drake university agricultural law center regulation of agricultural contracting: the u.s....

Drake University Agricultural Law CenterDrake University Agricultural Law Center

Regulation of Agricultural Contracting: the U.S. PerspectiveProf. Neil D. Hamilton, Dwight D. Opperman Chair of Law and director, Agricultural Law Center, Drake University Law School, Des Moines, Iowa USA


Do you want farmers to have the freedom to consider any production contract a company may offer or should the state protect farmers from bad deals?

Should companies be required to give farmers notice and reasons before terminating agreements?

If farmers make long-term investments in facilities or equipment should the contract be of an equal length?

These are the questions many state legislatures in the U.S. have tried to answer. In addition in recent years proposals have been introduced in the U.S. Congress for federal legislation to protect producers in agricultural production contracts.

Introduction: Why Consider Regulating Contracting


Introduction: Issues to Consider about Regulating Agricultural Contracting

When considering how agricultural contracts may be subject to legal regulation there are several basic issues to consider:

First, the arrangements are subject to existing contract and commercial laws - such as common law contract principles and any special legislation on commercial activity, such as the Uniform Commercial Code. In the U.S. issues of contract law are state law questions. There is not a federal law of contracting. This means state law - and state courts - are the primary sources of legal guidance on contracting.



Second, the arrangements may be subject to special laws enacted to address particular issues in the use of production contracts. This outline addresses examples of state laws enacted for this purpose.

Third, one important legal issue in determining which law may apply - and in drafting remedial legislation - is the question of how to classify the parties’ relation. Agreements commonly are described as “contracts” and classify the farmer as an “independent contractor”. However the legal relations may be viewed in other ways, such as: employment agreements, agencies, or even franchises. The status of the parties will determine their legal relation and their rights and obligations under the agreement.



Fourth, while contract law is primarily an issue of state law, there are ways the regulation of agricultural contracting can become a federal matter. The central question in application of federal law is existence of some form of regulatory jurisdiction over either the parties or the commodity being produced. For example, the Congress and USDA have long been involved in regulating the marketing of poultry and livestock, which is one avenue for potential federal regulation of contracting.

Fifth, efforts to regulate contracting can implicate questions of federalism and state’s rights - as well as raise constitutional issues, such as the application of the dormant commerce clause.


Several states, such as Arkansas, Illinois, Iowa, Minnesota, Wisconsin and Kansas have enacted laws regulating some uses of production contracts.

While legislatures in many Southern states have chosen not to adopt laws designed to protect poultry growers, in 2005 Arkansas did adopt the “Livestock and Poultry Contract Protection Act” - at section 2-32-201 of the Arkansas Code.

Legislation to regulate contracting is a controversial issue which will help determine the future of agriculture. The type of laws proposed and enacted have a strong influence on what type of production contract relations are developed and even where the practice is used.

Contract Regulation by U.S. States


Legal Options for States to Regulate Contract Production

In recent years a number of U.S. states have enacted contracting laws.

For an excellent review of these laws, see “State Regulation of Production Contracts” by Alison Peck, May 2006, A National Agricultural Law Center Research Publication, available at www.NationalAgLawCenter.org

The U.S. laws can be divided into two categories: a) laws creating substantive rights for producers which can be enforced by private court actions, andb) laws designed to regulate contract formation and performance with the goal of equalizing the bargaining power between the parties.

http://www.NationalAgLawCenter.org/




Direct regulation of contract production

There are at least four different approaches states have used.

1. Direct Prohibitions - this approach, found in Iowa's restriction on feeding of livestock or contracting for swine by meat packers, attempted to ban the use of contract production by certain parties. It was struck down in federal court as an unconstitutional interference with interstate commerce. Today contacting is seen in most states as an essential component of agriculture.

2. Regulating Contracting Methods - this approach establishes minimum requirements for parties who engage in contracting and may require including certain terms in the contracts being used. There are several approaches states can follow when regulating contracting methods.


One approach is to establish a standardized form for all production contracts used in a state. In 1990 the Iowa House of Representatives adopted a bill requiring the state to develop model livestock production contracts. The law was ultimately not enacted by the Iowa legislature but it is an interesting idea. Under it the producer was to receive the model contract and be given 24 hours before signing any contract being offered. If the producer was not given the model the other contract was voidable. The law did not require companies to adopt any provisions of the model contract. The model contract was to be developed by the farm division of the Iowa Department of Justice. The bill provided that:

“Each model contract shall provide terms expressing alternative methods of structuring an agreement, including but not limited to methods of compensation. A model contract shall

not state a price to be paid under the contract. It shall provide for the division of expenses and losses. A contract shall include provisions relating to the following:

Proposed Standardized contract


The required provisions included:

1. exchange of financial information, including any perfected security interests in the livestock. The contractor could grant the grower a security interest to secure the contractor's performance.

2. the party responsible for insurance.3. delivery of livestock to the feeder, including terms on notice, delays,

and compensation for delays. 4. the grower's right to refuse livestock when delivered, if it was in less

than "normal" condition.5. information on the payment of expenses related to feeding and

sheltering the livestock.6. terms on the use of veterinary care.

Iowa model contract


7. any requirements relating to construction of required capital improvements.

8. a term on death or loss of the livestock and who bears the risk. Cost of disposal was to be shared.

9. procedures for contract termination, including: a) the actions which could result in termination, but the contractor couldn't

remove livestock due to a grower's refusal to accept changes in the contract;

b) grounds for termination couldn't be based on a subjective evaluation of feeder's husbandry practices unless done by a person other than owner.

The provision required a method for notice of termination and a minimum period of notice. Terms for automatic renewals were also to be provided.

10. compensation paid to the feeder, including the manner and when it is due.

11. mediation or arbitration requirement for resolving disputes.

Iowa model contract


In 1990 Minnesota was the first state to enact a law setting mandatory terms for inclusion in contracts and for interpreting the agreements.

[Minn. Stat. Ann §§17.90-.98 and §514.945 (1993)]

The legislation was the result of a report prepared by the "Agricultural Contracts Task Force" created by the legislature in 1988 to explore the subject. The task force met fifteen times in preparing its final report which included a series of legislative proposals. The laws enacted as a result of the task force effort established a number of requirements for all "agricultural contracts.”

2. Regulating the contract relation -


These include:

a) dispute resolution - The law requires a "contract for an agricultural commodity between a contractor and a producer must contain language providing for resolution of contract disputes by either mediation or arbitration."

b) recovery of investments - When a producer is required by a contract "to make a capital investment in buildings or equipment that cost $100,000 or more and have a useful life of five or more years," the contractor must not cancel or terminate the contract until:

Regulating the contract relation -


1. "the producer has been given written notice of the intention to terminate or cancel the contract for at least 180 days notice before the effective date of the termination or cancellation" ... [except when the producer abandons the contract or is convicted of an offense related to the contract business], and

2. "the producer has been reimbursed for damages incurred by an investment in buildings or equipment that was made for the purposes of meeting minimum requirements of the contract."

Minnesota contract regulation -


c) right to cure - If the producer breaches the contract the contractor must still give the producer 90 days notice before terminating the agreement and must give the producer 60 days to correct the breach.

d) parent company liability - Parent companies of subsidiaries licensed to purchase agricultural commodities are "liable to a seller for the amount of any unpaid claim or contract performance claim if the contractor fails to pay or perform according to the terms of the contract."

e) implied promise of good faith - All agricultural contracts must be interpreted by the Minnesota courts as including an "implied promise of good faith." If the court finds there has been a violation of the implied promise of good faith, the court may allow the party to recover "good faith damages, court costs, and attorney fees."

(f) return of prepayments - If a producer makes prepayments "for agricultural production inputs that include but are not limited to seed, feed, fertilizer, or fuel for future delivery, the producer may demand a letter of credit or bank guarantee from the provider of the inputs to ensure reimbursement if delivery does not occur."

Minnesota contract regulation -


3. Mandatory dispute resolution – A state may not want to regulate the terms of production contracts, but still require any legal disputes involving contracting to be submitted to mediation prior to filing a court action. Iowa enacted this law in 1990.

4. Required Contract Terms – One of the most common forms of state law regulating contracting is to mandate the inclusion of certain provisions – such as risk disclosure, methods of termination, and clearn payment terms.

Other Forms of State Direct Regulation


Another approach to regulating contracting is to use indirect methods of controlling their use or for protecting producers who sign contracts.

1. Producer bargaining protections - increased use of contract production can raise concerns about the ability of contract producers to organize to bargain for more favorable contract terms. Several states, including Maine and Washington, have enacted state "Agricultural Marketing and Fair Practices" acts to protect the interests of producers who form associations to bargain for better contract terms. [See, Washington: Wash. Rev. Code Ann. §§ 15.83,005 - ,905; and Maine: Me. Rev. Stat. Ann. tit. 13 §1953, et seq.]

Indirect Regulation of Contract Production


A. Agricultural Fair Practices Protections

Federal and state laws have been enacted to protect the rights of producer to organize and bargain in marketing commodities. The laws, in particular the Agricultural Fair Practices Act of 1967, have been used by poultry producers to challenge the manner in which contracts were terminated. Congress passed the AFPA to protect the right of farmers and ranchers to join with other growers to form associations to bargain for better prices and terms with handlers and processors. The Act sets out a number of prohibited practices for handlers, which is defined to include persons engaged in "contracting ... with .. producers .... with respect to production or marketing of any agricultural product ... ." The act focuses on prohibiting handlers from discriminating against or intimidating producers because of membership in or exercise of the right to organize.

Federal Involvement In Contract Production Relations

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