.net Internet address: www.iafu.org
Iowa Mediation Service, 1025 Ashworth Road, West Des Moines, IA 50265.
(515) 223-2318. Regional offices: Cedar Rapids (319) 398-4042.
Spencer (712) 262-7007. Mason City (515) 423-4322.
Iowa Soybean Association, 4554 NW 114th Street, Urbandale, IA 50322-5410. (515) 251-8640.
Iowa State University Extension, Iowa Concern Hotline. 1-800-447-1985.
TASK FORCE ON PRODUCTION CONTRACTS
Attorney General Tom Miller established a Task Force on Production Contracts that met three times in the fall of 1995. Members of the Task Force included individuals representing:
Agricultural Law Center at Drake University Law School
Iowa Institute for Cooperatives
Iowa Bankers Association
Iowa Cattlemen's Association
Iowa Corn Growers Association
Iowa Farmers Union
Iowa Farm Bureau Federation
Iowa Mediation Service
Iowa Pork Producers Association
Iowa Select Farms
Iowa Soybean Association
Iowa State University Economics
Iowa State University Extension
Pioneer Hi-Bred International, Inc.
For additional information on this checklist or on production contracts generally, please:
Iowa Attorney General Farm Division
321 East 12th St., Room 018
Des Moines, Iowa 50319