This presentation gives a cursory overview of agriculture production contracts, custom feeding arrangements, farm leases, farm machinery leases, animal leases (e.g., bull and horse leases) and partnership agreements

1. Overview of Common
Agriculture Contracts
Food and Farm Law CLE
North Carolina Bar Association
October 17, 2013
By Cari B. Rincker, Esq.

2. 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

3. Overview
• Agriculture Production
Contracts
• Custom Feeding
Arrangements
• Farm Leases
• Farm Machinery Leases
• Leasing Animals
• Partnership
Agreements

4. Agriculture Production Contracts

5. 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.

6. Types of Agriculture Production
Contracts
• 3 Types
– Sales Contract
– Personal Service
Contract
– Bailment

7. 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)

8. 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

9. 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

10. 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.

11. 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.

12. 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.

13. 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.

14. 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

15. 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.

16. Disadvantages of Production Contracts
• 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.

17. Disadvantages of Production Contracts
• 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

18. 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.

19. Custom Feeding Arrangements

20. Applicability of Custom Feeding
Arrangements
This is a contract
between a livestock
owner and a livestock
feeder with market
animals.

21. Provisions for Custom Feeding
Arrangements
• Identification of
Livestock
– Type
– Weight
– Sex
– Breed/coloring

22. Provisions for Custom Feeding
Arrangements
• Feeding and Nutrition
– Feeding regime
– Expenses/ Finances
• Some feedyards will
finance the feed bill for
the owner.
• Is a deposit required?

23. Provisions for Custom Feeding
Arrangements
• Division of Profit or
Loss
• Marketing of the
Livestock
– Approximate timeline
for marketing
– Desired stage of finish

24. Provisions for Custom Feeding
Arrangements
• Delivery
– Approximate date
of delivery
– Deadline for
delivery
– Shipping/transport
ation costs

25. Provisions for Custom Feeding
Arrangements
• 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

26. 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.

27. 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.

28. Provisions for Custom Feeding
Arrangements
• 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.

29. Provisions for Custom Feeding
Arrangements
• 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

30. Provisions for Custom Feeding
Arrangements
• 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.

31. Payment Terms
• 2 Most Common
Ways of Charging
Services
– Yardage
• Dollar per head per
day basis
– Yardage plus feed
markup

32. 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.

33. 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.

34. 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.

35. Farm Leases

36. Three Basic Types of Farm Leases
• Cash-Rent Lease
• Crop-Share Lease
• Hybrid Lease

37. 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

38. 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

39. 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

40. Some Farm Lease Terms to Think About
• Some basics
– Parties
– Purpose of Lease (e.g.,
crop production)
– Property Description
– Lease Term
– Renewal Terms

41. Some Farm Lease Terms to Think About
• Payment Terms
– Per acre/farm basis
– Timing
• Who is responsible for
– Property taxes
– Farm insurance
– Utilities

42. Some Farm Lease Terms to Think About
• 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

43. Some Farm Lease Terms to Think About
• Rights to natural
resources
– Wind rights
– Solar rights
– Mineral rights
– Timber rights
– Fishing/Hunting rights
– Camping Rights

44. Some Farm Lease Terms to Think About
• Does the T have any
reporting
requirements to the
LL?
– Grid sampling
– Yield monitor data
– Weigh wagon
– Test plot results

45. Some Farm Lease Terms to Think About
• Miscellaneous
– Assign/Sublease
– Notice
– Termination
– Confidentiality
– Choice of forum/law

46. Some Farm Lease Terms to Think About
• 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

47. Farm Machinery Leases

48. 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

49. 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

50. 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

51. Leasing Animals

52. 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

53. 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)

54. 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

55. 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)

56. 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

57. Partnership Agreements

58. Overview: “The Desirable Plan”
• Understand culture of
industry
• Does client have a
business plan?
• Choice of business
entity
• Draft and execute a
partnership agreement

59. 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

60. 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?

61. 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

62. 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

63. Some Basics
• Principal Place of
Business
• Choice of Law
– Are there any specific
state law issues?
• Name of Partnership
• Licenses, Permits, Fr
anchises?

64. 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

65. 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

66. 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

67. 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

68. 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

69. 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

70. 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

71. 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

72. 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

73. 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

74. Admission of Partners
• Voting requirements
• Initial qualifications
• Duties/restrictions
• Equity
• How will profits/losses be
divided with new
partners?

75. 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

76. 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?

77. 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

78. “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.

79. 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

80. Miscellaneous Provisions
• Notice
• Amendments
• Life Insurance
• Waiver
• Validity
• Confidentiality
– Separate NDA?
• Rules of Interpretation
• Indemnification
• Entire agreement

81. 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/Fi
eld-Manual-Legal-Farmers-
Entrepreneurs/dp/1484965
191
…and that’s marketing.

82. 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: cari@rinckerlaw.com
• 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