A. Trend Towards Production Contracting/Definitions. There is a new era of livestock production on the rise in Iowa and across the nation. Traditional patterns of livestock production are giving way to new care and feeding arrangements. Many of these arrangements involve livestock production contracts.
A livestock production contract can be defined as an agreement under which a producer agrees to feed and care for livestock owned by a contractor in return for a payment. Production contracts should be distinguished from marketing agreements, cash forward contracts, and futures contracts which involve the sale of livestock produced and owned by the producer.
B. Use of checklist. This checklist has been prepared by Attorney General Tom Miller's Task Force on Production Contracts (the members are listed on page 11). It was developed as an educational tool for producers considering a livestock production contract. The producer is encouraged to ask the type of questions posed in the checklist before signing a contract. No checklist can raise every relevant question, and, conversely, this checklist may raise questions that are not relevant to each producer.
C. References in Checklist. Note that the term "you" as used in this checklist refers to the producer or grower involved. The term "contractor" refers to the other party to the contract.
A. Consult Experts. Before committing yourself to this contractual obligation, be absolutely sure you understand the entire document.
If you do not fully and completely understand the legal terms in the contract or the legal consequences of the contract, then you should consult an attorney.
2. Financial and technical experts.
If you do not fully understand the financial or tax consequences of the contract, then you should consult your lender, a tax professional, the Extension Service, an agricultural consultant or others.
3. Other producers.
Talk to other producers who have had experience with contracts. They may be a good source of advice.
B. Facility Requirements. (If you are required to construct a building, make improvements in an existing building, or purchase new equipment.)
1. Exclusivity of Use.
Can you have livestock other than the contractor's livestock in the facilities?
Can you have other livestock on the farm?
2. Construction Timing.
When does construction have to be completed?
Are there penalties for construction delays?
3. Construction Costs/Depreciation.
Do you know the total costs of construction?
Do you pay for all the material and labor?
Who pays the costs of site surveys, engineering, and excavating?
What are the depreciation costs? Depreciation claim able on your taxes differs with various types of livestock.
Who "owns" the facility?
4. Construction Specifications/Modernization.
Who provides the specifications for construction?
Who is responsible if there are defects?
Is the facility standard for the industry? Would the facility be acceptable if you wanted to enter into contracts with other contractors in the future? Could the facility be used for other purposes?
Are you required to pay for future modernization or upgrades in the facility or its equipment?
5. Government Approval of Facility.
Who is responsible for obtaining governmental permits and/or county zoning approval?
Who pays permit fees?
What happens if facility is not approved?
6. Miscellaneous Facility Costs.
Who pays for maintenance and repairs on the facility?
Who pays for insurance for liability and property/casualty on the facility?
Will the facility require a new well or other source of water? Who pays for this?
Who pays for security?
7. Access to Facility.
Who has access to the facility?
If the contractor or others have access, then do they have to give you advance notice?
What if there are damages, such as introduction of disease?
8. Recovery of Investment.
Is the duration of the contract adequate to recover your investment in the facility and equipment?
Can the contract be terminated before the investment is recovered? What if the contractor goes bankrupt?
Is there a guarantee of minimum occupancy for the facility?
9. Financing of Facility/Lender Approval.
Is the financing of the facility certain? Do you have a written loan commitment?
Does your lender need to accept the contract before financing of the facility is approved?
Does your lender require the contractor to provide assurances that the contractor can perform the contract?
C. Operational Issues.
1. Delivery of Livestock.
Who pays the cost of trucking livestock in and out?
Who decides when and how livestock will be delivered to the facility? Is there a set schedule for livestock deliveries?
What if deliveries are late or less than expected? Do you have a guaranteed minimum or maximum occupancy rate for your facilities? Is there compensation for non-compliance?
If applicable, when, where, and under what supervision will livestock be weighed coming into or leaving the facility?
Who bears the risk of death loss of livestock while trucked in or out?
Who is responsible for providing feed and guaranteeing feed quality?
Who sets the rations? Who decides on changes in rations due to weather, market conditions, development of new techniques, or other factors?
Who is responsible if feed conversions are below expectations?
If marketing is delayed and feed efficiency declines, then are you compensated for the extra feed costs?
If you use feed you raised, then how is it priced? Is there a mark-up?
Whether you raised the feed or not, how are feed storage, drying, processing, trucking or other handling costs allocated?
3. Livestock Health.
Who checks for livestock health at arrival?
Can you reject livestock you think are sick? Can you demand a veterinarian's certification of health? If so, then whose vet is used and who pays?
Who is responsible for compliance with state and federal animal health regulations?
Who bears death loss risk while the livestock are at your facility?
Some contracts have a rebuttable presumption that death loss occurring soon after the arrival of livestock is the contractor's responsibility because unhealthy animals were supplied. Does this contract address this situation?
Who bears death loss risk due to failure of ventilation, heating, cooling, watering, or other equipment?
Who bears death loss risk due to extreme weather conditions such as heat, cold, floods, wind, lightning, etc.?
Who bears the costs if unhealthy livestock brought to the facility infect other livestock on the farm?
Who bears the costs of poor performance due to unhealthy or low-quality livestock? Can you renegotiate compensation terms?
Who determines and pays for programs for scheduled or unscheduled health care?
Who chooses the veterinarian? Who pays the vet?
What are your responsibilities for cleaning or disinfecting facilities between turns of livestock?
Who is responsible for manure management?
If a manure management plan must be filed with the Department of Natural Resources (DNR), then who files it, updates it, implements it, and communicates with the DNR concerning it?
Who is responsible to respond if there are complaints, lawsuits, or alleged violations of law, involving odor, dust, water quality, or other types of nuisance? Who is ultimately liable for damages, penalties, or legal expenses from complaints, lawsuits, or enforcement actions?
Are there any cost-effective steps you can take to minimize the possibility of complaints involving odor, dust, water quality, or other types of nuisance, which may stem from the contract?
Who is responsible for compliance with new regulations?
Who, in fact, owns the manure? Can you sell the manure?
If the manure is to be spread on someone else's land, then is a manure application agreement in place? Does the agreement specify a method of manure application? Can you comply with this agreement?
5. Labor and Management/ Record Keeping.
Who provides labor and management to raise the livestock? Can this be delegated or subcontracted? If you delegated or subcontracted labor or management, then what impact would this have on your cash flow or the profitability of the contract?
Who sets and "judges" husbandry practices?
Are you or your employees required to have special skills or training? Who pays for the training?
What production records are you required to maintain?
6. Insurance and Other Costs.
Who pays for liability and casualty insurance on the livestock? Is there coverage for suffocation of livestock due to equipment failure?
Who pays for workers' compensation, health, disability, and general liability insurance?
Do you have to provide certificates of insurance?
Who is responsible for utilities?
Who is responsible for dead animal removal?
Who is responsible for dust control? Weed Control?
Who pays for roadway construction and maintenance?
1. Payment Terms.
On what basis are you being paid? Are the terms clear?
What payment factors are out of your control?
Is the schedule of payments firmly set? Will this schedule satisfy your cash flow?
Are there penalties for late payments?
Can the payments be assigned to a lender?
Will the last payment be made before the livestock leave your facilities?
Will your lender's name be on the check?
2. Incentive Payments.
If production incentive payments (based on factors such as death loss, feed conversion, or rate of gain) are involved, then exactly what do you have to do to receive the incentive payments? How are the payments calculated and when are the payments made?
Can you examine the computations used to determine these incentive payments?
3. Costs of Production.
Do you know your costs of production to determine the profitability of the contract?
If you don't have cost of production records, then you should consult with the Extension Service or others to arrive at estimated production costs.
4. Custom Feeding Cattle Liens.
If the contract involves custom feeding cattle, your payments may be protected by perfecting a lien on the cattle under Iowa Code chapter 579A. This lien must be filed in the Iowa Secretary of State's office not later than 20 days after the cattle arrive at your feedlot. The lien is superior to all other liens (except a veterinarian's lien) and continues against the holder of the identifiable cash proceeds from the sale of the cattle or the processor who has purchased the cattle within 3 days after the cattle leave your feedlot.
Does the contract attempt to modify your right to this lien?
5. Contract Grower Liens effective 5/24/99.
Note: Iowa has passed the first-in-the-nation contract producer lien law, Iowa Code Chapter 579B, whereby farmers raising cattle, hogs, sheep and dairy cattle under production contracts for companies have the legal authority to file a one-page lien form with the Iowa Secretary of State within 45 days from the time the livestock arrives at your facility. The lien is a first priority lien on the livestock, or the proceeds of the animals if they have been sold. The lien exsist for a period of one year after the livestock leaves the authority of the producer.
Does the contract prohibit you from discussing your contract with others? (This type of statement, commonly referred to as a "confidentiality clause", is unenforceable in contracts executed before 5/24/99 and void in contracts executed after 5/24/99. Iowa Code section 8E.3).
Does the contract request or require you to "waive" statutory provisions in order to be accepted by the contractor? (Waiver clauses, eliminating protection created by Production Contract Lien Law, are void and unenforceable. Iowa Code sections 579A.4 and 579B.6).
When can you file a contract producer lien?
If you operate a custom cattle feedlot, are you better off filing your lien pursuant to the Iowa Contract Producer Law, Iowa Code section 579B.4? (Time within which you can file your lien differs between Iowa Code section 579A.2 - 20 days - and Iowa Code section 579B.4 - 45 days - and you CANNOT file under both, pursuant to Iowa Code section 579A.5).
What are the legal requirements for preserving the lien?
6. Contractor Credentials.
If you have concerns about getting paid, then will the contractor provide you with a financial statement? With a list of producers the contractor has contracted with in the past?
Does it appear that the contractor is committed to contracting in the region? Has the contractor made investments in fixed assets or relocated management, in the region? Is contracting the contractor's core business?
7. Your Credentials.
If the contractor has questions about your ability to perform the contract, then are you willing and able to release a financial statement and names of individuals who will verify your financial stability and management abilities?
8. Parent Company Responsibility.
If the contractor is a subsidiary company, then does the contract make the parent company responsible for payment if the contractor defaults?
E. Legal Issues.
1. Dispute Resolution.
Iowa Code chapter 654B requires persons involved in custom feeding disputes to participate in mediation prior to filing a lawsuit in court. Mediation is negotiation between you and the contractor facilitated by a neutral third party.
Does the contract require other forms of dispute resolution such as arbitration? Unlike mediation, arbitration is a process where a third party arbitrator hears the dispute like a judge and renders a decision, usually binding on the parties. Arbitration often is much more expensive than mediation.
2. Termination of Contract.
Under what conditions can the contractor terminate the contract?
Who determines whether those conditions are met? Are there objective standards or is it in the discretion of the contractor?
How much notice does the contractor have to give you before termination?
Are you given an opportunity to cure a problem before termination? How much time are you given for this?
What are your rights after termination of the contract? Will you be paid for work done to date? Do you have an option to buy the livestock?
Under what conditions can you terminate the contract? What if you get sick, disabled, or die? What if you file bankruptcy?
Can you terminate if the contractor fails to deliver livestock or feed or fails to make payments on time?
Does the contract excuse non-performance caused by "Acts of God", meaning occurrences out of human control?
3. Renewal of Contract.
Under what conditions can the contract be renewed?
Again, are there standards for renewal, or is it up to the contractor?
4. Status of Parties.
What legal relationship does the contract establish between you and the contractor? Is it a landlord/tenant relationship, employer/employee relationship, independent contractor, partnership, joint venture, agency? The legal status of the relationship not only affects your rights and responsibilities under the contract, but has important tax consequences.
5. Approval of Contract By Others/Assignment.
Do other parties have to approve the contract, such as your landlord, your lender, your spouse?
Can the contract be assigned or transferred by you or by the contractor to others, such as a lender?
6. Choice of Law/Venue/Change of Law.
If the contractor is from another state, then does the contract specify the state law that governs? Is this choice of law fair?
Does the contract set a venue (location) for any lawsuit that might be filed? Is this location fair?
Does the contract permit renegotiation or nullification of the contract if the laws governing production contracts are changed?
7. Duration of Offer.
How long do you have to accept the contract? Is there an expiration date for signing?
8. Put It in Writing.
You should not rely on oral agreements or interpretations of the contract. Reduce all understandings or modifications to writing.
Will raising livestock under this contract affect your relationship with your neighbors?
Have you talked with your neighbors about your plans?
2. Long Term Goals.
How does this contract fit into your long terms goals for your farm, your family, your community?
There are several other excellent sources of information on livestock production contracting. Publications on the topic include:
Custom Cattle Feeding in Iowa, Iowa State University Extension, Publications Pm-1927a and Pm-1297b, 1987. (For other ISU Extension publications, call (515) 294-5247.)
Hamilton, Neil D., A Farmers' Legal Guide to Production Contracts, Farm Journal, Inc., Philadelphia, Penn., 1995. (For copies, call (515) 271-2947.)
IPPA Swine Contract Approaches, Iowa Pork Producers Association, Clive, Iowa, 1990.
NPPC/Guide to Contracting, National Pork Producers Council, Clive, Iowa, publication forthcoming.
You may also want to contact the following organizations for information:
Iowa Cattlemen's Association, 2055 Ironwood Court, P.O. Box 1490 Ames, IA 50010.
Iowa Farm Bureau Federation, 5400 University Avenue West Des Moines, IA 50265. (515) 225-5400.
Iowa Farmers Union, P.O. Box 8988, Ames, IA 50010
(515) 382-4725. E-Mail address:IAFU@isunet.net Internet address: www.iafu.org
Iowa Mediation Service, 1025 Ashworth Road, West Des Moines, IA 50265.
(515) 223-2318. Regional offices: Cedar Rapids (319) 398-4042.
Spencer (712) 262-7007. Mason City (515) 423-4322.
Iowa Pork Producers Association, 1636 N.W. 114th Street Clive, IA 50325. (515) 225-7675.
Iowa State University Extension, Iowa Concern Hotline. 1-800-447-1985.
National Pork Producers Council, 1778 N.W. 114th Street, Clive, IA 50325.
Attorney General Tom Miller established a Task Force on Production Contracts that met three times in the fall of 1995. Members of the Task Force included individuals representing:
Agricultural Law Center at Drake University Law School
Independent producers/family farmers
Iowa Institute for Cooperatives
Iowa Bankers Association
Iowa Cattlemen's Association
Iowa Corn Growers Association
Iowa Farmers Union
Iowa Farm Bureau Federation
Iowa Mediation Service
Iowa Pork Producers Association
Iowa Select Farms
Iowa Soybean Association
Iowa State University Economics
Iowa State University Extension
Pioneer Hi-Bred International, Inc.
For additional information on this checklist or on production contracts generally, please contact:
Iowa Attorney General's Office
1223 E. Court Avenue
Des Moines, IA 50319
Telephone (515) 281-5351. FAX (515) 242-6072.