What is Contract Production in Agriculture?

Agricultural production contracts are agreements between producers, such as farmers, and contractors, such as agricultural companies, for agricultural commodities. These contracts usually identify the production practices that will be used, identify the party responsible for providing the necessary resources, and specify the quantity, quality and payment method of the basic product. Farmers and ranchers use production contracts as a tool to manage the risks inherent to agricultural production. Agricultural companies use production contracts to manage risk and control expenses. The legal implications of production contracts are unique to each jurisdiction because the law of each state governs their interpretation.

In addition, the variations in terms and language contained in individual production contracts make each one different. Contract farming implies that agricultural production is carried out on the basis of an agreement between the purchaser and the agricultural producers. Sometimes, it involves the purchaser specifying the required quality and price, and the farmer agrees to deliver at a future date. However, most commonly, contracts describe the conditions for the production of agricultural products and for their delivery to the purchaser's facilities. The farmer undertakes to supply the agreed quantities of an agricultural or livestock product, based on the quality standards and delivery requirements of the purchaser.

In exchange, the purchaser, normally a company, agrees to buy the product, often at a price that is set beforehand. The company also often agrees to support the farmer through, for example, technical assistance or pre-financing of inputs. The term contract producer system is sometimes used synonymously with contract agriculture, most commonly in Eastern and Southern Africa. Contract farming can be used for many agricultural products, although in developing countries it is less common for staple crops such as rice and corn. Production-based contracts determine if the terms of the contract have been met by verifying the quality of the production.

For example, contracts for corn with high oil content pay based on the percentage of oil in the corn. Producers have a lot of freedom to grow corn, since they know that the final price will not be determined by the activities carried out during production, but by the measurable characteristics of the production. The company that buys the product can specify certain minimum inputs (e.g., fertilizers or pesticides) that must be used in order to meet quality standards. In 2000, the Iowa Attorney General, together with fifteen other offices of the state's attorney general, drafted a model law for state legislation that would regulate agricultural production contracts. Uncertainty increases when using long-term contracts because the longer a commercial relationship exists in the future, the more uncertain each of the parties will be about the financial and production conditions that will exist when the contract is executed. Risk reduction is one of the main benefits of these production contracts because the payment for the production of commodities is predetermined and described in the contract. On the other hand, long-term options for placing wind energy turbines onshore are quite new, and there are relatively few contracts on which to model new contracts.

It allows producers to discuss the details and terms of a production contract with federal or state agencies, legal advisors, lenders, accountants, managers, landlords and immediate family members, despite any confidentiality clauses that may appear in the contract. Most contract crop production, except for seeds and some processed vegetables, uses marketing contracts. Numerous studies have been conducted on contract agricultural enterprises and many are listed in the Resource Centre on Contract Agriculture of the United Nations Food and Agriculture Organization (FAO). The contract must include a cover page that explains in simple language the material risks of the contract. The publishers identify a gradual convergence in the clauses and conditions used in contracts and point out that two of most common contractual provisions - those involving technical assistance and pre-financing of inputs - may be essential for small farmers' inclusion. The assignment of risk arises from a situation in which future value of some element of contract is not known at time it is signed.

Some pigs may even be raised under a production contract between producer and an integrator (an intermediary who coordinates production) then sold by integrator under marketing contract with processor. Contracts commonly used in agriculture include sale of land, equipment & grain; loans & mortgages; purchase of inputs; lease of land & equipment; & production & marketing contracts. Production contracts: contractor is more involved in production process & often provides specific inputs & services; production guidelines & technical advice to producer who receives contractual fee for growing product. Termination of contract is also risk for producer especially if producer has spent significant amounts of capital to fulfill contract. Lack completeness likely to be bigger problem with wind energy contracts than with soil carbon sequestration contracts because they can affect company's risk; lending institutions have strong interest in having new contracts considered & often want to review them before signing them.