1. Contracting: An Overview of Why, When, Where, & the Future PIE 231 by: Joe Parcell Extension Economist University of Missouri - Columbia parcellj@missouri.edu (573) 882-6533

2. What is a Contract? A written or oral agreement between two or more parties involving an enforceable commitment to do or refrain from doing something. Soure: Hall, C., and M. Langemeier. “Contracts as a Risk Management Tool.” Texas Agricultural Experiment Service, Risk Management Education

3. Types of Contracts Marketing contract Bailment production contract –Generally involve the contractor producing some critical genetic trait or trains through seed input. RR soybean Personal Service Contracts –Contractor provides most of the non-land production inputs Seed corn Pool Contracts with Closed Cooperatives –Delivery by producer to a closed (new generation) cooperative jointly owned and operated by a group of producers to add value to the raw product. Equity contribution in proportion to producer’s commitment

4. Types of Contracting Production –Production management contracts –Resource-providing contracts Marketing –Forward price –Delayed or deferred –Basis –Flat price –Hedge to arrive –Quality attributes

5. Production vs. Marketing Contracts Production –Contractor Arranges to have a specific quality and quantity of commodity produced Usually owns the commodity being produced Makes most of the production decisions Marketing –Contractor Buys a known quality and quantity of the commodity for a negotiated price Doesn’t own the commodity until it is delivered Has little influence over production decisions

6. Production vs. Marketing Contracts Production –Contractee (operator) Provides service and other fixed inputs Supplies a small part of total production inputs Usually does not own the commodity Marketing –Contractee (operator) Has a buyer and price for commodity before harvested Supplies and finances nearly all of inputs Owns commodity while being produced

7. Production vs. Marketing Contracts Production –Contractee (operator) Few production decisions Few price or market uncertainties Marketing –Contractee (operator) Makes most of production decisions Assumes nearly all production related risks

9. Relative Price Risk (Percent of Mean Price) source: USDA, ERS, 1999

10. Corn Price Variability (Percent of Mean Price) source: USDA, ERS, 1999

11. To What Extent has Contracting Occurred?

12. Production Contracts source: USDA, ERS, 1997

13. Value of Production - Marketing Contract source: USDA, ERS, 1997

15. Current Level ?????

22. Percent of Acres Planted to VACC by Farm Size (source: University of Illinois)

23. 1998 Allocation of Value Added Contracts source:University of Illinois

24. Reason for Producing VACC source:University of Illinois

25. Producer Involvement source:University of Illinois

26. Importance of Information on VACC source:University of Illinois

27. Investment in Facilities source:University of Illinois

28. What are Elevator Managers Thinking?

29. Elevator Survey Results of IP Importance source: E-Markets, Inc. and Context Consulting

30. Elevator Survey Results source: E-Markets, Inc. and Context Consulting

31. Outlook for Missouri Producers

32. Value vs. Cost of IP Marginal Value = Marginal Cost –The premium paid for the commodity must at least equal the cost of obtaining the premium. –The cost of altering production to not receive a discount must be at most as great as the discount.

33. What are the Demand Drivers and Where will Contracting (IP) occur?