Production contract

A production contract is an agricultural agreement used in the United States to organize the production of a commodity between a contractor and a producer, commonly a farmer or livestock grower. The contract defines the production inputs to be supplied, the quality and quantity requirements, the producer’s husbandry or cultivation obligations, and the method of compensation. It therefore establishes the operational relationship between the party controlling the commodity program and the farm business that performs the production work. In livestock applications, the contractor may supply animals, feed, veterinary services, technical guidance, genetics, or other inputs. The farmer generally provides the facilities, labor, utilities, and day-to-day care required to raise the animals to market condition. A central feature is that the contractor can retain ownership of the animals throughout the growing period, while the farmer is paid for housing and caring for them rather than purchasing the livestock and independently marketing the finished product. This arrangement differs from a conventional spot-market transaction, in which a producer typically owns the commodity and sells it after production. Production contracts are associated especially with vertically coordinated sectors of American agriculture, including poultry, hogs, and cattle. They allow contractors to standardize production, coordinate supply with processing capacity, specify uniform quality, and manage risks connected with feed, genetics, animal health, and market timing. For producers, contracts can provide a more predictable production arrangement and access to inputs or technical systems that might otherwise be difficult to obtain. The agreement can also shift particular market and production risks between the contractor and the farmer, depending on its terms. The form became an important part of the organization of U.S. livestock production by the late twentieth century. United States Department of Agriculture figures cited in a Congressional Research Service glossary reported that, in 1997, approximately 70 percent of the value of poultry production, 33 percent of hog production, and 14 percent of cattle production was conducted under production contracts. These figures illustrate the uneven but substantial role of contractual integration across major livestock industries. A production contract is not a corporate brand, consumer product, or individual company. It is a category of agricultural agreement and a mechanism of production coordination. Its legal and economic effects depend on the detailed provisions governing ownership, inputs, performance standards, payment, losses, termination, and responsibility for production problems. Related arrangements include marketing contracts, which generally concern the sale or marketing of a commodity, and production flexibility contracts, a separate type of U.S. agricultural policy instrument.

Production contracts developed as part of the broader organization and vertical coordination of American agriculture. Rather than requiring every farmer to purchase inputs, own the animals, determine production methods, and sell the finished commodity independently, a production contract divides those functions between a contractor and a producer. The contractor establishes the production program and commonly controls important inputs or retains ownership of the commodity, while the farmer supplies facilities, labor, and care. The arrangement became particularly significant in livestock industries in which processors and other upstream or downstream firms sought greater control over uniformity, timing, animal genetics, feed programs, disease management, and supply volume. Poultry production became the most extensively contract-based of the sectors identified in the available reference material. Hog and cattle production also used production contracts, although at lower proportions of sector value in the cited 1997 figures. Under a typical livestock production contract, the farmer houses and cares for animals until they reach the required market condition. The contractor may provide the animals and specify feed, veterinary protocols, housing standards, weight targets, quality measures, and delivery arrangements. Compensation is determined by the contract rather than solely by the open market price at the time of sale. The farmer’s economic role is consequently closer to that of a contracted production service provider, while the contractor coordinates the commodity’s movement through an integrated supply chain. The model can offer producers access to stable production relationships, technical support, and supplied inputs. At the same time, it may reduce the producer’s control over production decisions and expose the farm to contractual performance requirements, investment obligations, and dependence on a single contractor. The allocation of ownership and risk is therefore central to the economic meaning of each agreement. A 2005 Congressional Research Service glossary, drawing on United States Department of Agriculture material, recorded that approximately 70 percent of the value of U.S. poultry production, 33 percent of hog production, and 14 percent of cattle production was under production contracts in 1997. These statistics are commonly used to demonstrate the importance of contractual coordination in U.S. livestock agriculture, although they describe that historical year rather than a current market share. Production contracts are distinct from marketing contracts. A marketing contract primarily establishes terms for selling a commodity, while a production contract governs how the commodity is produced and which party supplies inputs, owns it during production, and pays the producer. The term is also distinct from production flexibility contracts, which were agricultural policy payment arrangements rather than private production agreements.

• 2005

  Agricultural terminology documented in a Congressional glossary

  [1]Production contracten.wikipedia.org

  The Congressional Research Service included the concept in its Agriculture: A Glossary of Terms, Programs, and Laws, 2005 Edition, using public-domain agricultural policy reference material.

• 1997

  Widespread use documented in U.S. livestock production

  [1]Production contracten.wikipedia.org

  United States Department of Agriculture figures cited by the Congressional Research Service indicated that production contracts covered about 70 percent of poultry production value, 33 percent of hog production value, and 14 percent of cattle production value in the United States.

An agricultural production-coordination arrangement used to specify inputs, output requirements, producer duties, ownership, and compensation.

1. 1Production contracten.wikipedia.org
2. 2Agriculture: A Glossary of Terms, Programs, and Laws, 2005 Editioneverycrsreport.com