Contracts can potentially provide benefits to both producers and contractors. Farmers get a guaranteed outlet for their production with known compensation, while contractors get an assured supply of commodities with specified characteristics, delivered in a timely manner.
Types of Contracts
A contract is a legal agreement between a farm operator (contractee) and another person or firm (contractor) to produce a specific type, quantity, and quality of agricultural commodity. ERS classifies contracts into two types—marketing contracts and production contracts.
Marketing contract. Ownership of the commodity remains with the farmer during production. The contract sets a price (or a pricing formula), product quantities and qualities, and a delivery schedule. Contractor involvement in production is minimal, and the farmer provides all the inputs. For crops, the contract is finalized before harvest. For livestock, the contract is finalized before the animals are ready to be marketed.
Production contract. The contractor usually owns the commodity during production, and the farmer is paid a fee for services rendered. The contract specifies farmer and contractor responsibilities for inputs and practices. The contractor often provides specific inputs and services, production guidelines, and technical advice. In livestock contracts, for example, contractors typically provide feed, veterinary services, transportation, and young animals. The contract is finalized before production of the commodity.
Marketing contracts held more of the value of contract production than production contracts in 2018. Production contracts were commonly used on livestock farms, representing the majority of production on poultry/egg, hog farms, and cattle farms. Marketing contracts were commonly used on crop farms. Roughly 68 percent of production on tobacco and 87 percent sugarbeet farms was under marketing contract. Fruit and vegetable farms had over one-half of their production under marketing contract. Only 10 to 22 percent of corn, soybean, and wheat production was produced under marketing contract in 2018.
Who Uses Contracts?
Use of contracts—of either type—varies by farm type. Overall, the share of U.S. farms using contracts was about 9 percent. In 2018, small farms made up about 58 percent of the farms with contracts, but accounted for only 22 percent of the production under contract. Midsize farms accounted for 24 percent of farms with contracts and 21 percent of production under contract. In contrast, large-scale and nonfamily farms together accounted for 19 percent of farms with contracts and 58 percent of contract production.