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Farm Advisory

Caution on Contracts

More and more Iowa farmers are asking themselves: "Should I enter into long- term production contracts with processors, and what should I look for in such contracts?"
For livestock producers, the arrangement may be as simple as this: The producer contracts to deliver a set number of a specific type of animal on a regular schedule. The packer agrees to pay the producer the market price OR not less than a "floor price" established in the contract. (The contract may also set a ceiling price above which the packer will not be bound.) Thus, the producer is guaranteed a market and minimum price for the livestock, and the processor is guaranteed a steady supply of animals. Row-crop farmers are now seeing the introduction of grain contracts with comparable terms.

Here are some questions farmers should consider about contracts:

  1. Am I absolutely locked-in by the contract for the number of years stated in the agreement? It may be prudent to have an escape clause in the event you quit farming (due to health, family, or financial problems, for example.)
  2. Does the contract offer me a realistic expectation for profit? Know your production costs and make sure you have protection against dramatic changes in your costs which are possible over the life of the contract. Be careful not to overestimate your financial or physical abilities to meet the requirements of the contract.
  3. What percentage of my grain or livestock production should I put on contract? Don't put all your eggs in one basket. Market factors may fluctuate to the extent that more profit can be had from non-contracted production. You may need to have additional grain or livestock available to meet unforeseen expenses caused by increased production costs, above-normal death loss, or scheduled delivery shortfalls.
  4. If the processor changes my delivery point or grading standards, what protection do I have? Plants can close overnight, leaving you with additional delivery costs. Also, many farmers report that grading varies from processor to processor. Make sure you have adequate protection in the event of these situations.
  5. Finally, talk to others who are experienced with long-term contracting. Explore the pros and cons of contracts. Talk to your banker or lawyer for their assessment of any contract.

Contact:

Iowa Attorney General Farm Division
321 East 12th St., Room 018
Des Moines, Iowa 50319
Phone: 515/281-5351
Fax: 515/242-6072
Email: farm@ag.state.ia.us