Agricultural Contracting Debate May Heat Up in State Legislatures.

Farming can be a risky business. With crops depending on the whims of Mother Nature and a demand that can be capricious, the prices a farmer gets can bounce like pingpong balls.

A move to level out crops, prices and risk may portend some hot legislative sessions this year.

Lawmakers will face some difficult questions when they debate a model law drafted by 16 state attorneys general. Unveiled last September, the Producer Protection Act is designed to protect farmers from potential risks in agricultural contracting.

"This issue is important to every legislature that wants to keep its farmers in production agriculture," says Senator Merton "Cap" Dierks of Nebraska. "It is something we all must be concerned with."

In the past, farmers operated independently and maintained complete control over production and marketing. More recently, many farmers and agribusinesses have shifted to contracting with one another to try to reduce risks, increase efficiency and ensure steady commodity supplies.

Controversy may arise in three areas when the model law is considered:

* Supporters want better protections for farmers when they're dealing with the companies on the other side of a contract. But others say there are already laws in place that should cover them, and contracts are, after all, voluntary--so some argue that this law goes too far. They say that less severe solutions could protect the farmer.

* Supporters of the proposed law say that contracting encourages fewer, larger farms, and this law will slow that trend. Others argue that an explicit anti-concentration law would be better and that contracting has nothing to do with the death of the family farm.

* Proponents want the issue handled at the state level to ensure the most appropriate prescription for each state. Others call for a federal law.

In 1998, the U.S. Department of Agriculture estimated that $67 billion, or 35 percent, of agricultural commodities were produced under some form of marketing or production contract.

Under marketing contracts, the contractor and farmer establish a price before the product is delivered. The farmer controls production and owns the product until its sale.

In a production contract, the farmer gives up most control over crop production and does not own the product. The farmer usually receives an incentive-based fee for services and is reimbursed for a portion of the farm's operating expenses.

Both forms give farmers a guaranteed market and help reduce income risk.

But contract arrangements also have drawbacks and potential risks. These are what the Producer Protection Act (PPA) seeks to allay. "It is important that producers have contracts that treat them fairly," Dierks says, "so they can stay in business."

For example, disparities in bargaining power and market information may put farmers at a disadvantage.

In production contracts, farmers may be required to make substantial capital investments and take on economic risks beyond the life of a contract. The PPA protects farmers from capricious termination of contracts if they are required to make a large capital investment. The PPA would also provide farmers with a first-priority lien for payments due under a contract if a contractor goes out of business.

Many contracts contain confidentiality provisions that discourage price disclosure. The PPA would prohibit these. Farmers would be granted three days to review production contracts, and full disclosure of material risks would be provided.