Texas Law
Texas Agricultural & Natural Resources Law
- Agricultural & Natural Resources Law
Agricultural & Natural Resources Law
Agricultural and natural resources law both are very broad areas of law that encompass narrower legal disciplines. This chapter addresses some of the legal issues involved in agricultural and natural resources law. Specifically, this chapter addresses agricultural production contracts, corporate ownership of farms, international agricultural agreements, and farm bankruptcies. This chapter also addresses coastal and wetlands protection, land and water management, and outdoor recreation. The Intellectual Property & Computer Law Chapter describes the process for obtaining a plant patent. The Contract Law Chapter discusses general contract issues, and the Environmental Law Chapter discusses general environmental laws that affect farmers and contains additional natural resources law information. The International Law Chapter contains information about importing and exporting agricultural products.
Agriculture Law
The word "change" often is 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 subcategory of the American legal system, the practice of agricultural law is changing swiftly as 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.
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 Texas. Drafting an agricultural production contract involves many of the same considerations discussed in the Contract Law Chapter. However, there are additional concerns unique to this type of contract. When drafted well, an agricultural production contract can be a beneficial arrangement for both the producer and the processor. When drafted poorly, one or both parties 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; others have grown enormously and spread nationally or even 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 as food processors 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 feel they have no choice but to enter into agricultural production contracts when the purchasers of their products insist on such contracts. 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 generally takes 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. It states the price, quantity, and quality of a product that will be traded at some future time. A market specification contract reduces uncertainties for both the producer and the 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 usually do not take into account 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 it 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. These 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 the failure to account for the unpredictable aspects of the industry (as is true of market specification contracts) and the sacrifice of independence in managing the affairs of the farm that a farmer may make by entering into a production management contract.
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 input to be used in producing the output to ensure the 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. In addition, the farmer is 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 such as seed and fertilizer from a processor, 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 contracts: quality, acceptance, title, and nonperformance.
Quality
To address the issue of quality, the parties to the contract should set standards that will be used to determine whether the producer has met the quality target set forth in the contract. Third-party grading standards--such as government grades--are most commonly used, but the parties should anticipate and address in the contract 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 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
There are several issues relating to title of the product. One issue is 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, such a provision is almost never a good idea from the producer's standpoint.
Nonperformance
The nonperformance provision of the agricultural production contract should clearly state each party's responsibilities in the event of 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 give notice of the nonperformance within a specified period of time, in a specified manner, and 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 they receive from the government. Agriculture is one of the most highly regulated sectors of the economy. Both market prices and support payments are largely determined at the federal level by Congress and the President. 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. While American farmers are enjoying the benefits of increased access to many formerly closed foreign markets, 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. Some economists argue that price supports are a form of unfair subsidy and an inefficient way to help needy farmers. Political backing of 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.
Because foreign trade practices have resulted in increasing foreign imports and decreasing export markets, some states have passed protective legislation to assist domestic agriculture. Texas has not yet done so, but the legislature has given the Agriculture Department responsibility for investigating and reporting on the development of foreign markets. 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 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 occur.
Farm Bankruptcies
The federal Bankruptcy Code contains several provisions applicable 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 they reorganize and attempt to pay off their debts. Chapter 12 offers the family farmer several advantages over other bankruptcy reorganization chapters. 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 originally was scheduled to be repealed on October 1, 1993, but the repeal date was extended to October 1, 1998. 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 Chapter discusses the basics of bankruptcy for businesses that do not qualify to proceed under the farm bankruptcy provisions of the federal Bankruptcy Code. After a farmer files for Chapter 12 bankruptcy, 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. After filing, 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 only will remove a farmer if he or she is guilty of fraud, dishonesty, incompetence, or gross mismanagement of his or her affairs. The reorganization plan is supervised by a court-appointed trustee. While the plan is in place, 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."
Texas Agriculture Programs
Texas takes an active role in developing and promoting its agricultural base. To enhance the potential for domestic and international marketing of Texas agricultural products, the Agriculture Code allows for the creation of commodity producers boards to develop and participate in research, disease and insect control, predator control, and education and promotion to encourage production and use of agricultural commodities. The law also encourages the development of cooperative marketing associations to promote production and marketing of agricultural products. In addition, Texas has a network of experimental farms and the Texas Food and Fibers Commission to conduct research and other agricultural development. Information on agricultural issues in Texas may be obtained from the Texas Agriculture Department.
Natural Resources Law
Natural resources law consists of public lands and resources law, environmental law, environmental assessment, minerals law, timber law, and water law. The law of natural resources entails common law doctrines, statutory and administrative regulation, and constitutional law limitations on government action. Several Texas departments and agencies administer the state's natural resources, including the Natural Resource Conservation Commission, the Parks and Wildlife Department, the Water Development Board, and the General Land Office. These departments and agencies are responsible for traditional natural resource management programs, including state parks, state land ownership, fisheries and marine husbandry, coastal and wetlands protection, mine reclamation, and water management and quality.
Coastline Protection
In 1973 the Texas Legislature passed the Coastal Public Lands Management Act to preserve and protect the state's coastal land. The Act has since been amended and updated several times, most recently in 1995. The Act requires that the Land Office Commissioner develop a comprehensive coastal management program for implementation in cooperation with other agencies. The coastal management program must include: a continuous analysis of potential uses of the land and water within the coastal zone; guidelines on priority of uses; an inventory of coastal natural resource areas; a compilation of relevant state laws; a list of state and federal action that may have a direct and significant detrimental impact on coastal natural resource areas; and an explanation of the relationship of specific policies of the coastal management program to protection of resources, management of coastal development, and simplification of governmental procedures.
Land and Water Management
Texas has a variety of legislation dealing with issues of land and water management. The General Land Office is responsible for the administration and control of state lands generally, and the Texas Natural Resource Conservation Commission (TNRCC) has primary responsibility for the conservation of natural resources and protection of the environment. One area of land and water protection in which the TNRCC has been active is waste management. The TNRCC Office of Waste Management implements federal and state laws related to the regulation of above ground and underground petroleum storage tanks; the generation, treatment, storage and disposal of radioactive and hazardous wastes; the recovery and processing of uranium; and the cleanup of contaminated sites.
The TNRCC has extensive responsibility for the state's water resources as well. The lengthy Texas Water Code addresses a wide variety of issues regarding water rights, water quality, and water conservation. The TNRCC is given general jurisdiction over water rights, including the issuance of water permits, water quality and water quality planning, weather modification programs, the construction and maintenance of dams, state programs involving underground water and water wells, and administration of the national flood insurance program. The TNRCC Office of Water Resource Management implements programs regarding agricultural and watershed management, water planning and assessment, and water utilities. Because of the complex and dynamic nature of Texas land and water management law, 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.
Wetlands Protection
The Texas Coastal Wetland Acquisition Act reflects the state's interest in protecting coastal wetlands by acquiring and managing wetlands in a manner that will preserve and protect the productivity and integrity of the land. The Parks and Wildlife Department has authority under the Act to acquire and manage coastal wetlands and to adopt rules and regulations to preserve and protect the lands. The Department, together with the General Land Office, may certify essential coastal wetlands and prioritize their acquisition. In 1995, the Resources Protection Division of the Parks and Wildlife Department initiated efforts to develop a wetlands conservation plan that will focus on incentive-based actions to assist private landowners in conserving wetlands.
Outdoor Recreation
The Texas Parks and Wildlife Department, which has control of all recreational, natural and historical areas designated as state parks, is responsible for 141 state park units and natural areas. The Department, under the policy direction of the Parks and Wildlife Commission, also is responsible for managing game, fish and marine life in state lands and waters, including 49 wildlife management areas and ten fish hatcheries. Over 26 million people visited the Texas state parks in 1995, and over 2000 fish and wildlife events were held by the Department.
Resources
General information about agricultural policy in the United States may be obtained from the United States Department of Agriculture (USDA), 14th Street and Independence Avenue S.W., Washington, DC 20250, (202) 720-4623. The USDA also has an Extension Service at (202) 720-3029, and a Natural Resource Conservation Service, (202) 720-3210.
Contact the Texas Agricultural Department, P.O. Box 12847, Austin, TX 78711, (512) 463-7476, fax (512) 463-7643, TDD (800) 735-2989, for information about state agricultural policies and regulations.
For additional information on natural resources law in Texas, contact the Parks and Wildlife Department, 4200 Smith School Road, Austin, TX 78744, (512) 389-4800, or the Natural Resource Conservation Commission, P.O. Box 13087, Austin, TX 78711, (512) 239-1000. The Natural Resource Conservation Commission also has information available on-line at http://www.tnrcc.state.tx.us.