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Livestock Production Contract Checklist

Developed by Attorney General Tom Miller's Production Contracts Task Force

January 1996
Office of the Attorney General, Iowa Department of Justice

Introduction | Consult Experts | Facility Requirements | Operational Issues | Payment Legal Issues | Neighbor/Goals |  Other Sources of Information | Task Force Members

INTRODUCTION

1. Trend Towards Production Contracting/Definitions.

   There is a new era of grain production on the rise in Iowa and across the nation. Traditional patterns of grain production are giving way to new growing arrangements. Many of these arrangements involve grain production contracts. A grain production contract can be defined as an agreement under which a producer agrees to raise a crop in a manner established by the contractor, sell or deliver the crop to the contractor and, in return, receive a payment from the contractor. Production contracts should be distinguished from marketing agreements, cash forward contracts, and futures contracts which involve the sale of grain produced and owned by the producer.
   

2. Use of Checklist.

   This checklist has been prepared by Attorney General Tom Miller's Task Force on Production Contracts. It was developed as an educational tool for producers considering a production contract involving grain. 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.
   

3. 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.

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LIVESTOCK CONTRACT CHECKLIST

A.  Consult Experts.
Before committing yourself to this contractual obligation, be absolutely sure you understand the entire document.

1. 1. Attorneys.
      ___ 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, 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.

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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 claimable 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?

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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?
   
2. Feed.
   ___ 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?
   
4. Manure.
   ___ 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?

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D.  Payment.

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. Liens for Other Contracts.
   ___ If the contract is not a custom cattle feeding arrangement, then what recourse do you have if the contractor doesn't pay you?
   ___ Has the contractor already granted liens against the livestock to a lender or others? Will the contractor grant you a security interest against the livestock and take the steps to ensure that your interest is superior to prior liens? (This is very difficult to accomplish because the lender or other person holding the prior lien must approve.)
   
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?

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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.

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F.

1. Neighbors/Goals.
2. Neighbors.
   ___ Will raising livestock under this contract affect your relationship with your neighbors?
   ___ Have you talked with your neighbors about your plans?
   
3. Long Term Goals.
   ___ How does this contract fit into your long terms goals for your farm, your family, your community?

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OTHER SOURCES OF INFORMATION

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, P.O. Box 1730 Ames, IA 50010. (515) 296-2266.
• Iowa Farm Bureau Federation, 5400 University Avenue West Des Moines, IA 50265. (515) 225-5400.
• Iowa Farmers Union, 1229 South G Avenue, Nevada, IA 50201. (515) 382-4725.
• 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. (515) 223-2600.

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TASK FORCE ON PRODUCTION CONTRACTS

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
• IBP, Inc.
• 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.
• Private Attorneys

For additional information on this checklist or on production contracts generally, please contact:

Farm Section, Environmental and Agricultural Law Division
Iowa Attorney General's Office
1223 E. Court Avenue
Des Moines, IA 50319
Telephone (515) 281-5351
FAX (515) 242-6072

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Source: https://www.extension.iastate.edu/grain/topics/LivestockProductionContractChecklist.htm

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