Managing contracts is an essential part of running a successful farming business. Contracts help farmers plan for the future and balance financial risks. Sometimes, documents come across a farmer’s desk that don’t appear to be contracts but actually are. Seemingly small details in a contract can make a huge difference in your farm’s financial security and whether you are eligible for various grants and programs, including USDA funding. 

Here is some advice on what to look for when considering a new contract:

Read the fine print: Carefully read and make sure you understand every clause of the contract. One way to gauge your understanding is by trying to explain each clause to a family member or friend. If there is a clause you don’t fully understand, go back to the other party or seek legal assistance. If possible, always consult an attorney before signing a contract to ensure you fully understand the scope of the agreement.

Cradle to grave: Consider the full timeframe covered by the contract, which should be clearly defined. Contracts can be binding for any period, from a single season to 100 years. For example, most NRCS contracts require proof that you have control over the farm property for the next five years to be eligible for assistance. Can you commit to the timeframe required by the contract? Will the contract continue to be economically favorable for you over the long term? And if not, what are your options for terminating the contract?

It’s also important to understand how your responsibilities will change at different points during the entire life cycle of any new venture or project. If you’re leasing out some of your land to an energy developer to host solar panels or a wind turbine, who will be responsible for that infrastructure at the end of its useful life? Work with the other party to ensure everyone’s responsibilities are clearly defined at each stage.

Look out for liabilities: Reading through a contract to understand the benefits to each party is easy — understanding liabilities can be slightly more complicated. Ideally, both the benefits and the burden of liabilities should be more or less equally distributed — each side benefits; each side also shares in the risk of loss. 

But this is not always the case. Often, poultry and livestock contracts can be the opposite — the grower holds all of the financial risk, while the integrator is essentially insulated from loss. For example, most hog farming contracts place the responsibility of creating and adhering to a waste management plan on the farmer, not the integrator. In the case of a spill, the farmer would be liable to be fined or even shut down by the state, or could be sued by downstream neighbors affected by the breach. Understanding your liabilities and implied responsibilities — and their potential consequences — is absolutely crucial when entering into a contract. Overall, weigh the pros and cons and make sure you’re not absorbing additional risks that outweigh those you are trying to protect against by entering into the contract.

Think outside the box: Consider possible third-order effects of a contract, particularly how the contract will directly or indirectly impact your relationships with outside parties. For instance, contracts can affect your eligibility for government programs. In a production contract where a company is supplying the farmer with labor, equipment, or transportation, this can complicate the question of who qualifies as the “producer,” according to the Farm Service Agency (FSA). This will impact who is eligible for insurance or other USDA assistance.

Contracts can also influence your overall marketing opportunities. For example, a hemp farmer might contract to deliver 25,000 pounds of product to a buyer but end up having a bumper crop and producing in excess of that amount. The contract only obligates the buyer to take the agreed-upon amount, but might grant the buyer the right of first refusal before the farmer can sell the excess to someone else. This could leave the farmer scrambling to sell the surplus.

Understand your rights in these situations, and consult an attorney when in doubt.

What are you giving up? In reading through a contract, make note of every right you previously held that the contract would have you give up. This may take obvious or less obvious forms. For instance, does the contract exclusively grant the other party the right to public funds or grant money? This is the case in many carbon credit contracts, as more companies seek to capitalize on government programs incentivizing climate-smart practices. Farmers implementing climate-smart practices to sell carbon credits to a broker must often surrender any grants or public funding to the broker entity, which becomes legally recognized as the “grower.”

Also, consider any rights you might be giving up when borrowing money. Look at any requirements included when signing a promissory note — a legally binding document outlining a loan’s terms and repayment agreement. Promissory notes often restrict what farmers can do with any equipment put up as security. If a farmer sells their equipment without authorization from the lender and does not replace it with substitute collateral or tries to sell secured equipment to get money to make a payment, this would count as a non-monetary default on the loan.

Understand the consequences of termination: Get a clear understanding of what will happen if you can’t fulfill the terms of an agreement. For example, many NRCS contracts include a monetary termination penalty to cover for lost staff time if a farmer decides not to go through with a project. Failure to implement a funded project can be forgiven if the failure is due to something outside of the farmer’s control, like a natural disaster, but it’s important to understand where the boundaries of responsibility lie.

Likewise, it’s important to understand what your options are if the other party fails to uphold their end of the agreement. Farmer Advocates advise that it’s important to retain your right to go to court with a contracted party. In the past, many poultry and livestock contracts have forbidden growers from taking integrators to court, instead requiring them to go through an arbitration process that heavily favors the integrator. Understand your rights in these situations, and consult an attorney when in doubt.

A balanced deal: When it comes to negotiating a contract, you want to get a good deal — but you also want the other side to get a good deal. If something falls through that leaves the other party high and dry, chances are that is not going to be good for you either. Consider things like insurance and whether it should be required by the contract so that both parties are protected in the event of a loss. Ensuring a good deal for both sides will protect others’ willingness to work with you in the future.

Contracts are complicated — but they don’t have to be intimidating. Fortunately, resources are available to help. Organizations like Farmers Legal Action Group and Farm Commons produce high-quality print and online materials explaining legal issues surrounding different types of contracts encountered in farming. Regional organizations, like Legal Food Hub in the Northeast, match farmers with pro bono legal services to guide them through the process. Start by contacting a Farmer Advocate or exploring the links above to learn more.