Minnesota Agricultural & Natural Resources Law

Guide to
Minnesota Law

Minnesota Agricultural & Natural Resources Law

Agricultural & Natural Resources Law

Agricultural & Natural Resources Law

The word "change" is most frequently heard in discussions involving American agriculture today. The agriculture industry in this country is going through a period of unprecedented change as producers and processors struggle to deal with rapidly evolving technologies, increased mechanization, changing corporate ownership rules, international trade agreements, and a host of other issues unique to agriculture. Long considered a quiet, calm subcategory of the American legal system, the practice of agricultural law is changing swiftly as its practitioners strive to adapt their practices to the changing nature of the industry. Producers and processors alike need to keep themselves informed of how changes in agricultural law will affect them and the role they might play in directing that change. This chapter addresses agricultural production contracts, corporate ownership of farms, international agricultural agreements, and farm bankruptcies. The Intellectual Property & Computer Law Chapter describes the process for obtaining a plant patent. The Land Use & Environmental Law Chapter discusses general environmental laws that impact farmers.

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 Minnesota. Drafting an agricultural production contract involves many of the same considerations discussed in the Contract Law Chapter. However, there are additional concerns unique to agricultural production contracts. When drafted well, an agricultural production contract can be a beneficial arrangement for both 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 both 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 in turn 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

Food producers are as interested in stability and reliability in their business as food processors are in theirs. 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 feel they have no choice but to enter into agricultural production contracts. The purchasers of their products sometimes insist on agricultural production contracts and producers feel 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 Contracts

An agricultural production contract will generally follow one of three different forms -- market 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 while leaving 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 a notoriously 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 also is forced to do business with the processor in obtaining 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 the processor, for instance seed and fertilizer that went into producing the crop, the processor usually retains the right to buy or not to buy the final product if it fails to meet the processor's standards.

Minnesota Requirements for Agricultural Production Contracts

Theoretically, agricultural production contracts ought to benefit both parties; a win-win proposition. Many experts feel that historically, agricultural production contracts have been drafted not to share the risk of crop failure, but merely to shift the risk of crop failure to producers. In response to past abuses, many states have enacted laws designed to protect the interests of farmers who sign agricultural production contracts. Agricultural production contracts for crops grown in Minnesota must comply with Minnesota's Agricultural Contracts Statute, one of the strictest laws in the country for protecting the interests of food producers. The Minnesota Agricultural Contracts Statute has five principal features:

Arbitration or mediation clauses must be included in agricultural contracts governed by the law.
Termination rights are limited for any production contract that requires the producer to make a capital investment in buildings or equipment that cost $100,000 or more and have a useful life of five or more years.
Parent company responsibility is imposed on companies that make contracts through subsidiaries.
The Uniform Commercial Code's implied promise of good faith is imposed on all parties to the contract.
Minnesota's Commissioner of Agriculture is authorized to adopt additional rules prohibiting unfair trade practices.

The first of these requirements, an arbitration or mediation clause, is discussed more fully in the ADR: Commercial Law Chapter. Parties to the contract can choose arbitration or mediation and can choose to designate the Minnesota commissioner of Agriculture to conduct arbitration or mediation, or refer the matter to an outside service provider. Regardless of who conducts it, the arbitration or mediation must conform to the Minnesota Uniform Arbitration Act or the Minnesota Civil Mediation Act, respectively.

General Drafting Issues in Agricultural Production Contracts

Four general issues should be treated carefully when drafting agricultural production contracts -- quality, 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 a contract should anticipate the possibility of changes to those standards after formation of the contract but before delivery.

Acceptance

Acceptance refers to acceptance or non-acceptance 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 actually want risk of loss to remain with the producer for some period of time after title passes to the processor. Obviously, such a 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 that prevent one party's performance. Most such 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 farmers -- the market prices they receive for their products and support payments received from the government. Both 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 down domestic prices.

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 are sure to 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 Minnesota agriculture. The Minnesota State Legislature has found that "it is in the interest of the state to encourage and protect the family farm as a basic economic unit, to ensure it as the most socially desirable mode of agricultural production and to enhance and promote the stability and well-being of rural society in Minnesota and the nuclear family." 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 for corporate farms used for research, encumbrances taken for purposes of security, land acquired by gift, and land used to raise breeding stock. In addition, some corporate-owned land was "grandfathered" into the law. Significant exemptions from the law permit agricultural land to be owned by:

Family farm corporations
Authorized farm corporations
Family farm partnerships
Authorized farm partnerships or general partnerships

Each of these four forms of organization has detailed conditions attached to it. An agricultural law attorney with experience in these matters can help farmers set up their businesses so as to avoid running afoul of these laws.

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 in advance 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 percent of that debt must be related to the farming operations, not including debt on the farmer's principal residence. The Bankruptcy & Workout Law: Commercial Creditor/Debtor Chapter discusses basics of bankruptcy for businesses that do not qualify to proceed under the farm bankruptcy provisions of the federal Bankruptcy Code.

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."

Resources

United States Department of Agriculture, Fourteenth Street and Independence Avenue, NW, Washington, D.C. 20250; Office of Communications, (202) 720-4623; Extension Service, (202) 720-3029; Natural Resources Conservation Service, (202) 720-3210; Rural Economic and Community Development, (202) 720-6903.

Minnesota Attorney General, Agricultural Division, 900 NCL Tower, 445 Minnesota Street, St. Paul, MN 55101, (612) 297-1075 (free pamphlet: Farmer-Lender Mediation: Questions and Answers).

Minnesota Agriculture Department, 90 West Plato Boulevard, St. Paul, MN 55107; Agriculture Planning and Development, (612) 296-7686; Dairy and Livestock Services, (612) 296-3647; Food Inspection Division, (612) 296-2627; Grain Inspection Division, 316 Grain Exchange, Minneapolis, MN 55415, (612) 341-7190.