Legal Environment Facing Economic Agents in Production, The

Journal of Agricultural and Applied Economics, Aug 2005 by Hipp, Janie S, Francis, Harriet F

Agriculture has seen a steady movement toward the increased use of contracts. Agricultural contracts now guide the interrelationships of parties throughout the modern production system, extending well beyond the livestock sector. With this predominance come new issues that require us to reexamine contract theory and the roles of the parties. This review examines legislation, regulations, and recent court rulings in seemingly unrelated areas that have specific relationships to the development of contracts in production agriculture: environmental law and labor law.

Key Words: contracting, environment, labor, law, liability, relationships, risk

JEL Classifications: D23, D86, K12, K31, K32

Contracts have a long history of use in the world of agriculture, with early beginnings in sharecropping, a contract agreement to farm a parcel of land owned by another for a percentage of the produce. Currently, contracts are likewise a part of everything done in agriculture from acquisition of land, seed, and equipment to marketing agreements for products, crops, and livestock. In 1969, only 6% (156,000 farms) of all farms used contracts to raise 12% of the total value of agricultural production. By 1998, 11% of all farms used contracts to raise 35% of the total value of agricultural production (Census Bureau). By 2001, contracting accounted for one third of the total value of production on U.S. farms (USDA ERS). Most observers hold the opinion that this trend will continue. The poultry and livestock industries are among those segments of agriculture that have embraced and have pioneered the use of comprehensive contracts to define and guide relationships between components and participants in the agricultural marketplace.

Agricultural contracts now guide the interrelationships of parties throughout the modern production system, extending well beyond the livestock sector. With this predominance come new issues that require us to reexamine contract theory and the roles of the parties. In preparing this review, we limited ourselves to an examination of legislation, regulations, and recent court rulings in seemingly unrelated areas that have specific relationships to the development of contracts in production agriculture: environmental law and labor law. Many other areas of the law that affect and are affected by contract use in agriculture are outside the limitations of this article.

Contract Basics

A contract (whether oral or written) is a legally binding agreement between two or more parties involving an enforceable promise to do something or to refrain from doing something. In their simplest form, contracts embody social customs and rules and depend on each person's connection to one another and to third parties. Contracts, in general, usually relate to supply of goods or services and most often contain a prearranged or fixed price. They are used to reduce risks and stabilize quality and price fluctuations.

Two general types of contracts are in widespread use in U.S. agriculture: marketing contracts and production contracts. Marketing contracts establish a pricing mechanism, usually a set price for established quality grades, and identify delivery procedures. The producer makes most, if not all, management decisions and owns the commodity until marketing, thus bearing all the risk.

Production contracts involve a shift in management authority from the grower to the purchaser, usually a processing company. A production contract usually specifies in detail the production inputs to be supplied by the contractor, the quality and quantity of the particular commodity involved, the production practices to be used, and the manner in which compensation is to be paid to the producer (Kunkel and Larison). The buyer/contractor may also provide technical guidance for production or be given other forms of support. Production contracts can include formulas that base contract payments on a comparison of the performance of the livestock that are the subject of the contract to other similar livestock. These contracts usually specifically identify the risks of production or management that will be borne by the producer.1

Legislative Efforts to Address Agricultural Contract Issues

Federal laws dealing with agricultural contract relationships are few. The federal Packers and Stockyards Act (PASA) and Perishable Agricultural Commodities Act (PACA) provide some protection for producers involved in contract relationships that experience problems. PACA, in particular, provides significant protection for unpaid producers.

Few states have enacted provisions providing forms of protections for producers involved in these types of contracts. In the absence of statutory law, problems arising from a contractual relationship will be governed by traditional contract law theories. Although state legislative bodies have been urged to address issues of contract fairness, inequities in bargaining power, concentration in the marketplace, and other related issues, few legislative bodies have moved forward in this area. One of the proposed methods of dealing with concerns over agricultural contract fairness issues was first proposed by members of the National Association of Attorneys General and is called the Model Producer Protection Act.