By Bob Battel

If you’ve purchased inputs, hedged a crop or borrowed money, you’ve signed a contract. With these contracts, little negotiation, other than that over price and quantity, occurs.

A newer phenomenon is farmer-to-farmer (FTF) contracts. They are often made with no prespecified terms. One example of such a contract is when a livestock farmer sells, trades or otherwise provides manure to another farmer.

Contract negotiators must examine events that could create risks and the possible cost and allocation of these risks. Contract negotiation should be approached with a three-part question:

• What event(s) create risks and what is the probability of their occurrence?
• What are the costs if that event does occur?
• Which party will be required to bear those costs if the event does occur?

Identifying and allocating risks can reduce the probability of disputes occurring. Consider:

• Financial risk. What are the risks associated with the financial solvency of the parties?
• Investment risk. Does the contract require investments in assets that will have little value outside this transaction?
• Production (quantity) risk. What are the risks that either party will be unable to perform the contract because of weather or other events?
• Production (quality) risk. What are the risks that either party will be unable to satisfy any quality specification of the contract?
• Price risk. What are the risks associated with changes in the price of manifested manure?

It’s impossible to write a contract that allocates all risk. A risk (and its cost) will be allocated either by the parties during negotiation or by a court later.

Following is a partial list of the components of a manure manifestation contract:

• Names of each party.
• Location of manure source and where applied
• Number of acres available
• Length of contract.
• Terms of early termination.
• Timing of application.
• Portion of application costs to be shared by each party.
• Signature (and date) of each party
• Acknowledgement of required permits and manure management plans.
• Requirement that landowner provide record of crop yields and other nutrient applications.
• Requirement that landowner complies with manure management and utilization generally accepted agricultural management practices (GAAMPs).

Finally, an FTF contract should be in writing, and each party should have a legal adviser review the agreement before it is signed.

This article was originally published in the September 2008 issue of the Scoop. To read the whole issue, click here.