Peanut contract negotiations a matter of relationships

Two years ago, peanut farmers found themselves in a new world. The new farm bill passed quota into the history books and set peanuts in the world of commodity marketing. Along with the changes came a whole new set of terms and concepts for peanut farmers.

Chief among those concepts is the contract. “Contracting is all about the language,” says Mike Roberts, Virginia Tech Extension farm management specialist. Roberts and Jim Pease, Virginia Tech Extension ag economist, have developed a farmers guide to peanut contracting. “It's about how you say things.”

Contracts can offer benefits to both producers and shellers. A contract as a “legally binding document defining a written or oral agreement between two or more parties, and involving enforceable commitments to do or refrain from doing something in exchange for some form of compensation.

The peanut contract is a hybrid between a production contract and a marketing contract.

Successful use of a peanut contract to your benefit requires knowing what you're signing, knowing how to negotiate, knowing what's expected, and knowing your production costs.

In business terms, it's referred to as a “win-win” situation. To be effective in developing a mutually beneficial business relationship, contract negotiators should practice “principled negotiations.”

In negotiation, there's the hard and soft position and the principled position. For example, the soft position says, “trust everyone.” The hard position says, “trust no one.” The principled solution to the problem is, proceed independently of trust.

Another example with a hard take requires you to mislead the other party about your bottom line. The soft take would be to reveal your bottom line. The principled solution is, avoid having a bottom line.

Yet another example sums up the difference between the negotiating styles. The hard position says, be hard on the problem and the people involved. The soft position says, be soft on the problem and the people. The principled solution: be soft on the people and hard on the problem.

Roberts and Pease recommend getting negotiated changes signed and in writing. “Contracts are all about working together,” Roberts says. “It's about relationships.”

A hybrid of the marketing and production contract, the peanut contract sets out what the producer promises to deliver. The producer receives payments according to the contract terms.

A production contract is usually between a producer and a livestock processor and a feed mill and usually specified quantity and quality. A marketing contract is made between a producer and a sheller, processor or a retail firm.

The peanut contract is a hybrid between the production and marketing contract, Pease says.

The contract gives the producer market security, income stability, access to capital, and improved efficiencies.

For the sheller, the contract affords an assurance of product supply, quality, responsiveness to the market and protection of patented technology.

Under the general provisions of the contract, the peanut farmer promises to deliver a certain amount of Segregation 1 peanuts at a specified time and place. The producer gets paid according to the terms of the contract.

In some cases, peanut contracts have a marketing option. This means the buyer has the option to buy the peanuts.

Another type of peanut marketing agreement covers peanuts not covered by contracts with a sheller or processor. These contracts, through a Cooperative Marketing Association, provide further marketing services for the producer. There are three CMAs in the peanut belt.

With a CMA, the producer delivers and gives title to the peanuts to the CMA. The peanut farmer also gives the authority for the CMA to obtain loans, to pledge and to give liens on any peanuts delivered to the Commodity Credit Corporation as security for any amounts loaned by CCC to the CMA. The producer gives the CMA the sole right to redeem the peanuts held in collateral by the CCC. The producer agrees not to hold the CMA liable for payments in excess of government loan value until the peanuts are sold and patronage dividends have been determined and officially declared.

In return, the CMA makes an advance to the producer based on the marketing assistance loan, provides marketing options of the peanuts and accounts for the proceeds, provides and returns any proceeds, including marketing gains, to the producer upon completion of pool sales of peanuts.

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