Agricultural Contracts John C. Becker Penn State University Contracts What is a Contract? Five Elements of a Valid and Enforceable Contract Contract Formation Contract Performance Excuses for the Failure to Perform the Contract Long-Term Marketing Contracts An agreement under which a producer agrees to sell all of a designated commodity that is raised according to specific requirements and for which a specific price will be paid. Production Contracts An agreement under which a farmer agrees to feed and care for livestock owned by the contractor until the livestock are ready for market at which time the farmer is paid according to the terms of the contract. Reasons to Contract - Farmers Farmer gains another income source with little capital invested. Farmer gains a stable income source and reduces risk. Farmer has a guaranteed market for the production. Reasons to Contract Contractors Contractors gain access to a predictable supply The cost of this supply is fixed Contractors can quickly respond to changing consumer demand. Contractors can gain efficiency in producing large quantities of uniform goods. Legal Considerations Transferring possession of an item with transferring ownership. Relationship between contractor and farmer. Is it an employer/employee issue or that of an independent contractor? Leasing as a comparison Contract Issues - Farmer Who owns what is being raised? Will the contract pay for improvements needed to complete the contract? Under what circumstances can the contract end? Does the “economics” of the contract support being part of it? Contract Issues – Farmer, pt.2 How and when will payment be made? Who bears the “risk of loss”? Nonperformance by the Contractor Who should be responsible for environmental consequences? What if the Contractor files a Bankruptcy petition or assigns the contract? Contract Issues - Contractors Does the farmer have an “interest” in what is being raised under the contract? Clarifying the relationship between the contractor and the farmer What if the farmer files a Bankruptcy petition? Contracting in Modern Agriculture What is the role played by contracts in modern agriculture? How do you assess that role? What is the basis for your conclusion?