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Farmers' Guide to Peanut Contracts
 

Farmers' Guide to Peanut Contracts

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Published August 2007. ...

Published August 2007.
This booklet is written and published by Rural Advancement Foundation International-USA (RAFI-USA). It is intended especially for farmers in the United States. This booklet is for educational purposes only. To learn the details about any certain point, read the current statutes, regulations, and policy notices, which can change frequently. These materials cannot substitute for an experienced lawyer who is up to date on the latest changes in federal, state, and local laws and regulations.

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    Farmers' Guide to Peanut Contracts Farmers' Guide to Peanut Contracts Document Transcript

    • The Rural Advancement Foundation International - USAFARMERS’GUIDE TOPEANUT CONTRACTS
    • 2FARMERS’GUIDE TOPEANUT CONTRACTSJANUARY 2007This booklet is written and published byRural Advancement Foundation International-USA (RAFI-USA).It is intended especially for farmers in the United States.This booklet is for educational purposes only. To learn the details aboutany certain point, read the current statutes, regulations, and policy notices,which can change frequently. These materials cannot substitute for anexperienced lawyer who is up to date on the latest changes in federal,state, and local laws and regulations.Contributions from Scott Marlow, Becky Ceartas, and Jess Ana SpeierEdited by John B. JusticeLayout by Regina Dean BridgmanCover Photograph: John Branham, Jr. by Scott MarlowPhotographs on pages 5, 6, and 13 by Rob AmbergOther photographs by Scott Marlow and RAFI –USA staffPUBLISHED BYRURAL ADVANCEMENT FOUNDATION INTERNATIONAL - USAP.O. BOX 640274 Pittsboro Elementary School RoadPittsboro, NC 27312TEL: 919-542-1396FAX: 919-542-0069www.rafiusa.orgText © 2007 Rural Advancement Foundation International—USAAnyone has permission to use this material. We appreciate your creditingRAFI-USA if you reprint any portion of this document.
    • 3FARMERS’GUIDE TO PEANUT CONTRACTSTable of Contents1. INTRODUCTION .........................................................................................................................12. DYNAMIC CHANGES IN PEANUTS........................................................................................23. CONTRACT FARMING..............................................................................................................3A. MARKETING CONTRACTS..........................................................................................................................3B. PRODUCTION CONTRACTS……………………………………………………………………………..…3C. OPTION CONTRACTS……………………………………………………………………………………....34. CONTRACT PEANUT FARMING – FARMER CONCERNS................................................5A. GROWING WITHOUT A CONTRACT............................................................................................................5B. TIMING, FAIRNESS AND CORPORATE INTEGRATION ISSUES......................................................................6C. SHORT-TERM COMMITMENTS ...................................................................................................................7D. CAPITAL INVESTMENT...............................................................................................................................7E. INCREASING CONTRACT REQUIREMENTS ..................................................................................................7F. BENEFICIAL INTEREST ISSUES. ..................................................................................................................75. EVALUATING CONTRACT TERMS .......................................................................................8A. COMPENSATION.........................................................................................................................................9B. MANAGEMENT, PRODUCTION PRACTICES, AND EQUIPMENT UPGRADES................................................11C. DELIVERY AND STORAGE REQUIREMENTS. .............................................................................................11D. INCORPORATION BY REFERENCE AND ENTIRETY/INTEGRATION CLAUSES.............................................12E. EXCUSE OF PERFORMANCE......................................................................................................................12F. RIGHT OF ACCESS. ...................................................................................................................................13G. DISPUTES, TERMINATION, DAMAGES AND REMEDIES ............................................................................136. CONCLUSION ............................................................................................................................17QUICK REFERENCES ............................................................................................................................191. RESOURCES AND WHERE TO GET MORE INFORMATION......................................... 202. RELEVANT GOVERNING LAWS...................................................................................................21A. UNIFORM COMMERCIAL CODE (UCC).....................................................................................................21B. PRODUCER PROTECTION ACT AND SIMILAR STATE PROTECTIONS.........................................................21C. AGRICULTURAL FAIR PRACTICES ACT (AFPA).......................................................................................213. BEFORE SIGNING A CONTRACT FARMER CHECKLIST.............................................224. FARMERSGUIDE TO PEANUT CONTRACTS EVALUATION FORM.........................23
    • 11. IntroductionContracts are serious business. A contract is alegal document with binding obligations and risks. Youmay be deciding whether to sign a peanut contract. Or,having already signed one, you may want more informa-tion. Either way, this booklet can help. It doesn’t tell you whether acontract is right for you. That’s your decision and no one else’s. Butthis guide can help you understand key contract issues, how contractswork and how they fit into the larger picture of current peanut farming.It gives you information to use as you decide if a peanut contract willbenefit you and your farm operation.Keep in mind that almost all current peanut contracts are written bycompanies. And because the company wrote the agreement, it reflectscompany interests and aims first and foremost. The contract is usuallypresented to the farmer on a pre-printed form. The farmer is asked tosign on pretty much a take-it-or-leave-it basis, with few or no changes.You don’t have to sign the contract--contracts are voluntary agreementsno matter what financial necessities caused you to sign. It’s up to you.You must decide if a particular contract’s risk, obligations and rewardsare in your interest. If you do sign, you are legally bound by the con-tract’s terms as written. You promise certain things and other things arepromised you. The law has penalties for breaching contract terms. Andif things don’t work out, you cannot claim personal circumstances influ-enced your decision to sign.This book will give you useful general information as well as some references for other resourcesyou can use. However, certain things about contracts are beyond the scope of this guide. You mayneed an experienced lawyer to help you evaluate specific contracts and to give you details on currentstatutes, regulations and policy. All are involved in contracts, and all can change frequently.Section 2 - has basic information for new peanut growers on the peanut industry’s history andrecent changes.Section 3 - discusses contract farming in general with a focus on problems faced by contractfarmers.Section 4 - RAFI-USA reports on what we have learned from interviews conducted in 2005 withcontract peanut farmers.Section 5 - lists and describes some of the key terms found in peanut contracts.The guide concludes with some tools for you to use, including a list of helpful resources and afarmer’s checklist to use as you make decisions about signing a new peanut contract or renewingone you already have.This booklet can help you understand what is in a peanut contract--both risks and rewards--sothat you can make a decision that works out for you and your business.This booklet is pub-lished by the RuralAdvancement Founda-tion International-USA(RAFI-USA).It is intended for farm-ers who are consideringgrowing peanuts forthe first time and forthose who are decidingwhether or not toexpand their operationsand investment inequipment based oncontracts in the UnitedStates.This booklet is foreducational purposesonly.
    • 22. Dynamic Changes in PeanutsThe Federal peanut program was radically changed in 2002. This caused major shifts in how andwhere peanuts are grown and marketed, and peanut markets are still changing to this day. Growersand others continue to sort out the best responses to these changes, and ways to mitigate risk.Since 2002, several trends have become clear1.1,2, Dohlman, Erik and Janet Livezy, “Peanut Backgrounder” Electronic Outlook Report OCS-051-01, U.S.D.A. Economic researchService, 2005.Other Sources: Dohlman, Erik, Edwin Young, Linwood Hoffman and William McBride, “U.S. Sector Adapts to Major PolicyChanges” in Amber Waves, United States Department of Agriculture Economic Research Service, November 2004.Farmers are getting lower peanut prices.This resulted from eliminating restrictions on price and do-mestic production inherent in the old quota system. Demandfor peanuts has gone up in recent years. However, potentialprice gains have been offset by increases in acres planted inpeanuts, along with per-acre yield increases.Peanuts are being grown in more places.The old program had limits on where a farmer could growpeanuts. That limit is gone, and production has shifted tonew areas with conditions right for good yields.Peanut markets are less stable, requiring farmers to findways to reduce their risk.Current Federal peanut programs resemble those for othercommodities. However, other commodities have marketingtools not available for peanuts. An example is the absence ofa peanut futures market similar to that for cotton. This elimi-nates futures or time sales as a way for farmers to help stabi-lize prices. In addition, free trade agreements may destabilizepeanut markets even more. NAFTA has already agreed to letMexican peanuts onto the U.S. market as of 2008. Signspoint to additional future imports under NAFTA and GATT.On the plus side, peanut farmers do have access to certainrisk-management tools. Most farmers receive crop insurancefor their peanuts, and according to the Risk ManagementAgency, in 2005 80% of North Carolina peanut acreage hadcrop insurance. Policies vary from state to state. While APHcrop insurance policies for peanuts are popular, at this time,peanut farmers cannot get income-protection policies such asthose available for corn and cotton. Another way to increasethe farmer’s options is joining a marketing cooperative; threemarketing coops are operating as of now. Research showsthat cooperatives provide members more marketing optionsand stronger bargaining power.The Farmer’s ChallengeMany farmers are using market-ing and production contracts tomanage risks, and the number isrising. The domestic use ofmarketing contracts is a recentdevelopment. Although suchagreements were common forexports for years, it’s only since2002 that marketing contractshave been used for domesticfood products.Overall, the rise of peanut con-tracts has been lightning-fast.As of 2004, 80% of the peanutcrop was produced by marketingand production contracts2. Theterms of peanut contracts havechanged each year, and areexpected to change in the nearfuture.
    • 33. Contract FarmingTrends and forms of farm contracts:U.S. agriculture is following a steady path to increased contract farming. In 1969, 12% of U.S.farm goods were produced under contract. By 1991 the figure had risen to 29%, and in 2003 itwas 40%. Both the number of farms and the value of goods produced increased sharply overthe last several decades. This section will sketch in the rise of contract farming in general; itwill describe three kinds of farm contracts relevant to peanuts; and it will discuss risk/benefits forcontract farmers.Everyone understands that a contract is a mutual agreement between two or more parties to carry outcertain actions. But it’s necessary for farmers to have a good, solid grasp of the exact legal meaningof farm contracts.A. Marketing contracts:Contracts that peanut farmers have used forexport peanuts are marketing contracts. Theydiffer from production contracts in importantways. First, the grower owns the commodityuntil it is delivered to the buyer. Second, thefarmer makes production decisions. Third,price risks are shared by the farmer and thecontracting company.In short, marketing contracts allow growersmore independence than production contractsin terms of owning the commodity, managingthe farm, and choosing production practices.B. Production contracts:These are contracts under which a farmeragrees to use company-specified productionpractices to produce a marketable product.The company (integrator) typically keepsownership of the product and of some inputs.Production contracts aren’t used in peanuts asmuch as in hogs and poultry, where they arethe most common arrangement of production.The track record of production contractsshows some serious questions for farmers:Contracts usually require farmers to makelarge, long-term investment, while gettingonly short-term income security from the in-tegrator. The integrator controls productioncosts and price for the product. When disputesarise, some contracts have clauses that thatforce the farmer into mandatory binding arbi-tration, an expensive process that can strip thefarmer of the right to settle the dispute incourt.C. Option contracts:An option contract for peanuts is pretty muchlike a marketing contract. The companyagrees ahead of time to pay the contractinggrower a certain price for a specific qualityand amount of peanuts. But the payment isfor the option to buy the peanuts out fromunder loan, rather than for the peanuts them-selves. The price that the farmer receives isthe government payment from putting thepeanuts under loan, plus the option paymentfrom the company. This helps the companyplan ahead, reduces their costs and delaystheir investment in the peanuts. Later in thisguide, we’ll go deeper into specifics of optioncontracts, including payment.As a starter, here is how the law generally defines a contract:A set of promises creating an agreement between two or more parties that is enforceable by lawand which can be either written or oral; breaches of the agreement are subject to legal remedy.There’s more, but that description will do as we look at three basic kinds of farm contracts thatrelate to peanut production. They are marketing, production, and option contracts.
    • 4While peanuts are generally grown under marketing and options contracts, it is important to under-stand the difficulties that have arisen under production contracts. Peanut contracts are expected toevolve. The problems found in hog and poultry production contracts can creep into peanut con-tracts. So peanut growers must track contracts over time, as well as analyzing contracts presented atany given moment.Contract incentives for companies and farmers:Contracts help companies make sure they will have a dependable supply of the product they need;this helps them cushion the ill effects of market and production fluctuations. And it’s not just amatter of quantity: Peanut companies are increasingly having contracts stipulate the quality anduniformity of the product. Companies get other benefits from contracting directly with the peanutfarmer. Direct contracting eases management problems and lets companies limit their financial risk.And by contracting directly with the grower, the company can stipulate options to buy and othermeans of managing its risk.The peanut farmer has real incentives to consider a contract. A grower’s nightmare is to end upwith no market for the peanuts, having to settle for the loan-rate price. A contract prevents this.The contract provides a buyer. It gives price information that helps the farmer predict income.There is no need for the farmer to risk a season’s economic fate in a market that could send peanutprices plunging low. Farmers with longer-term contracts get the benefit of increased stability toplan ahead.What are the farmers’ risks?The potential benefits are real, and so are therisks. No contract can eliminate 100% of thefarmer’s risk. Here are some of the importantrisks that a farmer must consider along with thebenefit of a contracted price and other incen-tives to sign a peanut contract.The contract price may turn out to be lowerthan the market price at harvest time.Weather, disease and pests can damage thecrop and prevent it from meeting the com-pany’s standards.Input costs can rise and cut into net income.Contract terms may limit farmers to certain changes, denying farmers the option of adoptingnew technologies.Contracts can force a farmer into paying for and using expensive new equipment and technolo-gies to the detriment of the farmer’s net income.The company can refuse to renew the contract for following year, even after the farmer has in-vested in equipment.These and other farmer risks will be discussed in more detail in the sections that follow.
    • 54. Contract Peanut Farming – Farmer ConcernsThe farmers we interviewed were mostly long-time growerswho had been growing peanuts for years. Most were growingother crops besides peanuts. All were adjusting peanut opera-tions to changes we discussed earlier in this guide. All werebeing affected by the end of the old quota system, the rise ofcontracts, and changes in markets.In general, the farmers we spoke with had serious concernsabout their peanut business. Many had invested heavily inequipment specific to peanuts and didn’t see alternative cropsthat would generate enough income. But, said farmers, thepeanut industry presents its own problems. The new reality isthat contracts provide the surest way to current markets, sothey were producing under contracts. But these farmers feltthat they are on shaky ground. Contracting companies seem tohold a lot of the cards: Under the new rules, companies cannow grow peanuts anywhere growing conditions allow. "Thecompanies are able to control access to new markets almostcompletely." There are now relatively few peanut companiesfor growers to deal with. And farmers worry about the verybasic matter of how peanut contracts are awarded.So it’s fair to say that farmers interviewed for this guide were worried about their peanut contractson a number of scores. The rest of this section will go into some detail on six major concerns thatfarmers told us presented significant questions about contracts.A. Growing Without a Contract.Farmers who have peanutcontracts have a lot to tellus about how contractswork. While preparingthis guide, RAFI - USAtalked with contract pea-nut farmers in 2005 and2006 to get their first-handexperience. Their thoughtson the benefits and riskswill be especially usefulfor farmers decidingwhether to sign their firstpeanut contract.A grower can choose to produce peanuts with-out a contract. We interviewed growers think-ing about doing so. Their hope was that theycould sell their crop to shellers needing morepeanuts than the option contract supply pro-vided.This option has real risks. The most seriousone is the possibility that shellers might haveall the peanuts they need, and the grower willhave raised a crop with no market other thangovernment marketing loans.One way of reducing risk is joining marketingcooperatives that can negotiate with shellers atharvest. An increasing number of farmers areinvestigating such associations.
    • 6B. Timing, Fairness, and Corporate Integration Issues1. Time pressure to sign or not:The way it works now, farmers usually don’t have much time to decide whether to sign an of-fered contract. Companies typically allow the grower only a few days to make a decision. Un-der severe time pressure, the grower must analyze the contract, get legal or other professionaladvice, and investigate other options. The farmer could wait, hoping that another contract willbe offered later on. But by waiting the farmer risks that there will be no additional contracts,that subsequent contracts will be for a lower price or that the company will look elsewhere forgrowers.2. Fairness in how peanut contracts are awarded:Farmers are uneasy about the process. They understand there are more farmers than contracts,and that some farmers won’t get a contract. As realists, they accept competition, as long as thecompetition is fair. The problem is, farmers told us, they can’t tell if the current system is fairor not. They are given a complex contract to study and decide on under great time pressure andoften little or no helpful information from the company. In one case even the company’s ware-houseman couldn’t explain how things worked. He knew he had a certain number of contractsto offer for a certain volume of production at a certain price. Beyond that, he couldn’t helpfarmers much. Would the company offer a higher price if farmers declined the first offer? Hecouldn’t say. Was there a risk that the company would dump the first group of growers and of-fer the initial contract to a new set of farmers? The warehouseman didn’t know. If growerssigned the contract offered for this sea-son, would they get a contract for nextyear? Who knows? Clearly, thismurky process puts farmers in a toughposition.3. Questions of corporate integration:Farmers expressed concern about theway corporate integration can affectawarding of peanut contracts. We iden-tified at least one instance where thiscame into play: A sheller offered farm-ers contracts on the condition that, ifawarded the contract, the farmer wouldbuy peanut chemicals from a companythe sheller owned. The farmer mightnot like this corporate-integrationclause--it would legally bind him tousing the company’s chemicals whetheror not he could get a better priceelsewhere, whether or not he, as thefarmer, believed the company’s chemi-cals were good for his peanuts. Whilethis was not a universal concern offarmers interviewed, it worried some,and it’s worth keeping an eye on as youanalyze a particular peanut contract.
    • 74. Contract Peanut Farming – Farmer Concerns continuedC. Short-term commitments.Competition is stiff for today’s peanutfarmers. As we’ve mentioned, the standardcontract is for one year only. After that year,the contracting company may or may notoffer the grower another contract. The com-pany may offer a new contract with lowerprice and volume. The grower has no guaran-tees.Farmers are especially concerned about short-term commitments because competition isrising from the growing number of peanutfarmers wanting to get a limited number ofcontracts. Companies can now award con-tracts to farmers anywhere peanuts can begrown. Production is expanding into newareas of traditional peanut states, as well asstarting up in entirely new regions.It would seem obvious that long-time, experi-enced, and skilled peanut growers would havea competitive edge over brand-new growers.Not necessarily. "Peanut companies dontrequire that growers have a lot of experiencegrowing peanuts or how to get the best pricefor a crop - the companys ideal is a growerwho will sign the companys contract asoffered."D. Capital Investments.The farmers RAFI-USA talked with shared afundamental concern of other contract grow-ers: the problem of managing long-term debtalong with short-term income security.It costs money to earn money growing pea-nuts. Harvesters and other needs requirecapital investment. Growers most often getthis money through long-term loans. Con-tracts are for one season; loan payments go onfor months and years.Clearly, a grower is taking a huge risk if he orshe assumes peanut contracts will be offeredfor the time required to earn back the capitalinvestment and loan charges. There is abso-lutely no guarantee that a current one-yearpeanut contract will be renewed at all.We emphasize this point especially forfirst-time peanut growers who are consideringcontracts as part of their plans.E. Increasing Contract Requirements.Previous peanut marketing contracts did notrequire specific production practices and va-rieties, and the peanut program specified qual-ity standards. In recent years, contracts havebegun to require specific varieties, and gen-eral requirements of production practices.Farmers we spoke with were concerned thatover time peanut contracts will resemble pro-duction contracts, with companies specifyingproduction practices and determining all qual-ity standards.While these concerns are less pressing forfarmers considering a specific contract, theyare significant when considering investmentin equipment or facilities that requirelong-term financing as discussed above. Thegreater the investment that a farmer has incrop-specific equipment and facilities, the lessable they are to reject future contracts.F. Beneficial Interest Issues.Farmers are concerned with the unclear bene-ficial interest issues in current option con-tracts. U.S.D.A. requires that beneficial inter-est stay with the farmer in order to get MALor LDP payments and for the peanuts to re-main under loan. Since the contract requiresthat the peanuts stay under loan until thecompany exercises the option to buy them,the risk of loss may stay with the farmer untilwell after delivery. These liability issues arecurrently unresolved, and may become moreof an issue for farmers in the future.
    • 85. Evaluating Contract TermsUnderstand Before You SignWe’re now ready to go into some usefuldetails as you read, evaluate, and decide on aparticular contract placed before you. Theprevious information should help you asbackground. As you evaluate a contract,please add to this guide’s help any and allexpert advice you need on contract questions.Keep this in mind: When you sign a contract,its terms will govern all aspects of yourrelationship with the company.We will focus on the most common keyterms, the ones you are most likely to comeacross. Using examples from actual contractswe have reviewed, we will discuss the mean-ing of each term as it affects the contractgrower. We will also point to some states thathave passed laws to protect growers. All ofthis is designed to successfully follow themotto we headlined above: Understand be-fore you sign. Before tackling each term indetail, here are a few tips to bear in mindabout understanding peanut contracts.Be prepared.Many of the farmers that we spoke with wereconcerned about the short period of time thatthey had to evaluate offered contracts. It isbest to have a good idea of your situation, in-cluding production and post-harvest costs,price needs and alternative crop opportunitiesbefore you anticipate a contract will be of-fered. It is also good to identify professionalsthat you will call on to help you understandthe offered contract before the contract offeris anticipated. The better the information thatyou have going in to the contract evaluation,the better a decision you can make.You don’t have to go it alone.In fact, you should count on getting some ex-pert help. Contracts are legal documentswritten by attorneys and, when disputes arise,interpreted by attorneys and judges. So pleasegive some thought to enlisting some expertson your side. An experienced lawyer can be agood friend to have. So can Cooperative Ex-tension agents, growers’ associations, farmadvocates, and knowledgeable farm commu-nity leaders. They are the kinds of supportpeople who can help you with common andcomplex items like confidentiality clauses,beneficial interest terms, state law governingcontracts, financial technicalities, and more.We’ve mentioned before that your resourceteam needs to be identified before the momentwhen you’re sitting down and having yourfirst look at the contract. You won’t have alot of time to decide in most cases, so prepa-ration is well worth the time and effort.Look for contract obligations.Review the entire contract. See what thecompany is obliged to do for you. Contractsoften begin with statements of the company’sobligations, or duties, to the contractingfarmer. Be aware that the company’s positionis that its obligations to you are only thosewritten into the contract. So you must iden-tify and understand what the contract saysabout the company’s duties toward you. Inmost contracts, you will find a statement thatthe company accepts an obligation to pay youto deliver product that meets standards givenin the contract.Find out if there’s a cooling off period.You may sign a contract and decide, forwhatever reason, that you don’t want to fulfillit. Some (but not all) states protect growersby allowing them to cancel a contract within aspecified time. Before you sign, see if yourstate has this cooling off period. If so, thisgives you a safety valve. You can use the pe-riod--three days is fairly common--to studythe contract with great care, get any neededexpert help, and reassess contract peanuts aspart of your overall business plan.The main goal in this section is tosuggest a way that can help you studyand make sense of a particular contract.Contracts vary from company to com-pany and area to area, and this guidecannot cover everything.
    • 9Contract TermsUnderstanding a contract depends on understanding the terms clearly and fully.This section will go into detail on contract terms. All are common and importantand we’ve done our best to be clear. Still, you will probably have questions about thecontent of this section. Also, it’s very possible you will be reviewing a contract withterms that are not included here. This brings us back to the necessity for you to enlistlawyers, farmers, extension agents and/or advocates, to answer your questions. Also,you may have some questions best asked of the company or lenders.A. Compensation.If you’re like most farmers, your eye will go straight to the price a contract is offering. Which iswell and good--your goal is a contract enabling you to make some money from peanuts. However,the price is only a part of understanding how and how much you will be paid. It is important to fullyunderstand how payments will be calculated. Some contracts stipulate that the price is dependenton grading, or is for only a portion of the farmer’s production. Pricing conditions may reduce theoverall price for the crop.Costs. Check the contract for all costs of eve-ry thing the contract obligates you to do.While most farmers have a good understand-ing of their production costs, the contract mayhave other requirements that increase yourcosts. The contract may require you to dry,handle or transport the peanuts in a certainway. Keep in mind the risks of potential coststhat are out of your control. A rise in fuelcost is a common example. Few contractsmention this important point. Before yousign, understand what happens if unavoidablefactors greatly increase your production costsduring the growing season. And if you donegotiate contract changes, they must be writ-ten and signed by you and the company.Payment Schedule: You need to understandwhat the contract says about how and whenyou will be paid, including how the companycalculates the price, and when the companypromises to pay you.Payment information may not be in the basiccontract. It is often given in a price schedulethat the contract refers to. Review these termsbefore you sign. Find out if the contract al-lows either price or payment schedule to bechanged.Determine if your payment is due on the datethe company accepts your peanuts, and if thecontract includes interest payments for thegrower if payment is late. You want to avoidbecoming the company’s creditor, which wouldlikely leave you holding an unsecured debt.Payment timing and calculations may be es-pecially complicated in options contracts.Because these contracts are for the option topurchase peanuts from the government loanprogram and require farmers to put their pea-nuts under loan, farmers receive a portion oftheir payment from the government and partfrom the company. These should be carefullyreviewed for terms about when and how muchthe grower will be paid.Here’s an example from an option topurchase we reviewed for this guide:There have been some concerns that contractsmay allow for payment when the companybuys the peanuts from under loan, which maybe months later.“The option price will be paid as follows:$1.00 per net ton will be paid at signing ofthis Option and $94.00 per net ton basisgrade will be paid at the time of inspectionof the Peanuts.”
    • 10Crop grading: Contracts often specify the quality standards for the peanuts, and not meeting thesestandards can affect price. Standards may be caused by factors outside of the farmer’s control, suchas weather conditions during harvest. Consider what happens to your compensation if you do notget the expected grade for you peanuts. Also, consider any possible quality benefits that the con-tract may provide.Right of First Refusal: Most option contracts for peanut production reviewed for this article con-tained terms giving the shellers the right of first refusal for any crop produced beyond what wascontracted for in the option.The following is an example of one such provision.Right of First Refusal. Producer herebygives Buyer the right of first refusal withrespect to the purchase of all or anyportion of the farmers stock peanutsproduced on all Producer’s farms for the2005 Crop Year except those peanutswhich are subject to a presently existingcontract with Buyer or another bona fidecommercial sheller of peanuts for the2005 crop. Pursuant to this paragraph,Producer shall not sell any peanuts to abuyer at a price not greater and uponterms and conditions not less favorablethan the terms and conditions offered inwriting and in good faith by such buyerfor such peanuts. The terms and condi-tions of Producer’s offer of first refusalto Buyer shall be in writing. Buyer shallhave a period of 72 hours in which toaccept Producer’s offer. Should Buyerfail to accept Producer’s offer withinsuch time, Producer may proceed to sellsuch peanuts to the other buyer on thebasis of the same price, terms and condi-tions offered by Buyer.
    • 11Contract Terms continuedB. Management, Production Practices,and Equipment Upgrades.The peanut contracts we reviewed for thispublication are options to purchase. Theypretty much leave management and produc-tion decisions in the hands of growers. How-ever, as the peanut industry continues toevolve contracts can change.Some farmers we interviewed expressedconcern that contracting companies maybegin dictating that growers grow a certainvariety with specific production practices.One grower reported that shellers aredictating where growers should buy theirpeanut chemicals.Here is an example from a peanut optioncontract:Companies have legitimate needs forequipment and other changes to realizecompany objectives. Their requirementsmay be company-specific or industry-wide. The concern here is that companyrequirements may increase your costs,reducing your profit, or may tie you todebt that reduces your ability to negoti-ate the contract and adversely affectsyour long-term financial prospects.Once again, crop-specific expenses thatrequire long term financing, such as spe-cific equipment or handling facilities,should be evaluated very carefully with ashort term contract.C. Delivery and Storage Requirements.These are very important in almost all peanutoption contracts. A delivery date is of coursea key item to check. Late delivery can haveserious consequences. For example, oneoption contract we reviewed states that thebuyer “... at its sole discretion may rejectdelivery of the Peanuts” if the contract’sdeadline date is not met.But delivering on time is just one element.A delay between harvest and delivery cancause shrinkage in the peanuts, which reducesthe farmer’s income. Contracts can require agrower to put the crop under loan andtransport the peanuts to a storage facilitysometimes chosen by the company. Withwarehouses scarce in new peanut growingareas, transportation to existing warehousefacilities could be costly. It is importantto think through all of the post-harvestcosts, and to be sure that you include all of thecosts that you are responsible for in yourfinancial calculations.These delivery-related items require carefulthought. Before you sign, you want to be surenot only that you can fulfill these terms, butthat complying with these and other contractduties makes good economic sense for you.Producer agrees not to apply or use anychemicals not specifically approved andlabeled for use on peanuts or any chemi-cals which Buyer from time to time noti-fies Producer are not approved by Buyerto be used in connection with peanuts.
    • 12D. Incorporation by Reference andEntirety/Integration ClausesMost peanut contracts refer to outside docu-ments with specified terms that are as bindingas anything in the basic contract documentitself. Usually, the contract will have a listof such documents.You may see a provision like this one:Make sure your review includes all contractmaterials.Generally, the law presumes that anything that isnot included, or referred to, in the contract, will notbe considered part of the contract.This is tremendously important. What’s inthe contract is all that matters. Conversationsdon’t matter. Promises may have been made--if they’re not written into the contract, theycount for nothing. Other documents are to-tally irrelevant.This point is so critical that most contractshave specific clauses to underscore it. Theycan be called entirety clauses, integrationclauses, or merger clauses. They can differ inwording, but their objectives are exactly thesame: to establish the written contract as thefinal and complete legal record of an agree-ment between grower and company.Here are a couple examples from option con-tracts we reviewed for this guide:Note the last sentence of the second example--beginning with “Producer acknowledges that...”Boiled down, this says the grower is agreeing tothe written contract and only that. You see thecompany’s reason: If things go wrong after thecontract is signed, the grower can’t claim that thecompany promised him or her anything that isn’twritten in the contract. [This is not to say you andthe company couldn’t make a verbal agreement tosomething and then put it into writing as part ofthe contract.]E. Excuse of PerformanceContracts are strict about performance. The generalrule is that a farmer is liable for non-performanceunless the contract excuses non-performance for cer-tain reasons. Even if a flood or tornado ruins yourcrop, you can still be held responsible for fulfilling thecontract--unless your contract contains a natural-disasterclauseofsomesort.As you review a contract, see if it has some-thing called a force majeure clause. This is aclause protecting from liability growers unableto fulfill their contracted duties due to factorsthe grower couldn’t control. “Acts of God”generally qualify, as do profound events suchas riots and war. [These clauses apply only ifthe grower uses due care to try to avoid thecatastrophe. That is, if you drove a truckloadof peanuts into a riot area and rioters set fire toyour crops, you’re probably liable.]“The terms and conditions set forth on thisreverse side of the agreement are an inte-gral part of this agreement.”Merger. This writing constitutes the entireAgreement between Producer and Buyer,terminating and superseding any prior dis-cussions or agreements between Producerand Buyer with respect to the subject mat-ter hereof. Buyer and Producer agree toexecute any and all other documents nec-essary to comply with applicable federallaw or regulations or state law or regula-tions. Producer acknowledges that Buyersand its agents made no representations toinduce Producer to enter into this Agree-ment, except for such representations asmay expressly appear herein.Entire Agreement: This Agreement super-sedes all prior discussions and agreementsbetween the parties and may not be modi-fied or amended except in writing by bothparties. The failure or delay in exercisingany right hereunder shall not constituteany waiver of such right, and the waiver orany breach of this Agreement shall notconstitute a waiver of any later breach ofthis Agreement.
    • 13Contract Terms continuedHere’s is an example from an agreement forpeanut production.Note: Suppose you reach a point where youthink you won’t be able to deliver what youcontracted for. In that case, immediatelywrite the company and tell them. This in-cludes natural disasters, if that has causedyour problem. Prompt written notificationcan help the company adjust and curb its re-sulting damagesF. Right of Access: Many contracts give thecompany the right to go onto the farmer’sland to inspect the peanut crop. You willwant to see if this is true of the contract youare evaluating. You may have to search care-fully: Right of access may be given in a sepa-rate section under a clear title or it may fallunder another heading, such as this contractlanguage under “Warranties”:Notice that this clause does not spell out thesituation required for the company to takeplant samples. In some situations in othercommodities, farmers have had problems withcompanies taking samples without theirknowledge, and then being presented withresults after harvest when the farmer has noway to take their own samples or refute theresults. Crop inspection and plant samplingare certainly legitimate requirements from thecompany, but the farmer should be careful tomatch any sampling with his/her own.G. Disputes, Termination, and Damagesand Remedies(1). Dispute Resolution:Most people downplay the possibility of fu-ture disagreements when entering into a busi-ness contract, but dispute resolution optionshave become a critical issue in agriculturalcontracts. The peanut contracts that we re-viewed for this publication do not lay out aspecific process for handling disagreements.However, in commodities with a longer his-tory of contract-based markets - particularlypoultry and pork - many company contractshave evolved over time to include specificdispute resolution language that can stack thedeck against the farmer.Acts of God, No Allocation: The Sellershall not be excused from its obligationsset forth in this Agreement for failure todeliver the full amount of Peanuts con-tracted hereunder unless the actual pro-duction of Peanuts on the farm specifiedabove is less than the contracted amountbecause of physical loss of production re-sulting solely from external sources suchas fire, lightning, inherent explosion,windstorm, drought, tornado, flood, orother acts of God. If Seller is unable todeliver the full amount of Peanuts con-tracted herein because of such reason, theSeller agrees to deliver and sell to Shellerthe full amount of Peanuts actually pro-duced from the above specified farm, andthis obligation of the Seller shall not besubject to excuse or allocation pursuantto Section 2-615 of the Uniform Commer-cial Code.Should Buyer request it, Producer agreesto permit Buyer access to inspect Pro-ducer’s crop during the growing seasonand to take a reasonable number of plantsamples for chemical analysis.
    • 14When a farmer signs a contractwith a binding mandatory arbitra-tion clause, he or she is waivingthe right to use the Americanpublic court system to settle anyfuture dispute with the company.The rules and procedures shapingthe arbitration are generallydetermined by whoever writes thecontract. Arbitration can be struc-tured to be prohibitively expensivefor the individual farmer andis lacking the same protectivelegal procedures of the publiccourt system.Some alternative dispute resolution optionscan be beneficial3. For example, mediation isa structured process that relies on a neutralthird party to help negotiate differences and istypically very affordable. The decision relieson voluntary implementation. Agreeing tomediate does not eliminate either party’sother legal options.Dispute resolution options are an issue to fol-low as peanut contracts evolve from year toyear. For any dispute resolution option that isincluded in the contract the farmer shouldseek clarification and understand the associ-ated costs, governing procedures and whetherthe decision can be appealed to a court of law.(2). Contract termination, exercise of optionand termination of option:Terms defining the duration of the contractwill be set out in all contracts. Some will beexplicitly titled, but others may not be as ob-vious. Most contracts being offered today arefor one growing season.3For additional information on dispute resolution,mediation, and arbitration issues in production con-tracts see “I’ll See you In Court– or Will I?” Assessingthe Impact of Integrator Practices on Contract PoultryGrowers (December 2001), pp 4 – 123,http://www.flaginc.org/topics/pubs/poultry/poultrypt6.pdfA peanut producer should know and under-stand how the contract can be terminated andwhen it can be terminated. A farmer shouldknow under what circumstances, including atwhose discretion, their peanut contract can beterminated before the end date on the con-tract.As discussed throughout this booklet, if itisn’t actually included in the written contract,it should not be relied upon. This goes forany comments a company representative orwarehouseman may make to you regarding acontract for the next season. Unless you havesigned a contract, you should not rely on anyof those conversations since it is unlikely thatthey could be enforced. You and the contract-ing company are bound by the duration of thecontract defined in the written and signedagreement.In an options contract, there are differentsections of a contract, often with similar lan-guage, that spell out conditions for the termi-nation of the option to buy, for the termina-tion of the contract itself, and the term or du-ration of the contract. It is important to knowwhich situation terms are talking about.Contracts use different language to talk aboutthe company exercising its option to buy thepeanuts. This is the point at which the com-pany uses its option to buy, pays for the pea-nuts and takes possession. The date the com-pany exercises its option can affect the datethe grower gets paid, so it’s important.
    • 15Contract Terms continuedHere are a couple examples of contract lan-guage on exercising the option.The following is a section of a contract outlin-ing the term and termination of the optionagreement itself. Note that “Term and Ter-mination” is about exercising the option,although it’s not mentioned in the title.(3). Damages/Remedies:Suppose either the company or the growerfails to carry out their contract duties. Thecontract has been broken, and someone maybe owed compensation, either in money orcompensatory actions. What happens next?This brings us to breach of contract, acomplex and technical thing best studied withaccess to an attorney or experienced farmadvocate. We will give you some basics tohelp you evaluate your contract in terms ofwhat happens when things go wrong.Some contracts contain language statingallowable damages for a breach of terms;some don’t. Some states have laws governingdamages for breach of contract. The UniformCommercial Code may apply; it gives bothparties options in certain cases, depending onwho breached the contract.Both parties will be able to seek recourse for abreach of contract if that claim is made withinthe applicable statute of limitations.Companies have several options if theybelieve a farmer has breached a contract. Thecompany may:• Get the grower to pay back any moneyalready received from the company.• Buy peanuts from someone else, and thenget the contracting farmer to pay for thecosts of the substitute goods.• Seek to have the farmer pay damages forfailing to deliver the crop as specified bythe contract.• The company also may try somethingcalled “specific performance.” This meansgetting the farmer to repair the breach bydoing what the contract called for. Forexample, if a farmer’s own crop failed,the company may ask that the farmer getsubstitute goods of the specified qualityand deliver them to the company.Notice of Exercise. Buyer may exercisethis Option by either (i) giving written no-tice of its exercise to Producer either inperson, via fax or by U.S. Mail with properpostage affixed and addressed to Producerat the address set out above, or (ii) by re-paying Producer’s marketing assistanceloan (MAL). If exercise is under (i), thedate and time Buyer exercises this Optionshall be deemed to be the date and time ofthe notice of exercise. If exercise is under(ii), the exercise shall be effective uponBuyer’s repaying the MAL on Producerbehalf.Option Payment Date: Sheller shall paythe Seller the Option Payment on the latterof the date that this Option has been exe-cuted by the parties hereto or the date thatthe Power of Attorney, appointing theSheller as attorney in fact to act for theSeller with respect to certain FCIC, FSAand/or CCC programs, is approved byFSA. Upon receiving an approved Powerof Attorney from FSA, Sheller shall have noobligation to notify the Seller of its inten-tion to exercise or the actual exercising ofthis Option.Term and Termination.A. Buyer may exercise this Option atanytime during a period beginning onthe date of this Agreement and endingon October 31, 2006.
    • 16The following is a specific performance pro-vision from a current option contract.A company may also request specific per-formance, requiring a remedy such as thefarmer acquiring substitute goods to fulfilltheir obligation under the contract.3It is con-ceivable that a farmer could buy the peanutselsewhere to deliver the required poundage.On the farmer’s side, a couple of main optionsexist when it’s the company that has breachedthe contract.• The farmer may sue for the full price of thegoods under the contract.• The farmer can also sell the peanuts to an-other company and, if the price is lowerthan the contract price, seek to recover thedifference from the original contractingcompany. Note: This second option is along shot. These days, peanut companiesare all contracting to fill their needs; sothey are unlikely to need peanuts offeredmid-season or later.3 There may be a potential conflict with a specificperformance remedy if the contract has conflictinglanguage stating the contracting company willonly accept peanuts produced on specific land -the contracting farmer’s land.Specific Performance. Producer andBuyer agree that they have executed anddelivered this Agreement in contemplationof the limited source or market of peanuts.Producer acknowledges that Buyer hasentered or will enter into commitmentswith other parties in reliance upon Pro-ducer’s performance hereunder. In rec-ognition of the foregoing and the uniquecharacteristics and sources under thisAgreement or otherwise, the remedy ofspecific performance of Producer’s obli-gations under this Agreement, and breachor threatened breach of this Agreementshall entitle Buyer to a temporary or per-manent restraining order or injunction.
    • 176. ConclusionIn the short term it is reasonable to assume the peanut production contracts willlook similar to the contracts that are being presented today. However, thepoultry and hog production industries teach us that in the long term the con-tracts will change to give companies tremendous control over production, man-agement, and the future of family farming businesses. It is important for everyfarmer who is considering a peanut contract to follow the checklist attached tothis article to ensure that they are prepared for the duties and risks associatedwith a proposed contract.
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    • 1. RESOURCES AND WHERE TO GET MORE INFORMATIONFor more information on a range of farming issues:RAFI-USARural Advancement Foundation International – USAPO Box 640Pittsboro, NC 27312Phone: 919-542-1396www.rafiusa.orgFarmers’ Legal Action Group, Inc.360 North Robert Street, Suite 500St. Paul, MN 55101Phone: 651-223-5400lawyers@flaginc.orgwww.flaginc.orgFor more information on production contracts and contracts generally:A Farmer’s Legal Guide to Production Contracts, Neil D. Hamilton, Top Producer, Jan.1995Livestock Production Contracts, Commodity Marketing Agreements, and Forward Con-tracts: Legal Risks and Protections for Family Farmers, Jill E. Krueger, March 12,2004 available at www.flaginc.orgAgricultural Production Contracts: Drafting Considerations, Christopher R. Kelley, 18Hamline L. Rev. 397 (1995)Assessing the Impact of Integrator Practices on Contract Poultry Growers, Farmers’Legal Action Group and others, September 2001, available atwww.flaginc.org/pubs/poultry.htmGrain Production Contract Checklist, Livestock Production Contract Checklist, IowaAttorney General, available atwww.state.ia.us/government/ag/working_for_farmers/contracts.html. (sample contractsalso available)Contracting in Agriculture: Making the Right Decision, USDA, available atwww.ams.usda.gov/contracting/contracting.htm20
    • 2. RELEVANT GOVERNING LAWSPeanut products and production are regulated in many different ways, from local environmental per-mitting of production, to monitoring pesticide residue under the Federal Insecticide, Fungicide, andRodenticide Act, to labeling the product for consumers. This booklet was not intended to go into thedetails of all the relevant governing laws for peanut production. Rather, it highlights many state andfederal laws and regulations that could affect contracting for peanut production. With that narrow fo-cus and context in mind, a few additional topics need to be highlighted because of their relevancy tothe operation of your peanut production contract. Below is a list, although not exhaustive, of state andfederal laws and regulations which may be relevant to the operation of your peanut marketing contract.A. Uniform Commercial Code (UCC)Contracts are generally governed by common law; also know as judge-made law or case law, applica-ble in a particular jurisdiction usually a particular state. This would be true except to the extent en-acted legislation has codified, changed, or added to it. Contracts for the “sale of goods,” moveabletangible items, are governed by the Uniform Commercial Code, or UCC. The UCC was developed todo exactly what it says, provide uniformity to commercial transactions. Most other contracts are gov-erned by states provision which can vary widely and the interstate nature of commercial transactionswarranted uniformity. Article Two of the UCC applies to contracts for the sale of goods involving$500 or more. This would be generally applicable to most peanut contracts. The UCC is probablymost relevant, for purposes of this booklet, when discussing a breach of contract and damages relatedto that breach. An attorney admitted to practice in your state can provide more detailed information onhow your state’s UCC impacts your contract.B. Producer Protection Act and Similar State ProtectionsThe Producer Protection Act was a model state statue proposed by 17 state Attorneys General in 2000as a means to assist agricultural contract producers and provide uniform protections for producers.4The proposed legislation was a result of the experiences of farmers, attorneys, and legislators in thebroiler industry. In response to that situation, the state model protections included requirements fordisclosure, transparency, and readability as well as economic liability limits. The proposed law didnot, however, equalize bargaining power, guarantee a fair price, or mandate that contracting companiesprovide different contract options to their producers. A few states have provisions similar to or basedon the Producer Protection Act many of those have been highlighted throughout this article from Min-nesota, Illinois, North Carolina, Kansas, and Georgia. Illinois has since enacted an Agricultural Pro-duction Contract Code for the farmers of Illinois.5The Illinois law is a great example of producer pro-tections for farmers involved in a variety of agricultural contracts. It is mentioned throughout this arti-cle. Farmers working to have state laws governing agricultural contract issues should take a look at theIllinois law.C. Agricultural Fair Practices Act (AFPA)Many farmers have a fear of retaliation from a contracting company if they join an organization advo-cating for the interests of peanut farmers. The right for a farmer to form or join an association for ne-gotiating contract terms is protected under the federal Agricultural Fair Practice Act, 7 USC §§2301-2306. This Act forbids unfair interference by contractors into producers associations, but it does notrequire companies to negotiate with such associations.4 The model language of the Act is available athttp://www.state.ia.us/government/ag/agcontractingexplanation.htm.5 Illinois Public Act 93-0522, codified at § 505 ILCS 17/1-99.21
    • 3. FARMER CHECKLISTBefore signing a contract…Be Prepared. Contract offers often allow little time for consideration before signing. It is bestto know your situation and what you need to make producing peanuts profitable BEFORE youexpect a contract offer.Read the whole contract. This is the time to use as much information as possible so you canmake informed decisions about your future. The starting point for all your decisions should bethe actual contract AS WRITTEN.Understand the terms of the contract. You need to understand the terms of the ENTIRE con-tract, because the contract, IN ITS ENTIRETY, will govern all aspects of your relationshipwith the company. The contracting company wrote the contract to protect ITS interests. Youneed to protect yours.Get the help you need. If you have any difficulty understanding the terms of the contract, youshould consult an attorney, or someone who has a great deal of knowledge or experience withsimilar contracts such as an experienced member of your community, a farm advocate, or agrowers association.Identify your obligations and risks under the contract. In exchange for a contract price foryour peanuts, a farmer committed under a contract faces significant risks and obligations.Some may be obvious, others may not, but ALL must be fulfilled. Determine if you can meetyour production obligations under the contract including the required inputs, equipment and fa-cilities, quality, and harvesting requirements. Know what is expected of you and how yourcosts and income can be affected. Analyzing risk is an area where expert help can be vital.Determine the contract’s economic impact. Figure up your likely production costs, income,and variables. Don’t calculate only the best-case scenario with the highest profit. Run thenumbers on a range of outcomes. What would bad weather, plant disease, or an outright disas-ter do to your net return? Calculate the effect of increased production costs or changes in mar-ket prices. Analyze the bottom-line impact of the way your crop is graded. Look for contractlanguage about penalties if you don’t deliver the quality products the contract specifies at theright time.Keep a written record of everything. Write down all your dealings with the contracting com-pany. This is important. Make sure that any changes to the contract are put into writing andsigned and dated by both parties. In some cases, this is required by law--in any case it’s goodbusiness. Also for your own protection, keep a written record of your contract performance,such things as planting, harvesting, fertilizing, and delivery.Know your payment and delivery details. Know how much you will be paid for your pea-nuts. Just as important, know when you’ll get paid and by whom. Know when, where and howyou will be required to deliver the peanuts, and if there are additional costs involved.Know how disputes are resolved. Understand what happens if things go wrong. Review thecontract to see what it says about grading disputes in particular and about general disputes.Know how the contract can be terminated. Know when and how the contract can be termi-nated by you and/or the contracting company.22
    • “Farmers’ Guide to Peanut Contracts”Evaluation FormWe are always interested in hearing from readers. Please fill out the form below and send it to:RAFI-USA, PO Box 640, Pittsboro, NC 273121. How did you use this guide? Check any that apply:as general background on peanut contracts and the industryas a tool you referenced in the process of making a decision related to entering a peanut (orother) contractas a tool you referenced for more information on your rights as a contract peanut growerother: __________________________________________________________________2. What information did you find the most helpful or interesting?3.example, are you going to talk to more farmers or revise your cash flow projections?)4. After reading “Farmers’ Guide to Peanut Contracts” do you have additional questions ortypes of information you wish we had included?Name ______________________________________________________________Address ____________________________________________________________City _________________________ State _______________ Zip_______________Phone ___________________________ Email______________________________Organization / Business ________________________________________________Thank You!23If you read “Farmers’ Guide to Peanut Contracts” because you are considering gettinginto the contract peanut business or other contract-based agricultural enterprise, hasthe guide caused you to do anything differently than you were previously planning?(For
    • 25PUBLISHED BYRURAL ADVANCEMENT FOUNDATION INTERNATIONAL - USAP.O. BOX 640274 Pittsboro Elementary School RoadPittsboro, NC 27312TEL: 919-542-1396FAX: 919-542-0069www.rafiusa.orgText © 2007 Rural Advancement Foundation International—USAAnyone has permission to use this material. We appreciate your creditingRAFI-USA if you reprint any portion of this document.