March 11, 2005 | By: Laura Skillman
PRINCETON, Ky.

For many Kentucky tobacco producers dealing with production contracts this year will be a new experience, but contracting has been a growing trend in agriculture.

With two-thirds of America’s farmers renting land, many use verbal or written contracts to outline their rental agreements, said Larry Jones, an agricultural economist with the University of Kentucky College of Agriculture.

“Other farmers use contracts to outsource part of their production or marketing programs,” he said. “More recent farm contracting involves contracts for the production of commodities.”

Today, more than a third of U.S. farm products are sold under some form of contract. That compares to about 12 percent 25 years ago.

Production contracts have been common for many years in poultry and fruits and vegetable enterprises. In recent years, contracting has rapidly expanded into hogs, dairy and tobacco, Jones said.

The U.S. Department of Agriculture reports that farms with sales of more than $500,000 per year are more likely to use contracts than smaller farms. Large farms also provide the majority of food and fiber production. USDA also reports that more than half the livestock sold in the United States are under contract, while about a quarter of row crops are contracted.

“Buyers such as processors are using contracts to control various aspects of production, not only from the inputs to be used but the production practices and the final form of the product they wish to buy,” he said. “Often processors are looking for specific attributes in the products they wish to buy, and contracts are one way to guarantee that the processor can get what their customers are looking for. These attributes can include such things as moisture, oil content, weight of an animal or various grades of tobacco.”

Specific feature contracts can limit the decision-making that a farmer has over the production process. Specific characteristic contracts are common in areas such as Brazil and in the United States with poultry.

The amount of products being contracted has resulted in the amount of products being sold on spot markets being much less today than 25 years ago. This has increased the chance of more price volatility and higher market risk by selling on spot markets. The trend toward contracting likely will continue in agriculture. It will in large part be driven by buying systems that provide specific product attributes that the consumer of the final product is demanding.

 

Contact: 

Writer: Laura Skillman 270-365-7541 ext. 278

Contacts: Larry Jones 859-257-7289