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0706 PD: Dairy heifer contracting fundamentals

Sarah Roth, Jud Heinrichs and Coleen Jones Published on 18 July 2006

The custom heifer industry in the United States continues to grow and develop. An understanding of the importance of a written contract and its components is essential for custom heifer growers and for the dairy producers planning to employ these services.

In the past, agricultural producers tended to shy away from written contracts; for example, in the 2002 Farm Credit Northeast Dairy Farm Summary, only 17 percent of the herds that contracted heifers utilized a contract agreement. In today’s world, contracts are just as necessary in agriculture as they are in any other business.

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The advantages to using a contract far outweigh the disadvantages of having one. When the future of a dairy herd is riding on whether or not heifers are being raised properly, a detailed, written agreement should be considered an essential component of the relationship between the heifer grower and the dairy producer.

The purpose of this [article] is to outline the advantages of utilizing contracts and to describe the components custom heifer growers may want to include in their own contracts. Please note that we are not dispensing legal advice. Everything presented here is meant for educational purposes only.

Advantages of using a written contract
The primary advantage of a written contract is its clear description or outline of each party’s responsibilities. This document specifies what the dairy producer expects of the custom grower (and vice versa) in animal outcomes and economic terms. It’s a document that can be referred to whenever questions arise. Periodic review of the agreement allows each party to refresh their memory as to what their responsibilities are and offers the opportunity to make needed changes.

Signed contracts also provide a form of protection should a disagreement ever result in a lawsuit. If you have the unfortunate experience of having a lawsuit brought against you in relation to your work, a contract can help protect your interests and potentially keep you from experiencing a significant financial loss to the business.

Along the same lines, the terms of a contract specify how and when the agreement can be terminated, thus providing stability for your business. A well-written, comprehensive contract that spells out each party’s responsibilities makes it clear who was negligent or responsible for a certain outcome.

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Types of contracts
There are at least five types of contract agreements commonly used. Each one differs in how charges are calculated and ownership of animals. The one you decide to use will depend on both your preferences and those of the producer you grow for. It may be helpful to discuss contract choice with each client.

1. Full contract
Under a full contract, the producer pays the heifer grower a set fee to raise the animals for a specific length of time. The contract period may be set by the calendar, as in 12 months, or it may depend on animal development, growth stages, breeding age or perhaps calving. This type of contract rewards the grower for returning heifers that meet the contract’s specifications in a timely fashion, and is highly recommended for this reason.

2. Daily charge (per head per day)
This type of contract charges the dairy producer a set amount per day for each animal. The longer the animal remains in the grower’s care, the more the producer pays in total. This type of contract rewards the grower for low rates of gain and keeping heifers longer than needed. This option should include specific growth parameters listed in the contract to keep heifers on track with an appropriate growth regimen.

3. Per pound of gain
Gain-based contracts charge a set fee for each pound of weight gain that the animal has while in the grower’s care. This requires the grower to handle each animal several times to measure weight. This type of contract is not recommended for dairy heifers unless it also specifies a corresponding measure of structural growth, such as withers height or hip height. Merely having a set level of bodyweight does not constitute good growth for the dairy heifer and encourages the grower to raise fat heifers.

4. Feed plus yardage
Under this payment option, the producer pays for the cost of feed plus an additional set charge to cover all other expenses such as labor, overhead and management. Thus, feed becomes a variable expense, changing as the animal eats more or more expensive feeds are provided. Since feed is the largest component of raising a heifer, and often quite variable from year to year, this type of contract may be logical in some instances. However, this option may encourage the use of cheap feeds at the expense of heifer performance.

5. Sell and buy back
With a sell and buy back agreement, the producer sells young heifers to the grower with the option to repurchase animals prior to calving. Ownership of the heifers is transferred to the grower. This arrangement completely relieves the dairy producer of any liability related to the animal; however, they also completely give up control of any decisions related to the care of the heifers.

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Contract contents
Some of the items that should be addressed in a written contract for custom heifer growing services are outlined in the following sections. These items can be grouped into the following five categories:

1. Time period

•Time frame
You and each producer you will be raising heifers for will need to agree on the age of animals’ maturity at which they come and go from your operation. This will be determined mostly by your skills, the type of facilities you have, the type of feeds you are able to provide and the specific needs of the producer.

2. Billing and payment

•Payment calculation
Once a contract type has been chosen, make sure to clearly spell out how charges will be calculated. If you use any type of formula, it may be a good idea to include that in the contract. Everyone signing the contract needs to understand how payment amounts are calculated.

•Payment method and timing
Determine how and when payments will be made. Do you want to be paid by cash, check or is some sort of barter acceptable? When do you want to be paid? There are many options, including weekly, biweekly, monthly and half up front and half when heifers return to the producer. Before you decide, analyze your expected costs and cash flow. You want to make sure you are receiving payments often enough to cash flow your business and meet your family’s living expenses.

•Nonpayment
You should also include in the contract how nonpayments will be handled. Perhaps there will be a period of time after the payment due date where the producer can still pay without incurring a penalty. If nonpayment is a recurring problem or payments are routinely months late, you may want to incorporate a penalty charge into your fee structure. For producers who still do not pay for your services, you may need to specify the option to take over ownership of the number of animals that will satisfy your bill.

•Last payment
Determine a procedure for obtaining last payments after the contract is terminated. Perhaps you will want to refrain from returning a number of animals valued at the payment amount until payment is made. Decide the date payment is due when the decision is made to terminate the contract.

3. Responsibilities

•Entrance requirements
Establish standards for animals entering your facility and criteria for rejecting animals if need be. Some items to consider include: health status, vaccination history and previous performance. Decide if and how you will alter your charges or performance standards for animals that fail to meet entrance requirements.

•Performance and quality standards
Determine what the producer’s standards are for animal performance. Where do heifers need to be in respect to age, weight, structural growth, body condition and reproductive status when they return to the home farm? Spell out how agreed-upon performance standards will be measured and how often.

•Monitoring and reporting
Once performance and quality standards have been set, a procedure for monitoring and reporting heifer performance should be determined. For instance, will you need to weigh and measure height monthly? How and when will you report progress to the producer? Is a simple phone call or e-mail assuring them of satisfactory progress sufficient? Perhaps they would rather receive a detailed report on each animal indicating how well they meet performance standards as well as all health procedures, such as vaccinations, that have been performed.

Reporting should also include death losses and major health events where a veterinarian has been called in or an animal suffers a problem that has long-term implications.

Reports need to be made periodically, at least quarterly, if not monthly. One possibility is to send reports with billing statements and use the time interval dictated by billing.

•Health practices
Do you have a health protocol that will be followed for all animals in your care or will you customize health care to each producer’s preferences? Whose veterinarian will be employed, yours or the producer’s? You may also want to include in the contract who performs what health practices and who pays the veterinarian bills.

•Breeding
Who is responsible for seeing that the heifer is bred? What bulls will be used and what mating programs will be employed? Who pays for breeding and semen? Also, how many times will heifers be inseminated before it is determined they cannot be bred?

•Death losses
Acceptable levels of loss and who will incur the loss when deaths occur need to be specified. This, in part, is determined by the type of contract that is in effect.

•Transportation
Identify how, how often and by whom animals will be transported to and from the producer’s farm.

•Animal identification
If you are raising heifers for more than one producer, you will need to think about how animals belonging to one producer will be distinguished from those belonging to the others. Decide how animals will be identified and who will be responsible for record keeping.

•Animal nonperformance
Who will determine whether heifers are meeting performance standards? If an animal is not making the grade, who will decide whether the heifer should be removed from the herd or if the contract should be terminated? If heifers are sold, how will the proceeds be distributed?

•Reassignment of duties
Consider what would happen if you suffer a long-term illness, become injured, disabled or die. Is there someone who could step into your place and take over management of the business and care of the animals? If you have a plan to cover these incidences, discuss them with each producer to make sure they agree with your plans, and then write them into the contract.

•Insurance
Whose insurance covers the loss and liability of the animals while they are being raised by the contract grower?

Again, this in part is determined by the type of contract in effect.

3. Amendments, renegotiations and renewal

•Arbitration
Arbitration procedures should be written into the contract to solve disagreements that cannot be settled quickly and easily. This may include how mediators will be chosen and how long arbitration will last.

•Renegotiation
Guidelines for renegotiation of contract components should be spelled out, too. If renegotiation of responsibilities is to occur, you may want to make this part of the renewal process. Fees and charges may also need to be renegotiated from time to time. If you feel markets are volatile, you may want to renegotiate fees more often.

•Contract renewal
Included in the contract should be start and end dates (contract length), as well as when negotiations for renewal of the contract will take place. The renewal process should begin far enough in advance of the current contract’s ending date to allow for other arrangements in case it is determined that renewal should not be pursued.

5. Termination

•Contract termination
Contract termination can sometimes be a painful process. However, if the heifer-raising partnership is not working successfully for either party, it is best to have a mechanism in place to allow for the contract to end before business success or relationships are endangered. In cases of contract termination, refer to your procedure for last payments.

Summary
Contracting is a necessary part of doing business. As a heifer grower, the first step to successfully employing the use of contracts is learning the pieces that should be written into one. This [article] has listed the components for a comprehensive contract and should assist you in developing your own contract. PD

References omitted due to space but are available upon request.

—From Penn State University

Sarah Roth, Jud Heinrichs and Coleen Jones; Department of Dairy and Animal Science; Pennsylvania State University

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