By Cheryl Stubbendieck
Vice President of Public Relations
Nebraska Farm Bureau Federation
The use of production contracts is increasing in agriculture, and, with it, the need for ag producers to know what they are getting into.
The Nebraska Legislature likely will consider model legislation on this issue, in its 2001 session.
Contracting is on the rise for two major reasons, says ag economist Jay Rempe, Nebraska Farm Bureau Federation director of state governmental relations. More lending institutions are encouraging producers to use contracts for risk management. And producers who grow commodities with unique characteristics need to be sure there is a buyer for them; at the same time, the purchaser wants to be assured the product received will have certain attributes.
Contracts provide assurances for both parties, but it is important to remember that contracts are drafted by corporate attorneys who are looking out for the best interests of their company or client. Contracting can help producers manage risk, but it also can be used to shift more risk to the producer, Rempe warns,
Concern about disparity in "market power" between the company offering a contract and the ag producer who might sign it has prompted state attorneys general in 16 Midwestern states, including Nebraska, to develop model state legislation on production contracts. State Sen. Merton "Cap" Dierks, Ewing, NE, likely will introduce the proposal in the 2001 Unicameral.
Concerns about producer contracts began to surface about 18 months to two years ago, according to Rempe, when hogs were selling for $8 per hundredweight. Producers holding a ledger contract with a processor received the difference between the market price and their contract price, but this was provided as a loan, and recorded as a ledger balance. With ledger balances exceeding $100,000 and the choice of paying up or accepting a certain kind of contract, many producers had little choice but to enter into the subsequent contract.
Ledger contracts aren't being used as extensively as before, but they illustrate the concerns addressed by the attorneys general. The model legislation recognizes that producer contracts have a place in agriculture and can be valuable. But it also seeks to level the playing field for the producer, by requiring that contracts be written in plain language, rather than legalese, and that risks be fully disclosed.
The model bill prohibits confidentiality clauses some contracts have had previously, which prohibited the producer from discussing the contract with a banker, attorney or accountant. The model legislation also calls for a three-day period of review, during which the producer can get out of the contract--similar to the three-day right of recession in consumer contracts.
A Nebraska law similar to what the attorneys general propose would give ag producers more rights and greater market power. But with or without such legislation, producers are well-advised to get legal advice before signing on the dotted line. It may cost a couple of hours of legal time, but that is a small price, compared to the cost of learning the contract you signed isn't what you thought.