Hemp Production Contract Checklist

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Considerations Specific to Hemp Production

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1. Grower licensed to produce hemp under state, tribal, or federal regulations.  Information about the appropriate permitting authority can be found on USDA’s Agricultural Marketing Service’s website to determine the appropriate authority.  Check with the appropriate permitting authority for your operation.  At the same time, make sure all relevant licenses and permits are up-to-date.

2. End-use product and market – Are you producing CBD products, food products, industrial fiber, etc., or maximum usage through multiple markets?

3. Production plan required by state, tribal, or federal regulations.

   • Testing requirements (see Sampling Guidelines for Hemp U.S. Domestic Production Program)

   • Chemical and Land Use Requirements (See relevant state Department of Agriculture or other agency responsible for hemp production program for approved chemical and land use methods)

   • Remediation and disposal of “hot hemp” (see, Remediation and Disposal Guidelines for Hemp Growing Facilities U.S. Domestic Hemp Production Program)

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General Contract Practices for Hemp Producers

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A.  Consulting Experts.

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Before committing yourself to this contractual obligation, be sure you understand the entire document.

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1. Attorneys. If you do not fully and completely understand the legal terms in the contract or the legal consequences, you should consult an attorney.
    

2. Financial and technical experts. If you do not fully understand the financial or tax consequences of the contract, consult your lender, a tax professional, university Extension faculty, an agricultural consultant, or others.
    

3. Other producers. Talk to other producers who have had experience with contracts. They may be a good source of advice.

 

1.  Contracting.

Contracts can potentially provide benefits to both producers and contractors.  Be aware, however, that contracts are typically drafted to the benefit of the contracting party, oftentimes the purchasing company.  Farmers get a guaranteed outlet for their production with known compensation, while contractors get an assured supply of commodities with specified characteristics delivered promptly.

 

2.  Types of contracts.

A contract is a legal agreement between a farm operator (contractee) and another person or firm (contractor) to produce a specific agricultural commodity type, quantity, and quality. The USDA-Economic Research Service classifies contracts as either marketing or production.

 

• Marketing contract. Under a marketing contract, ownership of the commodity remains with the farmer during production. The contract sets a price (or a pricing formula), product quantities and qualities, and a delivery schedule. Contractor involvement in production is minimal, and the farmer provides all the inputs. For crops, the contract is finalized before harvest. For livestock, the contract is completed before the animals are ready for market.

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• Production contract. With a production contract, the contractor usually owns the commodity during production, and the farmer is paid a fee for services rendered. The contract specifies farmer and contractor responsibilities for inputs and practices. The contractor often provides specific inputs and services, production guidelines, and technical advice. For example, contractors typically specify the inputs and services with a production contract. The farmer will typically use those inputs and additional ones needed to grow the crop.

 

B.  Production Issues.

1. Facilities and equipment.
   ___ Does the contract require you to make investments in equipment or facilities?
   ___ Is special drying, storage, irrigation, or other handling equipment needed?  Does this equipment require extra management, fuel, utilities, or repair?
   ___ Is the duration of the contract adequate to recover your investment? Can the contract be terminated before your investment is fully recovered?
   ___ Does the contract require your facilities or equipment to be approved or certified? Is unique calibration needed?
    

2. Production costs.
   ___ Do you know your costs of production for the crop involved? If not, you should consult University Extension programs or others for estimated costs of production. (University of Kentucky here; University of Tennessee  here)
   ___ Do the requirements of the contract increase the production costs above those normally expected?
   ___ Are you required to use inputs or techniques that are more expensive than normal?
   ___ Are you required to buy inputs from a certain source?
    

3. Yield/production penalty.
   ___ What is the expected yield of the crop involved?
   ___ Do you receive compensation for this yield reduction?
    

4. Growing obligations. (regulatory plan requirement)
   ___ Are you able to comply with the growing obligations in the contract? Are you willing to comply with these obligations and give up certain decision-making freedom on how, when, and where to grow crops?
   ___ Is a specific pest control program required?
   ___ Is a particular fertility program required?

___Who provides the seeds? (Grower or buyer, or is it a contract for seed)
___ Do you need to maintain a distance from other crops to prevent cross-pollination or other adverse effects?
___ How much crop residue is left from this crop, and how does that impact your conservation compliance plan? What should the grower do with any seed generated as a result of growing this crop?
___ What authority does the contractor have to enforce growing obligations? Can the contractor enter your land and do work on the crops? If so, who is responsible for any damage and when/how often are they allowed to enter?

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C.  Payment and Delivery Issues.

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1.  Payment terms.
___ How will you be paid? Are the terms of payment clear? Can payment be held in escrow?
___ If you will be paid on the hemp price, how is that price established?
___ When is the hemp priced? Can the hemp be forward priced?
___ Who markets the hemp?
___ Is the schedule of payments firmly set? Does this schedule satisfy your cash flow?

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2.  Premiums/bonuses.

___ If premiums or bonuses are involved, how are they calculated, and when are they paid?
___ Can you examine the calculations used to determine these premiums or bonuses?

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3. Condition of crop.

___ What does the contract require regarding the hemp's condition, such as moisture, foreign material, test weight, oil content, THC content, etc.?
___ Are quality standards for this hemp detailed? If not, then what measures are used? Can you achieve those standards? (Should list all the requirements such as whether the plants must be male/female, required THC content, etc. particularly if the buyer’s requirements are different from the standard set by the state regulatory agency)
___ ___ What are the penalties for quality non-compliance? How is the amount of the liability determined? Is it set in the contract language itself, or resolved at the time of harvest?
___ Are you penalized if the quality non-compliance was caused by adverse weather conditions or other factors out of your control?
___ Who bears extra costs incurred to achieve quality compliance?
___ Does quality non-compliance on a portion of the crop result in penalties on all of the crops involved in the contract?
___ Can any rejected hemp be sold on the open market? (does ownership of rejected hemp pass to the grower, if the grower does not already have ownership rights)

4.  Amount of production.
___ Are you required to deliver a set amount of hemp under the contract?
___ What is the penalty for failing to deliver this amount?
___ Do you have to find substitute supplies to fulfill the contract if you have a shortfall?
___ Are you responsible if the shortfall is due to an "act of God,” such as weather, insects, plant disease?
___ If the weather prevents planting, can you make adjustments in the number or location of acres? Are there trigger dates for these adjustments?
___ Are you responsible if the shortfall is due to production decisions you did not make, such as fertility or pest programs?
___ Under your State’s Uniform Commercial Code, is a breach of contract excused because of impracticability (such as bad weather) if the contract involves the output of particular tracts of the land? Does this contract list the fields on which the crops are grown?

5.  Delivery site/delivery date.
___ Where is the crop to be delivered?
___ Are there any special handling procedures?
___ Who pays for delivery to the site?
___ When is the crop to be delivered?
___ Is the date set in the contract? If not, then who sets the date?
___ What is the penalty for late delivery? Early delivery?
___ What happens if late delivery is due to circumstances beyond your control?
 

6.  Payment date.
___ When are you entitled to receive payment?
___ If payment may be made after delivery, what guarantee of payment do you have?
 

7.  Ownership of crop/risk of loss.
___ Who owns the crop?
___ Usually, the party with the title of ownership bears the risk of loss. Does the contract modify this rule?
___ Who bears the risk of loss in the crop in the field, in storage, or in transport (likely the owner will have the risk)?

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8.  Liens.
___ Does the contract prohibit you from granting liens or security interests on the crop to a third party such as a landlord, lender, or supplier?
___ Will the contractor grant you a producer's lien in the crop superior to other interests?
 

9.  Contractor credentials.
___ If you have concerns about getting paid under the contract, will the contractor provide you with a financial statement? Or with a list of producers the contractor has contracted with in the past? Does the financial information indicate a sound history in hemp production and marketing?
___ Is the contractor bonded for this type of obligation?
___ Does it appear that the contractor is committed to contracting in the region? Has the contractor made investments in fixed assets or relocated management to the area? Is contracting the contractor's core business?

 

10.  Your credentials.
___ If the contractor has questions about your ability to perform the contract, are you willing and able to give the contractor a financial statement and names of individuals who will verify your financial stability and management abilities?
 

11.  Parent company responsibility.
___ If the contractor is a subsidiary company, does the contract make the parent company responsible for payment if the contractor defaults?

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D.  Other Legal Issues.

1.  Dispute resolution.
___ Does the contract provide for alternative dispute resolution such as mediation or arbitration before the parties can take a dispute to court? Alternative dispute resolution often is far less costly and disruptive than litigation. Mediation is a negotiation between you and the contractor facilitated by a neutral third party.  Arbitration is a process where a third-party arbitrator hears the dispute like a judge and renders a decision, usually binding on the parties.
 

2.  Termination of contract.
___ Under what conditions can the contractor terminate the contract?
___ Who determines whether those conditions are met? Are there objective standards, or is it at the contractor’s discretion? For example, can the contractor terminate the contract if the contractor determines you have not complied with quality provisions? Or does the contractor have to verify the quality problems with independent testing?
___ Can the contractor terminate the contract for minor breaches of the contract?
___ How much notice does the contractor have to give before termination?
___ Are you allowed to fix a problem related to performance before termination? How much time are you given for this?
___ What are your rights after termination by a contractor? Can you sell or use the crop not purchased under the contract?
___ Under what conditions may you terminate the contract? What if you get sick, disabled, or die? What if you go bankrupt?
 

3.  Legal relationship of parties.
___ What legal relationship does the contract create between you and the contractor? Is it a landlord/tenant relationship, employer/employee relationship, independent contractor, partnership, joint venture, agency? The legal relationship involved will determine your rights and duties under the contract and have significant tax consequences.
 

4.  Approval of others/assignment.
___ Do other parties have to approve the contract, such as your landlord, lender, or spouse?
___ Can the contract be assigned or transferred by you or by the contractor to other parties? This may have significant tax consequences.
 

5.  Farm programs.
___ How will the contract affect your eligibility for farm program payments? To be eligible for USDA programs, you must have a "beneficial interest" in the commodity,  determined by looking at the contractual terms regarding title, risk of loss, and payment.

 

6.  Insurance.
___ Are you required to buy multi-peril, hail, or other crop insurance?
___ Can you get Federal Crop Insurance for the crops involved? If so, can you use your actual production history or will other yield determinations be used?
 

7.  Protection of intellectual property.
___ Are you required to take any special steps to protect the contractor's property interests in the hemp's genetic material?
___ Are you responsible for the security of genetic material?
___ Who owns the genetic material? Does the contract limit your ability to save seed to plant on your farm in future years?

 

8.  Choice of law/venue/change of law.
___ If the contractor is from another state, does the contract specify the state law that governs? Is this choice of law fair?
___ Does the contract set a venue (location) for any lawsuit that might be filed? Is this location fair?
___ Does the contract permit renegotiation or nullification of the contract if the laws governing production contracts change?
 

9.  Duration of offer.
___ How long do you have to accept the contract? Is there an expiration date for signing?
 

10.  Everything in writing.
___ Are all terms spelled out clearly in writing?  You should not rely on oral agreements or interpretations of the contract. Reduce all understandings or modifications to writing.