Overview of Common Agriculture Contracts

Overview of Common Agriculture Contracts

Food and Farm Law CLENorth Carolina Bar Association

October 17, 2013By Cari B. Rincker, Esq.

Who I Am• Food and agriculture law

practice in New York • Chair of the ABA, General

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

• Client bases ranges from livestock producers & food entrepreneurs to mid-size agri-businesses

Overview• Agriculture Production

Contracts• Custom Feeding

Arrangements• Farm Leases• Farm Machinery Leases• Leasing Animals• Partnership Agreements

Agriculture Production Contracts

Applicability of Agriculture Production Contracts

It is an agreement under which a producer agrees to raise a commodity in a manner established by the contractor and to deliver the commodity to the contractor while the contractor agrees to pay the producer in return.

Types of Agriculture Production Contracts

• 3 Types– Sales Contract– Personal Service

Contract– Bailment

Sales Contract

• 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 services rather than supplying the commodity.

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

• Generally subject to the applicable state common law governing contracts instead of UCC

Bailment• Producer has possession of the

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

• Producer must exercise care in safeguarding the commodity and protecting the contractor’s intellectual property interests.

• Often used in seed production contracts (i.e. seedman’s contracts) and grain storage arrangements.

• Generally subject to the UCC

Advantages of Production Contracts• For Producers

– Income stability - A reduction in marketing risks, insulation from price swings, and a guaranteed market provide producers with a more stable income stream.

– Improved efficiency and expertise - A producer may benefit from access to the contractor’s increased managerial, marketing, and technological resources.

Advantages of Production Contracts• For Producers

– Greater access to capital Increased income stability may increase the producer’s credit rating, thus making him a more favorable loan applicant. Additionally, because the contractor provides most of the production inputs, the producer can increase his business volume without large increases in capital requirements.

Advantages of Production Contracts

• For Producers

– New market access A producer may be able to expand into new markets more easily by entering into a production contract with a contractor that is already established in that market.

Advantages of Production Contracts• For Contractors

– Production and quality control – A production contract establishes uniformity, which increases quality control and regulates production costs.

– Supply management – By controlling production, contractors can respond more efficiently to fluctuating market demands. Production contracts may also limit a contractor’s risk of acquiring oversupplies that exceed customer demand.

Advantages of Production Contracts

• For Contractors

– Expansion and diversification – Production contracts allow contractors to increase business volume and to expand into more diverse markets without the expense of acquiring the necessary land, machinery, and labor.

– Intellectual property protection – A production contract dictates how a contractor’s intellectual property is to be handled and protected to ensure its value is preserved

Disadvantages of Production Contracts

• Loss of entrepreneurial independence – The increase in quality control and uniformity that production contracts are designed to achieve limit a producer’s freedom to explore alternative practices.


• Assignment of risks – Both parties must thoroughly evaluate the risk associated with a potential production contract. The assignment of risks should be balanced between the contractor and the producer. Issues of ownership and responsibility for loss should be clearly specified.


• Limited natural disaster relief – Most disaster relief programs compensate the owner of the commodity for its loss with no provisions for the producer. Therefore, producers working under personal service contracts or bailment contracts may assume serious financial liability in the event of a natural disaster

Applicability in North Carolina

The 2002 US Census revealed that nearly 100 percent of the broilers and chickens raised in North Carolina were raised under production contracts, and 96 percent of North Carolina hogs were either raised under production contracts or directly by contractors. This is significant because in 2011 livestock, dairy, and poultry comprised 65.7% of North Carolina farm receipts.

Custom Feeding Arrangements

Applicability of Custom Feeding Arrangements

This is a contract between a livestock owner and a livestock feeder with market animals.

Provisions for Custom Feeding Arrangements

• Identification of Livestock – Type– Weight– Sex– Breed/coloring


• Feeding and Nutrition– Feeding regime– Expenses/ Finances• Some feedyards will

finance the feed bill for the owner. • Is a deposit required?


• Division of Profit or Loss

• Marketing of the Livestock– Approximate timeline

for marketing– Desired stage of finish


• Delivery– Approximate date

of delivery– Deadline for

delivery– Shipping/

transportation costs


• Shrink– This is important if rate of

gain is used to determine any type of payment

• Management practices– Animal handling techniques– Feeding times– Access to water– Compliances with livestock

animal welfare law

A Word on Feeding• Feeding is central to the

custom feeding arrangement– Ration composition. The

feedlot should provide cattle owners with a report of the ration composition. • This report should include not

only the amounts of each feedstuff but also note the total ration's energy, protein and major vitamins and minerals.

• A list of feed additives should also be included.

A Word on Feeding• Cost of feed charged by

the feedlot. Feed may be marked up to cover overhead costs. – Some agreements mark

up the feed a little and do not charge "yardage."

– Others may charge a little more for yardage and not mark up the feed.


• Repossession of livestock– It should include a

provision for the repossession of livestock if the livestock are not cared for properly.

– Owner should be able to retrieve low-performing animals.


• Manure Handing– Feeder is usually

responsible for proper manure handling and storage.

– Feeder usually takes on any liability associated with manure handling, including compliance with environmental laws.

• Veterinary Care


• Risk of Loss– When cattle are fed under contract, the owner

retains title to the cattle. • The risk of loss due to death is usually borne by the

owner, except for those death losses caused by negligence of the feeder.

• Death losses will usually be borne by the owner.

– The parties also have the option of agreeing to share losses, above a certain percentage of dead livestock. • This is problematic as only one party will be around

to verify the death loss. • Both parties need to determine whose insurance

company will cover losses due to catastrophe, such as fire, wind and lighting.

Payment Terms

• 2 Most Common Ways of Charging Services– Yardage• Dollar per head per

day basis

– Yardage plus feed markup

Payment Terms• Cost of arrival treatments

usually includes cost of vaccination, dewormer, implants, etc.

• Labor cost may or may not be included in the yardage charge. The feedlot operator should send a complete record of the delivered feed and its cost.

Payment Terms

Billings should reflect changes in ration ingredient cost.

– The bill should contain an itemized list of any other costs billed to the cattle owner.

– The first bill should state the cost of processing.

– If the feed is financed through the feedlot, look for a statement of interest on the bill.

– It is a good idea to specify with the feedlot the exact time when interest charges for feed begin to accrue.

Prepaying for Feed• Because feed prices can

change, some feedlots allow customers to prepay for some or all of the feed. – The key point to keep in mind

is that IRS regulations do not allow one to pay a true feed bill in advance of its purchase and take a deduction, but the IRS allows the purchase of commodities such as grain, silage, or hay for future use to be deducted.

Farm Leases

Three Basic Types of Farm Leases

• Cash-Rent Lease• Crop-Share Lease• Hybrid Lease

Cash-Rent Leases• Tenant pays a fixed dollar amount in rent (per

acre or whole farm basis)• May be modified depending on crop yield – In other words, the price will increase in good

years and decrease in bad years)– Landlord is not as involved in crop production;

Tenant has more autonomy • LL is not “actively engaged in farming” and will likely

not be able to participate in federal farm programs• Income not subject to self-employment tax for LL

Crop-Share Lease• LL will share input costs (e.g., seed, fertilizer,

fuel) while T provides all of the labor and remaining input costs

• Once harvested, proceeds will be divided according to the agreement – Typically ranging from 25/75 to 50/50

• Both LL and T share risks• LL is “actively engaged in farming”– Subject to self-employment taxes

Hybrid Leases

• Landlord will receive a minimum fixed rent payment while sharing in some of the profits, losses and decision-making

• Depending on how the agreement is drafted, the LL may actively be involved in farming for self-employment tax purposes

Some Farm Lease Terms to Think About

• Some basics– Parties– Purpose of Lease (e.g.,

crop production)– Property Description– Lease Term– Renewal Terms


• Payment Terms– Per acre/farm basis– Timing

• Who is responsible for– Property taxes– Farm insurance– Utilities


• Duties of each party– Especially important if

LL wants to be “Actively engaging in farming” for self-employment tax purposes

– Example: LL’s duty to make all the repairs and maintenance on the property


• Rights to natural resources– Wind rights– Solar rights– Mineral rights– Timber rights– Fishing/Hunting rights– Camping Rights


• Does the T have any reporting requirements to the LL?– Grid sampling– Yield monitor data– Weigh wagon– Test plot results


• Miscellaneous – Assign/Sublease– Notice– Termination– Confidentiality– Choice of forum/law


• Think about liability issues– Who is responsible if T

spreads manure or pesticides on property and creates a nuisance?

• Indemnity clauses– T hold LL harmless based

on something T did on the land

Farm Machinery Leases

Applicability• Farm machinery leases may be a good option

when:– The farmer only needs the equipment for a short

period of time or it will be obsolete in a few years– The farmer’s ability to deduct the cost of the

purchase is limited by income and other deduction rules

– At the end of the projected use period, the equipment will have low residual value

Lease-to-Own Contracts

• If the title of the farm equipment transfers to the lessee at the end of the lease at no cost or a low set price, the IRS may view this as a disguised sale by the IRS

• Other warning signs: – farm machinery lease exceeds

75% of the useful life of the item– Payments equal nearly the cost of

acquisition

Lease-to-Own Contracts

• IRS 20/20 Test– 20% of the value or

20% of the useful life must remain at the end of the lease

– Otherwise, the IRS will see it as a sale

Leasing Animals

Bull Lease Provisions

• Term of the Breeding Season• Number of bulls leased• Payment• Bull owner representations

– Health– Body condition score– Fertility– Breed registration– Pedigree– Structural soundness– Libido/ sex drive – Genetic DNA Markers– EPD’s– Disposition/ Docility

Bull Lease Provisions• Lessee Representation

– Herd health – Fertility of cows (if there is a

penalty for low conception rates) – Number of cows that the bulls

will breed• Deliver of the bull to the cows• Risk of Death, Injury or Illness

of the Bull• Liability for Injuries to People

(Lessee should have the risk)

Bull Lease Provisions

• Insurance requirements (rare) • Performance requirements

– Minimum breeding rate – If represent the bull owner, make

sure there are provisions relating to drought, weather extremes or deficient grazing conditions

• Good Management Practices– Including info on health,

veterinary care, and feeding regime, including dietary supplements

Bull Lease Provisions• Right of inspection (by bull owner)• Option to purchase bull at the end of the lease• Title of progeny – Should be owned by T– Sometimes the lease will say co-owners; this

creates a general partnership• Confidentiality• Relationship (no joint venture or partnership)

Horse Leases

• Different types of leases for mares, geldings and stallions

• Some things to consider– Shoeing– Farrier fee– Training expense– No right to sublease– Health/veterinary care– Insurance

• Mortality insurance• Major medical• Loss of use insurance

Partnership Agreements

Overview: “The Desirable Plan”

• Understand culture of industry

• Does client have a business plan?

• Choice of business entity

• Draft and execute a partnership agreement

Cultural Hurdle• “Handshake” Culture• Partnerships are oftentimes

formed with trusted persons– Family– Friends

• Reluctance to put agreements in writing or hire attorneys

• Dynamic of farm family– Succession planning

Photo from Washington State University Extension

Business Plan

• Does your client have a business plan?– Does your client need a

business plan?– Should you help your

client develop a business plan?

• How can your client’s business plan be incorporated into the Partnership Agreement?

Choose a Business Entity

• Sole Proprietorship• General Partnership• Limited Partnership• Limited Liability Company– Professional Limited Liability Company

• Corporation– S-Corp vs. C-Corp.

• Cooperative

Photo taken at cattle branding near Casper, Wyoming

Understand Purpose of Partnership

• “Big Picture”• Purpose and Scope– What Type of Business?– Authorized business

activities?– Unauthorized business

activities• Duration or Term Erica Leubner from Tim’s Pumpkin Patch

in Upstate New York

Some Basics

• Principal Place of Business

• Choice of Law– Are there any

specific state law issues?

• Name of Partnership• Licenses, Permits,

Franchises?

Identify the Partners• Contact information– Full legal names– Business entity– Addresses– SSN or FEIN

• Qualifications of Partners– What are they each “bringing to the table”– Keep this in mind, even with farm families

Show Me the Money• What are the initial capital contributions of each partner?– Look at total initial capital of the Partnership– Cash, real property, personal property, intellectual

property– When should initial contributions be made

• Subsequent Capital Contributions• Interest on capital contributions

Title to Partnership Property• Title to Property to

Remain in Partner• Property to be in the

name of the Partnership

• Rights in Specific Partnership Property

Liabilities of Partnership

• Mortgages or liabilities assumed by partnership

• Loans to Partnership By Any Partners

• Look at terms– Amount– Interest– Security for repayment

• Monthly Expenses– Is the partnership properly

capitalized?

Photo taken at Marc King Simmentals in Montana

Duties of Partners

• Full or part-time duties– Management of day-to-

day operations– Accounting– Marketing/Advertising

• Time partners to devote to Partnership– Hours/week– Salaries– Vacation days

Photo taken at Lake Land College in Mattoon, Illinois

Restrictions on Partners• Examples:

– Not borrow money in name of partnership or individually for partnership use

– Not lend money or property of partnership or transfer, pledge or mortgage assets of partnership

– Not purchase property for partnership– Not execute bonds, guaranties, or

indemnities– Not release claims of partnership or

engage in settlements for partnership– Not to Engage in Other Businesses– Hire/Fire employee without consent of

other partners

Photo taken in Nebraska

Management of the Partnership• Managing Partner(s)– Limitation on Powers – Committees

• Voting– Matters requiring unanimity

• Participation of Partners– Normal operations– Extraordinary actions– Description of actions requiring vote of partners

Profits and Losses

• How the Partners will divide profits, losses and other financial attributes of partnership– Special tax allocations• Depreciation• Capital gains/losses• Other tax attributed

– When will the division of profits take place

Accounting• Who will manage books?• Where will records be kept?• Method of accounting (e.g., cash basis)• Tax year (e.g., calendar year)• Appointment of independent accountant• Periodic statements to partners• Right of partner to examine books• Accounting between Partners

Transfer of Partnership Interest• Restrictions on assignment, sale or pledge of

interest• Right of partnership to buy interest– Right of first refusal– Partner’s right to put interest to partnership– Valuation of interest

• Formula for valuing goodwill or other tangibles

– Method of payment• Installment payout

– Duty of incoming partner to assume share of partnership liabilities

Admission of Partners

• Voting requirements• Initial qualifications• Duties/restrictions• Equity• How will profits/losses be

divided with new partners?

Withdrawal or Retirement of Partners• Notice of Withdrawal or

Partnership• Is consent required from other partners?• If no consent, non-compete clause?• Payment for partnership

interest• Will partnership continue?

Leland and Davadia Rincker

Expulsion of Partners• Grounds– Adjudged insane or incompetent– Becomes disabled or unable to fulfill his or her

obligations to the partnership for X number of days– Fails to fulfill obligations

• Vote required– Majority?

• Payment for partnership interest as if partner voluntarily withdrew

• Non-compete?• Will partnership continue?

Dissolution of Partnership• Causes of Dissolution– Termination of defined term– Withdrawal, retirement or expulsion of any Partner– Death, disability, or bankruptcy of any Partner– Unanimous agreement

• Right to Continue Business After Dissolution• Payment if Partnership Continued After Dissolution– Value of partnership’s interest

“Winding Up” Stage• Upon dissolution, if partnership is not to be

continued then it will be “wound up”• During the “winding up” stage, the assets of the

partnership will be applied to liabilities in the following order:– Amounts owed to creditors other than Partners;– Amounts owed to Partners other than for capital and

profits;– Amounts owed to Partners for capital; and, – Amounts owed to Partners for profits.

Alternative Dispute Resolution• Negotiation• Mediation– State Agriculture Mediation Program?

• Arbitration – Rules – Arbitrator(s)

• Exceptions to ADR– Preliminary injunctions, temporary restraining orders,

court orders for interim relief to preserve status quo

Miscellaneous Provisions

• Notice• Amendments• Life Insurance• Waiver• Validity• Confidentiality– Separate NDA?

• Rules of Interpretation• Indemnification• Entire agreement

Oh, P.S. – I Just Wrote a Book

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

Available at http://www.amazon.com/Field-Manual-Legal-Farmers-Entrepreneurs/dp/1484965191

…and that’s marketing.

Please Stay in Touch• Send Me Snail Mail: 535 Fifth Avenue, 4th Floor, New

York, NY 10017• Call Me: (212) 427-2049 (office)• Email Me: [email protected]• Visit My Website: www.rinckerlaw.com • Read My Food & Ag Law Blog: www.rinckerlaw.com/blog• Tweet Me: @CariRincker @RinckerLaw• Facebook Me: www.facebook.com/rinckerlaw • Link to Me: http://www.linkedin.com/in/caririncker • Skype Me: Cari.Rincker

mailto:[email protected]

http://www.rinckerlaw.com/

http://www.rinckerlaw.com/blog

http://www.facebook.com/rinckerlaw

http://www.linkedin.com/in/caririncker