Illinois Agricultural & Natural Resources Law

Guide to
Illinois Law

Illinois Agricultural & Natural Resources Law

Agricultural & Natural Resources Law

Agricultural & Natural Resources Law

Many businesses, even those not directly involved in farming, are affected by federal and state regulation of agriculture and natural resources. These seemingly distinct areas of law are considered together in this chapter because both are concerned with the important issue of land use. In many states, agriculture and natural resources are regulated in a single agency that administers one comprehensive law. Most state agriculture agencies oversee many areas of business, ranging from food inspection to amusement parks to land protection. Agricultural and Natural Resources Law encompasses other legal disciplines, including contract law, environmental law and bankruptcies.

This chapter addresses some of the legal and regulatory issues involved in agricultural and natural resources law. Specifically, it addresses agricultural production contracts, farm bankruptcies and the regulation of agriculture business in Illinois. This chapter also addresses natural resources issues such as land and water management, protection of forests and parks and outdoor recreation.

Agricultural Production Contracts

An agricultural production contract is an agreement between a producer and a processor, usually entered into before planting or the birth of an animal, that obligates the producer to sell his or her agricultural output to a particular processor. Agricultural production contracts are an increasingly important and popular way for agricultural producers and processors to do business in Illinois. However, additional concerns unique to agricultural production contracts exist. When drafted well, an agricultural production contract can be a beneficial arrangement for producer and processor. When drafted poorly, one or both risk tremendous financial losses and business disruption. Given their growing popularity, agricultural production contracts are rapidly changing the face of American agriculture and have received increased scrutiny from state legislatures.

The Food Processors' Perspective

The United States food processing industry has undergone tremendous change in the decades since the Second World War. Most small food processors have gone out of business, while some other processors have grown enormously and spread nationally and in some cases, internationally. The increasing size of food processors has been the cause and effect of increased capital-intensive, fast-paced mechanization in the food processing industry. Increased economies of scale in the food processing industry require full capacity utilization of equipment. This need for full capacity utilization creates a need to line up supplies of raw materials well in advance of harvest. Production contracts are a way that processors seek to ensure quantity, quality and timeliness of food inputs into the production process.

The Food Producers' Perspective

Like food processors, food producers are also interested in stability and reliability in their business. The agriculture business is notoriously plagued by bad weather, crop failures, fluctuating commodity prices and soaring production costs. Theoretically, food producers seek agricultural production contracts out of a desire for stability and predictability. Realistically, many producers believe they have no choice but to enter into agricultural production contracts. The purchasers of their products sometimes insist on agricultural production contracts and producers believe they have no choice but to agree. Producers need not have such a fatalistic outlook, however. While most food processors prefer to do business using agricultural production contracts, most are willing to bargain over the terms.

Categories of Agricultural Production Contract

An agricultural production contract will generally follow one of three different formsmarket specification contract, production management contract or resource providing contract.

Market Specification Contract

The simplest form of the agricultural production contract is the market specification contract that states price, quantity and quality of a product that will be traded at some future time. A market specification contract reduces uncertainties both for producer and processor and leaves the producer relatively free to meet its obligations however it sees fit. The biggest drawback of market specification contracts is that they often ignore the possibility of bad weather or crop failure. Agriculture is an unpredictable business and a farmer who agrees to deliver a certain crop at a set time may be inviting liability if subsequent events make performance impossible.

Production Management Contract

A more complicated form of the agricultural production contract is the production management contract. Like a market specification contract, a production management contract specifies price, quantity and quality, but also dictates how the producer will produce the goods. Production management contracts are becoming increasingly popular as processors try to produce unique, specialty products for niche markets. Production management contracts are especially popular with mass market processors, such as fast food companies, that demand uniform products for national markets. Drawbacks to production management contracts include all those mentioned above for market specification contracts and, in addition, the farmer sacrifices some independence in deciding how best to manage the affairs of his or her farm.

Resource Providing Contract

The most complex form of the agricultural production contract is the resource providing contract. Under a resource providing contract, the processor provides all or part of the inputs to be used in producing the output to ensure that output will meet the processor's quality standards. Drawbacks to resource providing contracts include all those mentioned above for market specification contracts and production management contracts, and the farmer is also forced to do business with the processor to obtain inputs for the production process. Producers must be very careful to understand their obligations under resource providing contracts. Even after a farmer has purchased products from a processor, for instance the seed and fertilizer that went into producing the crop, the processor usually retains the right not to buy the final product if it fails to meet the processor's standards.

Drafting Issues in Agricultural Production Contracts

Four general issues should be treated carefully when drafting agricultural production contractsquality, acceptance, title and nonperformance.

Quality

To address the issue of quality, the parties determine standards that will decide whether the producer has met the quality target set forth in the contract. Third party grading standards, such as government grades, are most common, but the contract should anticipate the possibility of changes to those standards after formation of the contract but before delivery of the product.

Acceptance

Acceptance refers to acceptance or nonacceptance of a product. The agricultural production contract should state that the parties determine how, when and where acceptance will occur. An agricultural production contract should clarify which party pays for any required testing, who owns any rejected product, if and how any rejected product can be sold to third parties, and how and when a rejected product must be removed from the processor's facility.

Title

The issue of title refers to when title passes. A closely related issue is who bears the risk of loss before and after title passes. Some processors want risk of loss to remain with the producer for some period of time after title passes to the processor. Obviously, this provision is almost never a good idea from the producer's standpoint.

Nonperformance

The nonperformance provision should clearly state each party's responsibilities upon crop failure, animal loss or other factors preventing one party's performance. Most of these clauses include a requirement that the party unable to fulfill its side of the bargain must give notice of the nonperformance within a specified period of time, in a specified manner, to a specified person or office.

International Agricultural Agreements

Two primary factors determine the financial well-being of most farmersthe market prices they receive for their products and support payments received from the government. Market prices and support payments are largely determined at the federal level by Congress and the President because agriculture is one of the most highly regulated sectors of the economy. In line with the increased internationalization of other sectors of the economy, the agricultural economy is being affected by increased international competition and pressure from foreign countries to open American domestic markets to more imported goods. American farmers are enjoying the benefits of increased access to many formerly closed foreign markets, yet, at the same time, more foreign agricultural products are finding their way into the domestic market, driving domestic prices down.

Many of this country's agriculture support programs are under increasing pressure at international negotiating sessions. Economists argue that price supports are a form of unfair subsidy and an inefficient way to help needy farmers. Political support for some agriculture support programs is waning under pressure to erase deficits and balance budgets. International agreements like the General Agreement on Tariffs and Trade (GATT) and the North American Free Trade Agreement (NAFTA) are likely to lead to the demise or significant alteration of many existing government support programs for agriculture while they open new foreign markets to American farmers.

It is difficult to predict the future of international agriculture agreements, but agricultural organizations are mobilizing to ensure their voices are heard in debates over agricultural policy. All segments of the agriculture industry will be involved in the political process as they struggle to deal with change and seek the best in an uncertain international political climate for agriculture. Agricultural lawyers can help businesses engaged in agriculture get involved in the process, influence negotiations and prepare for changes that do come about.

Corporate Farming

How farmers are permitted to own their land is an important issue in Illinois agriculture. The Illinois General Assembly has declared a public policy of the state "to maintain the family farm and encourage the actual owners to maintain a system of widely dispersed and independently owned farms and an active interest in the supervision, management and operation of farms." For these reasons, the state forbids most corporations, limited liability companies, pension funds, investment funds or limited partnerships to directly or indirectly engage in farming or to obtain an interest in any real estate used for farming or capable of being used for farming. The law allows some minor exceptions, but to avoid running afoul of these laws, an agricultural law attorney with experience in these matters should be consulted prior to setting up a farm business.

Farm Bankruptcies

The federal Bankruptcy Code contains several provisions available only to family farmers. These provisions are known as Chapter 12 and are designed to allow family farmers to remain in the business of farming while reorganizing and attempting to pay off their debts. Chapter 12 offers the family farmer several advantages over other bankruptcy reorganization chapters because it recognizes the seasonal nature of most agricultural income, the difficulty of predicting how much a farmer will profit from a crop, and the fact that most farmers need much more credit than do most individuals. Chapter 12 was originally scheduled to be repealed on October 1, 1993, but the repeal date was extended to October 1, 1998. All cases commenced or pending under Chapter 12 by October 1, 1998 and all matters or proceedings relating to such cases will proceed and be determined as if Chapter 12 had not been repealed.

Farmers Eligible to File for Chapter 12

Chapter 12 is only an option for farmers who receive at least half of their income from farming operations and have no more than $1.5 million in debt. At least 80% of that debt must be related to the farming operations, not including debt on the farmer's principal residence.

Mechanics of a Chapter 12 Bankruptcy

A Chapter 12 bankruptcy filing is similar to a Chapter 11 corporate reorganization bankruptcy or a Chapter 13 personal reorganization bankruptcy. After a farmer files for Chapter 12, a "stay" is imposed and all actions of creditors to collect debt from the debtor must cease. If a creditor believes it deserves special protection, it can seek relief from the stay, requiring the debtor to give adequate protection to the creditor. Adequate protection under Chapter 12 is similar to adequate protection in other forms of bankruptcy but the terms are far more favorable to the farmer.

After filing for bankruptcy, the farmer has 90 days to file a plan of reorganization with the bankruptcy court. The reorganization plan must reveal all the farmer's debt and detail how he or she plans to repay the debt over three to five years. If the plan meets all of the requirements of Chapter 12, the bankruptcy court must approve it at a hearing held within 45 days after it is filed. Creditors are given an opportunity to file objections to the plan, but cannot veto it.

After filing for Chapter 12 the farmer almost always is allowed to continue operating the farm. An interested party can request that the farmer be removed from the farm, but a bankruptcy judge will only do so if the farmer is guilty of fraud, dishonesty, incompetence or gross mismanagement of his or her affairs.

The reorganization plan is supervised by a court-appointed trustee. During the plan, the farmer makes periodic payments to the trustee who then pays creditors according to the terms of the plan. Should the farmer be removed for one of the above-mentioned reasons, the trustee steps in to manage the farm. At the end of the plan period, the court discharges any remaining debts, with certain limited exceptions, and the debtor is given a fresh start.

Natural Resources Law

A state's natural resources include all of the land, water, forests, wetlands and wildlife living naturally within its geographic boundaries. Often, the state's historic landmarks, parks and recreation areas are considered its natural resources as well. The law of natural resources entails common law doctrines, statutes, administrative regulation and constitutional law limitations on government action. It includes laws governing use of public lands, environmental law, minerals law, timber law and water law. State agencies that manage natural resources are responsible for traditional natural resource management programs, including state parks, state land ownership, fisheries and marine husbandry, wetlands protection, mine reclamation and water management and quality. In Illinois, natural resources are generally managed by the Illinois Department of Natural Resources. In addition to the specific areas discussed below, Illinois has enacted numerous laws that designate the Department as the state agency with regulatory power to permit or deny certain activities that affect the state's natural resources. These powers include:

Preservation and conservation of fish, game, wild animals, fowl, birds, mussels, frogs and turtles
Gathering and publication of statistical information about the state's fauna and flora
Sale of obsolete buildings on state parks or natural lands
Granting of licenses, rights-of-way and other property interests
Licensing for growers, harvesters and dealers of wild ginseng

Conservation of Soil and Water

So as to prevent water shortages, Illinois has a declared policy that it is in the public interest to manage and preserve water. Through the Water Use Act of 1983, the state established county soil and water conservation districts through which this policy is fulfilled. The soil and water conservation districts are responsible for providing for soil and water conservation by regulating and permitting the withdrawal of groundwater and assisting in resolving water conflicts. If a land occupier wishes to develop a new groundwater withdrawal point that will withdraw in excess of 100,000 gallons each day, the person or business must notify the conservation district. The district works with other state agencies to determine the effect of the withdrawal and, within 30 days, completes a review and notifies the land occupier of the outcome. The districts also provide land owners with machinery, equipment and financial services in an effort to prevent soil erosion, water misuse, flooding and pollution. Funding is available to the conservation districts from government programs. Water and land pollution prevention and prosecution is charged to the Illinois Environmental Protection Agency.

Because of the complex and dynamic nature of Illinois' land and water management laws, a business considering using large quantities of water or conducting activities that may generate waste or other pollution should consult an attorney experienced in these issues.

Land Preservation

Land is considered one of Illinois' most important resources and land conservation is considered one of its top priorities, because the state has lost much of its land to surface and underground coal mining. The Department now seeks to balance productivity with conservation, in part by protecting the state's land through strict mining regulation. Although mining is not completely prohibited, the Department is authorized to deny permits to businesses failing to comply with protection, conservation and land and structure repair requirements. The state also administers programs created by legislative initiative to reclaim and recover land damaged by mining. State law is more stringent than the requirements of the federal surface mining control and reclamation law. Lands reclaimed by the state now are restored to productive land that can be used for forests, pasture, farming, wildlife and recreation.

Forests and Parks

The Department oversees use and protection of Illinois' state forests and parks. The government is authorized to acquire land to preserve for forest growth, and it has established laws prohibiting cutting or removal of certain species of trees. The Department is responsible for administration of the state's forestry development cost share program, which requires and approves timber growers' forestry management plans. These plans must provide for sound forestry management practices as well as strategies for reforestation, regenerative harvests, soil and water conservation and wildlife habitant enhancement.

The Department also works to preserve natural areas in the state. Such areas are designated specifically as places to provide the people of Illinois with areas for recreation and education. Funding to improve outdoor recreation areas is provided by federal aid programs as well as state bonds and privilege taxes. The Department also oversees and administers these funds to enhance the state's parks. Specific legislative mandates charge the Department with preserving important historic sites, areas with unique geologic or topographic formations and recreational waterways. As is true of many other areas of activity affecting natural resources and the environment, permits are required for many recreational activities.

Wetlands

Land designated as wetlands is protected by a state interagency committee that includes representatives from the Department as well as other agencies such as the Department of Agriculture and the Historic Preservation Agency. The committee develops rules and regulations for administration of the laws governing wetlands, and conducts research, permitting and assistance activities. Specifically, the committee develops technical procedures for identification and evaluation of the state's wetlands in an effort to determine whether to preserve and restore them. Any land management or construction project that has the potential for adverse impact on a wetlands area may proceed only after detailed planning for mitigating the impact and committee approval.

Resources

United States Department of Agriculture, 14th Street and Independence Avenue S.W., Washington, DC 20250; Office of Communications: (202) 720-4623; Extension Service: (202) 720-3029; Natural Resources Conservation Planning: (202) 720-3210; Farm Services Administration: (202) 720-5327.

Illinois Department of Agriculture, State Fairgrounds, P.O. Box 19281, Springfield, IL 62794- 9281, Phone: (217) 782-2172; (217) 524-6858 (TDD); Fax: (217) 785-4505.

AGNES, AgNews, Education and Services: Toll-Free Hot Line: (800) 273-4763 (Voice and TDD); Outside Illinois: (217) 785-9272; (217) 524-6858 (TDD). Provides information on the department's programs and services.

AMIS, Automated Market Information Service: (217) 782-2055; (217)524-6858 (TDD). Provides up-to-date market information.

Pesticide Misuse Hot Line: (800) 641-3934; (800) 273-4763 (TDD). Provides consumers a means to report potential pesticide misuse.

For additional information on natural resources law in Illinois, contact the Department of Natural Resources, 524 Second Street South, Springfield, IL 62701, Phone: (217) 782-6302. Specific regulatory offices should be contacted with specific questions:

Resource Conservation Office, (217) 785-8287

Forest Resources Division, (217) 782-2361

Wildlife Resources Division, (217) 782-6384

Nature Preserves Commission, (217) 785-8774

Mines and Minerals Office, (217) 782-6791

Land Reclamation Division, (217) 782-4970

Water Survey Division, (217) 244-5459