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. The Economic Research Service classifies contracts as either marketing or production.
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 and production contracts contributed the same levels of value of production in 2019. Production contracts—commonly used on livestock farms—represented the majority of production on poultry/egg, hog, and cattle farms. In contrast, marketing contracts were commonly used on crop farms. Roughly 72 percent of production on peanut farms and 68 percent of production on tobacco farms were under marketing contracts, and nearly half of production on fruit farms was under marketing contract. Only 10 to 15 percent of corn, soybean, and wheat production was produced under marketing contract in 2019.
Who Uses Contracts?
Overall, the share of U.S. farms using contracts is about 7 percent, but use of contracts varies by farm type. In 2019, small farms made up 53 percent of the farms with contracts, but accounted for only 24 percent of the production under contract. Midsize farms account for 26 percent of farms with contracts and account for another 25 percent of production. In contrast, large-scale and nonfamily farms together accounted for 21 percent of farms with contracts and 51 percent of contract production