Structure and Finances of U.S. Farms: Family Farm Report ... - AgWeb

Types of ContractsA contract is a legal agreement between a farm operator (contractee) andanother person or firm (contractor) to produce a specific type, quantity,and quality of agricultural commodity. Farmers typically use two typesof contracts, marketing contracts and production contracts.Marketing contract. Ownership of the commodity remains withthe farmer during production. The contract sets a price (or a pricingformula), product quantities and qualities, and a delivery schedule.Contractor involvement in production is minimal, and the farmerprovides all the inputs. For crops, the contract is finalized before harvest.For livestock, the contract is finalized before the animals are ready to bemarketed.Production contract. The contractor usually owns the commodityduring production, and the farmer is paid a fee for services rendered.The contract specifies farmer and contractor responsibilities for inputsand practices. The contractor often provides specific inputs and services,production guidelines, and technical advice. In livestock contracts, forexample, contractors typically provide feed, veterinary services, transportation,and young animals. The contract is finalized before productionof the commodity.Source: MacDonald and Banker (2005) and MacDonald and Korb(2008).large number of small farms. Production under contract, in contrast, isconcentrated among large-scale family farms and nonfamily farms, whichtogether account for 94 percent of the total. Very large family farms aloneturn out 65 percent of the production under contract.Large-scale family farms and nonfamily farms also generate a 77-percentshare of production not under contract—sold in the cash or spot market—with very large family farms alone accounting for 47 percent. Threecommodities make up three-fourths of noncontract production in the UnitedStates: high-value crops (20 percent), cash grain (33 percent), and beef (22percent).Farms as ContractorsFarms can also serve as contractors. The 2007 ARMS questionnaire askedif any other operations produced livestock—including poultry—under acontract arrangement for the farm being interviewed. About 7,300 farms—less than 1 percent of all U.S. farms—reported acting as a contractor, butthe percentage was higher (3 percent) for very large family farms. Livestockvalued at about $3.9 billion was placed on farms by contracting farms.Dairy herd replacements, other cattle, and hogs accounted for most of theplacements.39Structure and Finances of U.S. Farms: Family Farm Report, 2010 Edition / EIB-66Economic Research Service/USDA