Economic 

Information 

Bulletin

Number 9

United States 

Department 

of Agriculture 

Economic 

Research 

Service 

James M. MacDonald

Penni Korb

Electronic

Report

Agricultural Contracting Update

Contracts in 2003
www.ers.usda.gov

Want to learn more about agricultural contracting? Visit 

our website at www.ers.usda.gov.

You can also find additional information about ERS 

publications, databases, and other products at our 

website.

Visit Our Website To Learn More!

National Agricultural Library

Cataloging Record:

The U.S. Department of Agriculture (USDA) prohibits discrimination in all its programs 

and activities on the basis of race, color, national origin, sex, religion, age, disability, 

political beliefs, sexual orientation, or marital or family status. (Not all prohibited bases 

apply to all programs.) Persons with disabilities who require alternative means for 

communication of program information (Braille, large print, audiotape, etc.) should 

contact USDA's TARGET Center at (202) 720-2600 (voice and TDD). 

To file a complaint of discrimination, write USDA, Director, Office of Civil Rights, Room 

326-W, Whitten Building, 14th and Independence Ave., SW, Washington, DC 

20250-9410, or call (202) 720-5964 (voice and TDD). USDA is an equal opportunity 

provider and employer. 

MacDonald, James M.

 Agricultural contracting update : contracts in 2003.

 (Economic information bulletin ; no. 9)

 1. Contracts, Agricultural--United States.

 2. Farm produce--Marketing--United States. 

 3. Farm produce--Prices--United States.

 4. Industrial organization (Economic theory)

 I. Korb, Penelope.

 II. United States. Dept. of Agriculture. Economic 

Research Service.
United States

Department

of Agriculture

www.ers.usda.gov

Electronic Report from the Economic Research Service

Economic

Information

Bulletin No. 9 Agricultural Contracting Update:

Contracts in 2003

James M. MacDonald

Penni Korb

January 2006

Abstract

Marketing and production contracts covered 39 percent of the value of U.S. agricultural

production in 2003, up from 36 percent in 2001 and a substantial increase over estimated values of 28 percent for 1991 and 11 percent in 1969. Large farms are far more

likely to contract than small farms; in fact, contracts cover over half of the value of

production from farms with at least $1 million in sales. Although use of both production

and marketing contracts has grown over time, growth is more rapid for production

contracts, which are largely used for livestock. 

Keywords: contracts, contracting, marketing contracts, production contracts, vertical

integration, vertical coordination, market structure, risk analysis, price signals

Acknowledgments

Thanks go to our reviewers—Michael Sykuta, University of Missouri; Kyle Stiegert,

University of Wisconsin; Alphonso Drain, USDA’s National Agricultural Statistics

Service; Warren Preston, USDA’s Agricultural Marketing Service; Gary McBryde and

Martin Johnson, USDA’s Grain Inspection, Packers, and Stockyards Administration; and

Mitch Morehart and Jet Yee, USDA’s Economic Research Service. Our editor was 

John Weber, and Cynthia A. Ray prepared the document for publication.
Contents

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

What Are Agricultural Contracts? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Data on Contracting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Other USDA sources for data on agricultural contracts . . . . . . . . . . . . . 7

How Contracting Has Grown . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Contracts cover a growing volume of production . . . . . . . . . . . . . . . . . . 8

Contracts and commodities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Prices, Fees, and Terms in Agricultural Contracts . . . . . . . . . . . . . . . . 16

Marketing contracts for field crops . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Production contracts for broilers and hogs . . . . . . . . . . . . . . . . . . . . . . . 18

Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Appendix: Contract Questions in the 2003 ARMS Survey . . . . . . . . . 24

2

Agricultural Contracting Update: Contracts in 2003 / EIB-9

Economic Research Service/USDA
Summary

Spot market exchanges in which commodities are bought and sold for

immediate delivery continue to govern most transactions for U.S. agricultural products. But a growing share of farm product transactions are organized through agricultural contracts, agreements between farmers and their

buyers that are reached prior to harvest (or before the completion of a

production stage in the case of livestock) and which govern the terms under

which products are transferred from the farm. Contracts provide much

closer links between farmers and specific buyers and may give the

contractor/buyer greater control over agricultural production decisions. 

Increased reliance on contracting is one important feature of ongoing structural change in U.S. agriculture and is closely tied to other features of structural change, including shifts of production to larger farms, increased

specialization on farms, and greater product differentiation. Contracts can

ease the production and marketing of more specialized product varieties,

and can help create lower costs and increased efficiency throughout the food

marketing system. They may also reduce risks for farmers and ease access

to credit. But contracts reduce farmers’ autonomy, and they may harm the

efficacy of some spot market institutions that are used for both spot market

and contract transactions. 

What is the issue?

Contract usage features prominently in several policy issues, including the

survival of family farms, the effects of processor concentration on farm

financial performance, and the regulation of excess nutrients from large livestock operations. Despite this prominent role, little is known about basic

issues related to agricultural contracting, such as who uses contracts, how

usage has changed over time, what prices are received under contract

production, or how features of specific contracts have evolved. 

What did the study find?

Contracts covered 39 percent of the value of U.S. agricultural production in

2003, up from 36 percent in 2001. Over the long term, contracting shows a

strong upward trend—contracting covered 11 percent of the value of

production in 1969 and 28 percent in 1991. While contracting appears to be

growing steadily in the aggregate, growth varies within regions and among

certain commodities. Recent increases in contracting are concentrated in

hog, tobacco, cotton, and rice production.

Contracting is closely tied to farm size. Contracts covered just one-fifth of

production among farms with less than $250,000 in sales, and over half (53

percent) of production on the largest farms, those with over $1 million in

sales. Moreover, contracting increased among the largest farms between

2001 and 2003, but held steady or declined among smaller farms. Increases

in contracting mirror increased volumes of production among large farms.

Our data distinguish between marketing contracts, which are used to set

prices and determine market outlets for commodities produced under a

3

Agricultural Contracting Update: Contracts in 2003 / EIB-9

Economic Research Service/USDA
farmer’s direct control, and production contracts, which compensate farmers

for the service of producing commodities for a contractor, with many inputs

provided by the contractor. 

Mean prices received by farmers with marketing contracts exceeded mean

prices received by noncontract farmers for corn (3 percent), cotton (19

percent) and rice (62 percent) and matched mean noncontract prices for

soybeans and wheat. Some of the price advantage to contracts may reflect

price premia paid for specialized varieties, and some may reflect timely

marketing decisions. In cotton and rice production, the data show a shift

toward greater reliance on marketing pools, in which the contractor assumes

responsibility for marketing the crop committed by a pool of producers.

Production contracts, which are used most commonly on hog and poultry

operations, commit farmers to substantial investments in large-scale production, and tie farmers and contractors together in long-term relationships.

Despite the substantial investment, the contracts themselves tend to be of

short duration—for example, two-thirds of contract broiler production

occurs under contracts with a duration of 1 year or less.

How was the study conducted?

The study relies on data obtained from the 2003 Agricultural Resource and

Management Survey (ARMS), USDA’s primary source of information on

the financial condition, production practices, resource use, and economic

well-being of U.S. farm households. Some farms receive a core version of

the survey, distributed by mail, while others complete longer versions

through personal interviews with trained enumerators. Each version asks

farmers about the use of production or marketing contracts and the volume

of production, receipts, and unit prices or fees received for each commodity

under contract. The longer version includes more detailed questions on

contractors, contract terms, and alternatives available to farmers. The survey

also includes questions about the farm business and the farm operator’s

household, which allows for a comparison of different types of farms.

This bulletin follows a more comprehensive ERS report that relied on data

through 2001: Contracts, Markets, and Prices: Organizing the Production

and Use of Agricultural Commodities (Agricultural Economic Report No.

837, November 2004). The current study updates the information in that

report with 2003 ARMS data and also exploits survey questions to explore

recent developments in contract terms.

4

Agricultural Contracting Update: Contracts in 2003 / EIB-9

Economic Research Service/USDA
What Are Agricultural Contracts?

Formal contractual arrangements cover a growing share of U.S. agricultural

production and are increasingly employed on large commercial farms.

Increased reliance on contracting is closely tied to other features of ongoing

structural change in agriculture, including shifts of production to larger

farms, increased specialization on farms, and greater product differentiation.

USDA’s Economic Research Service (ERS) analyzes the use of contracting

and related developments in agriculture. This bulletin follows a more

comprehensive ERS report on agricultural contracting that relied on data

through 2001.1 It uses data gathered in USDA’s 2003 Agricultural Resource

Management Survey (ARMS) to update information in the previous report

and exploits new survey questions to explore recent developments in

contract terms. 

Economists commonly distinguish three broad methods for organizing the

transfer of commodities from farms to the next stages of food production:

spot markets, vertical integration, and contracts. Spot (or cash) markets

provide the traditional means of transferring products and determining

prices in agriculture. In spot markets, producers are paid for their products

at the time ownership is transferred off the farm, with prices based on

prevailing market prices at the time of sale, under agreements reached at or

after harvest. Buyers may pay premiums for products of superior quality,

based on factors observable or agreed to at the time of sale. Farm operators

participating in spot markets control production decisions, such as the types

of farm inputs to buy, as well as when and how to apply them. Operators

also make financing decisions (often in concert with their bankers) and

arrange for selling their products, including finding a seller, determining a

price, and delivering the product. Spot market exchanges continue to govern

most transactions for farm products.

Product transfers could also be organized through vertical integration,

which combines the farm and downstream users of a commodity under

single ownership. For example, many wineries own and operate vineyards,

while citrus processors may own and operate orange groves. Meatpackers

may own hog farms or cattle feedlots, and dairy farmers may choose to

purchase feed or integrate the production of feed onfarm. Under vertical

integration, markets do not determine commodity prices, and internal decisions drive product transfer. Farm operators in vertically integrated firms are

employees of much larger organizations. Vertical integration that links farms

with processors or retailers is still relatively uncommon. 

More and more, farm product transactions are organized through agricultural contracts, agreements between farmers and buyers that are reached

prior to harvest (or before the completion of a production stage, as in the

case of livestock), and which govern the terms under which products are

transferred from the farm. Contracts provide for much closer linkages

between farmers and specific buyers than other methods of transfer and may

provide the contractor/buyer with greater control of agricultural production

decisions. 

1MacDonald et al. (November

2004). 

5

Agricultural Contracting Update: Contracts in 2003 / EIB-9

Economic Research Service/USDA
ERS distinguishes between two types of agricultural contracts—production

contracts and marketing contracts. Under a production contract, the farmer

provides a set of services to the contractor, who usually owns the

commodity while it is being produced. The contract specifies the services

to be provided by the farmer, the manner in which the farmer is to be

compensated for the services, and specific contractor responsibilities for

provision of inputs. For example, the farmer provides labor, equipment, and

housing under many livestock production contracts, while the contractor

provides other inputs, such as feed, veterinary and livestock transportation

services, and young animals. The farmer’s payment is based on the costs of

farmer-provided inputs, the quantity of production, or both, and usually

resembles a fee paid for the specific services provided by the farmer,

instead of a payment for the market value of the product (because the

contractor-provided inputs may account for a large share of production

costs, the fee paid to the farmer may be a small fraction of the

commodity’s value). Under such contracts, farmers often cede substantial

control over production decisions to contractors. Because of the nature of

the agreement, farmers and contractors agree upon the terms of production

contracts before production begins. 

Marketing contracts focus on the commodity as it is delivered to the

contractor, rather than on the services provided by the farmer. They specify

a commodity’s price or a mechanism for determining the price, a delivery

outlet, and a quantity to be delivered. The parties in a marketing contract

agree to its terms before harvest or, for livestock, before removal. The

pricing mechanisms may limit a farmer’s exposure to the risks of wide fluctuations in market prices, and they often specify price premiums to be paid

for commodities with desired levels of specified attributes (such as oil

content in corn, or leanness in hogs).2 The farmer owns the commodity

during production and retains substantial control over major management

decisions, with limited direction from the contractor, and hence retains more

autonomy of decisionmaking than is available under production contracts.

2Some crop marketing contracts tie

input purchases and commodity delivery by setting price and delivery

schedules for specified seed and chemical inputs, as well as prices and outlets for harvested crops. 

6

Agricultural Contracting Update: Contracts in 2003 / EIB-9

Economic Research Service/USDA
Data on Contracting

For this study, ERS relied on data from the 2003 Agricultural Resource and

Management Survey (ARMS). Conducted annually, ARMS provides information on a stratified random sample of U.S. farms and is USDA’s primary

source of information on the financial condition, production practices,

resource use, and economic well-being of U.S. farm households. Some

farms complete a core version of the survey, distributed and returned by

mail, while others complete longer versions through personal interviews

with trained enumerators. Each version asks farmers about the use of

production or marketing contracts, and the volume of production, receipts,

and unit prices or fees received for each commodity under contract.3 The

longer version includes more detailed questions on contractors, contract

terms, and alternatives available to farmers. The detailed questions, and the

short versions of those questions used in some of the tables in this report,

are provided in the appendix. The annual nature of ARMS enables ERS to

compare survey data across years, as well as against data provided in the

predecessor to ARMS, the Farm Costs and Returns Survey (FCRS), which

provides contracting information from 1991 to 1995. For a longer term

view, ERS drew upon information gathered in the 1970 Census of Agriculture. Further information on ARMS, including downloadable questionnaires,

can be found at www.ers.usda.gov/Briefing/ARMS/. 

Other USDA sources for data on 

agricultural contracts

USDA’s Grain Inspection, Packers and Stockyards Administration provides

annual data on packer procurement methods for fed cattle, hogs, and lambs

through its annual Statistical Reports and through industry studies

(www.usda.gov/gipsa/). USDA’s Agricultural Marketing Service provides

data on the characteristics of livestock transactions between producers and

packers, organized by transaction type and on daily, weekly, monthly, and

annual bases. The data are derived from the agency’s Price Reporting

program (http://www.ams.usda.gov/LSMNpubs/index.htm and

http://mpr.datamart.ams.usda.gov/menu.do). Finally, USDA’s National Agricultural Statistics Service (NASS), which administers the ARMS program in

partnership with ERS, also reports data on production contract use, by

commodity, in the quinquennial Census of Agriculture

(http://www.nass.usda.gov/census/).

3The decision to specify only two

types of contracts is influenced by

pragmatic considerations of survey

design—how to ask questions that a

broad cross-section of producers will

understand, and that conform to other

USDA surveys, in a limited space.

However, we believe that the production-marketing distinction is a powerful one, and so far have not found

another two-way classification, or any

third general category, to be a compelling alternative.

7

Agricultural Contracting Update: Contracts in 2003 / EIB-9

Economic Research Service/USDA
How Contracting Has Grown

ERS used data from ARMS and the Census of Agriculture to trace the

growth of contracting, to show how the use of contracts varies among

commodities and regions, and to show the types of farms that use contracts.4

Contracts cover a growing volume 

of production

Agricultural contracts covered 39 percent of the value of agricultural

production in 2003, up from 36 percent in 2001 (fig. 1). Over short periods

covering a few years, this share may fluctuate.5 But over longer periods,

contracting shows a strong upward trend—contracting covered 28 percent of

the value of production in 1991 and 11 percent in 1969.

A simple three-way classification of commercial, intermediate, and rural

residence farms helps show how the use of contracts varies among different

farm types. Commercial farms include family-operated farms with gross

sales in excess of $250,000 and all nonfamily farms, which can be cooperatives, nonfamily corporations, or family-owned farms operated by a hired

manager. Intermediate farms have sales below $250,000 and operators who

report farming as their major occupation, but the category excludes limitedresource farms.6 Most farms in the United States are rural residence

farms—family-operated farms with sales below $250,000 whose operators

report that they are retired or that their primary occupation is not farming, as

well as limited resource farms.

Commercial farms exhibited most of the growth in contracting from 2001 to

2003. Contract sales accounted for almost 47 percent of the total value of

production on commercial farms in 2003, and commercial farms, in turn,

handled almost 87 percent of the total U.S. value of production under

contract (table 1). More commercial farms held contracts in 2003 than in

2001, and the share of their production under contract rose as well, by over

4 percentage points (we define farm sales classes in constant 2003 dollars,

4Because this bulletin is aimed at a

broad audience, we do not include tests

of statistical significance. However, in

all cases in which we state that one

measure is larger than another, either in

cross-section or over time, statistical

tests support the assertion at a 95-percent level of confidence.

5Contracting is more prevalent in

some commodities, like sugar beets

and hogs, than in others, like corn and

wheat. In years of relatively high corn

and wheat production and relatively

low sugar beet and poultry production,

contracting’s share of total production

falls. In addition, our ARMS data are

drawn from random samples of farms,

and hence contain sampling errors in

estimates of contracting’s share.

6Limited-resource farms had gross

farm sales of less than $100,000 in

2003 and total operator household

income that fell below specified

thresholds in 2003 and 2002.

8

Agricultural Contracting Update: Contracts in 2003 / EIB-9

Economic Research Service/USDA

Figure 1

Expansion of agricultural contracting, 1969-2003

Percent

Source: Compiled by USDA’s Economic Research Service using data from the 1991 Farm 

Costs and Returns Survey, the 2001 and 2003 Agricultural Resource Management Survey, 

and the Census of Agriculture.

Farms with contracts

Value of production under contract

0

5

10

15

20

25

30

35

40

45

1969 1991 2001 2003

Ag. Census data

FCRS/ARMS data
and adjust for inflation using the USDA/NASS index of prices received for

farm products). In contrast, fewer rural residence and intermediate farms

contracted in 2003 than in 2001, and the share of their value of production

under contract also fell.

Contracting is closely tied to farm size (table 2). Nearly two-thirds of the

largest farms (those with at least $1 million in sales) used contracts in 2003,

while considerably fewer small farms used them. Contracts covered just

one-fifth of production among small farms (those with less than $250,000 in

sales) and over half of production on the largest farms. Moreover,

contracting increased among the largest farms between 2001 and 2003, but

held steady or declined among smaller farms. 

9

Agricultural Contracting Update: Contracts in 2003 / EIB-9

Economic Research Service/USDA

Table 1

Share of farms using contracts and share of value produced under contract by typology, 2001 and 2003

Farm typology

Item Rural residence farms Intermediate farms Commercial farms 48-State total

Contract share within each category (percent)

Farms with contracts, 2001 3.6 16.0 41.7 11.0

Farms with contracts, 2003 3.4 13.5 46.7 9.6

Production value under contract, 2001 13.3 24.2 42.2 36.4

Production value under contract, 2003 11.6 22.5 46.6 39.1

Share of each category in all contracts (percent)

Farms with contracts, 2001 19.6 44.6 35.8 100.0

Farms with contracts, 2003 23.9 33.3 42.9 100.0

Production value under contract, 2001 2.3 14.4 83.2 100.0

Production value under contract, 2003 2.4 10.9 86.7 100.0

Source: Compiled by USDA’s Economic Research Service, using data from the 2001 and 2003 USDA Agricultural Resource 

Management Survey.

Table 2

Contracting among commercial farms, 2001 and 2003

Farms with contracts Value of production under contract

Farm size (gross sales) 2001 2003 2001 2003

Percent

Less than $250,000 7.7 6.2 19.1 19.9

$250,000-$499,999 47.9 43.5 31.2 31.3

$500,000-$999,999 60.9 59.1 45.7 42.6

$1 million or more 61.5 64.2 46.6 53.4

Note: All farm size class cutoffs are adjusted for inflation (in 2003 dollars) using the USDA/NASS index of prices received by farmers.

Source: Compiled by USDA’s Economic Research Service using data from the 2001 and 2003 USDA Agricultural Resource Management

Survey.
ERS also examined marketing and production contracts separately,

combining earlier years to expand sample sizes and smooth out some

random fluctuations (table 3).7 In 2003, more farms used marketing

contracts than production contracts, and marketing contracts covered a

greater share of agricultural output. However, coverage by production

contracts has increased significantly since 1991-93, and this shift was driven

by expansion at commercial farms with at least $500,000 in sales. The

growth in use of production contracts primarily reflects the expansion of

poultry production (where production contracts are the typical form of

governance) and the expansion of production contracting in the hog sector. 

7As a result of expanded funding,

the 2003 ARMS has a much larger

sample than earlier surveys.

10

Agricultural Contracting Update: Contracts in 2003 / EIB-9

Economic Research Service/USDA

Table 3

Share of farms using contracts and share of value produced under contract, 1991-2003

Item 1991-93 1994-95 1996-97 1998-2000 2001-02 2003

Percent

Share of farms with contracts:

Any contracts 10.1 13.0 12.1 10.6 11.2 9.6 

Marketing contracts 8.2 10.8 10.2 8.4 9.0 7.8 

Crop 6.6 8.0 8.3 6.5 7.4 6.2 

Livestock 1.6 3.0 2.0 2.0 1.6 1.6 

Production contracts 2.1 2.4 2.2 2.5 2.6 2.1 

Crop 0.6 0.7 0.6 0.6 0.5 0.4 

Livestock 1.6 1.7 1.6 1.9 2.1 1.7 

Share of production under contract:

Any contracts 28.9 34.2 32.1 37.3 37.8 39.1 

Marketing contracts 17.0 21.2 21.5 20.4 19.7 21.7 

Crop 11.0 12.2 12.2 11.3 12.7 14.8 

Livestock 6.0 8.9 9.2 9.1 7.1 6.9 

Production contracts 11.8 13.0 10.6 16.9 18.0 17.5 

Crop 0.9 1.0 1.0 2.1 1.6 0.6 

Livestock 10.9 12.1 9.6 14.7 16.5 16.9 

Share of farms in class with production 

contracts:

$249,999 or less 1.2 1.5 1.2 1.1 1.0 0.8 

$250,000 to $499,999 14.2 10.1 11.5 11.9 12.0 11.8 

$500,000 to $999,999 21.9 20.8 20.9 27.6 31.3 23.6 

$1 million or more 17.7 27.6 23.0 31.0 34.9 31.1 

Share of production value under production 

contract in class:

$249,999 or less 2.8 3.5 2.4 3.0 2.6 2.2 

$250,000 to $499,999 11.7 8.6 8.4 8.7 10.1 9.8 

$500,000 to $999,999 18.9 18.3 16.6 23.9 28.3 20.7 

$1 million or more 22.8 25.4 19.2 28.3 27.6 29.1 

Share of farms in class with marketing 

contracts:

$249,999 or less 6.6 8.9 7.8 6.0 6.8 5.5 

$250,000 to $499,999 29.1 36.6 39.3 35.2 34.1 33.2 

$500,000 to $999,999 34.8 40.7 45.5 37.4 33.8 38.4 

$1 million or more 40.0 38.2 48.0 39.8 35.2 37.7 

Share of production value under marketing

contract in class:

$249,999 or less 11.8 15.2 16.0 13.0 16.2 17.7 

$250,000 to $499,999 15.9 19.8 17.0 20.5 18.0 21.5 

$500,000 to $999,999 19.6 25.7 25.4 21.5 18.6 21.9 

$1 million or more 24.9 27.5 29.1 25.8 23.2 24.2 

Note: All farm size class cutoffs are adjusted for inflation (in 2003 dollars) using the USDA/NASS index of prices received by farmers.

Source: Compiled by USDA’s Economic Research Service using data from the 1991, 1994, 1996, 1998, 2001, and 2003 USDA Farm Costs and

Returns Survey/Agricultural Resource Management Survey.
Contracts and commodities

Contract use varies widely across commodities. In the aggregate, contracts

in 2003 covered 47 percent of livestock production, up from 33 percent in

1991-93, and 31 percent of crop production, up from 25 percent in 1991-93

(table 4). Among livestock commodities, contracts cover nearly 90 percent

of poultry and egg production (and vertical integration likely covers most of

the rest), as well as more than half of dairy and hog production. Since 1991-

93, contract coverage grew sharply in hog production and showed some

modest growth in cattle production (driven by sharper increases in the fed

cattle part of the cattle sector).

Among crop commodities, contract coverage in 2003 ranges from only 8

percent of wheat production and 14 percent of corn and soybean production,

to over half of rice, peanut, tobacco, and cotton production, to nearly all of

sugar beet production. Over the long term, the increase in contract coverage

for all crop production between 1991-93 and 2003 reflects sharp increases

in contract share for cotton, rice, tobacco, and “other crops,” with very little

change in share for fruits, vegetables, peanuts, sugar beets, corn, soybeans,

and wheat.8

In crop production, marketing contracts are far more prevalent than production contracts—marketing contracts covered 30 percent of crop production

in 2003, while production contracts covered only 1 percent (table 5).

Production contracts show significant coverage only in vegetable production, though marketing contracts still dominate that category with 85 percent

of contract production. 

8The category “other crops”

includes many commodities; the

largest, in terms of production value,

include popcorn, field seeds, mushrooms, sunflowers, hops, flax,

peppermint, and lentils.

11

Agricultural Contracting Update: Contracts in 2003 / EIB-9

Economic Research Service/USDA

Table 4

Distribution of the contract share of U.S. agricultural production by commodity and year, 1991-2003

Item 1991-93 1994-95 1996-97 1998-2000 2001-02 2003

Percent of production value under contract

All commodities 28.9 34.2 32.1 37.3 37.8 39.1

Crops 24.7 25.8 22.9 26.7 27.8 30.8

Corn 11.4 13.9 13.0 12.9 14.8 14.3

Soybeans 10.1 10.0 13.5 10.3 9.6 14.0

Wheat 5.9 6.2 9.1 7.0 6.5 7.6

Sugar beets 91.1 83.7 75.1 89.0 96.7 95.5

Rice 19.7 25.2 25.8 30.5 38.7 51.8

Peanuts 47.5 58.3 34.2 45.0 27.9 53.3

Tobacco 0.3 0.6 0.3 1.9 52.6 54.8

Cotton 30.4 44.5 33.8 42.9 52.6 51.4

Fruit na 64.2 56.8 65.4 62.2 68.1

Vegetables na 55.0 38.5 39.7 42.1 42.7

Other crops 7.8 15.9 23.8 33.6 39.1 45.9

Livestock 32.8 42.9 44.8 48.0 48.3 47.4

Cattle na 19.0 17.0 24.3 21.1 28.9

Hogs na 31.1 34.2 55.1 62.6 57.3

Poultry and eggs 88.7 84.6 84.1 88.8 92.3 88.2

Dairy 36.8 56.7 58.2 53.6 48.7 50.6

Other livestock 0.2 9.3 4.9 10.9 9.0 7.6

Note: na indicates value is not available due to no observations, an undefined statistic, or reliability concerns.

Source: Compiled by USDA’s Economic Research Service using data from the 1991, 1994, 1996, 1998, 2001, and 2003 USDA Farm Costs

and Returns Survey/Agricultural Resource Management Survey.
Production contracts are more prevalent among livestock producers, while

dairy farms are the major users of marketing contracts, representing over

half of dairy production value in 2003. Hogs and fed cattle are the only

sectors that extensively combine marketing and production contracts. In hog

production, integrators (who often may themselves be farmers) typically

arrange with farmers to grow hogs for them under production contracts, and

they may also maintain marketing contracts with packing plants.9 Independent hog producers may also hold marketing contracts with meatpackers,

9“Integrators” coordinate two or

more stages of production (the term is

used most frequently in hog and poultry

production). They contract with farmers

to grow market hogs, broilers, or

turkeys. They provide feed and young

poultry or pigs to those growers from

facilities that they operate or with

whom they have contracts, and they

arrange for processing, again at facilities that they operate or contract. 

12

Agricultural Contracting Update: Contracts in 2003 / EIB-9

Economic Research Service/USDA

Table 5

Distribution of the contract share of U.S. agricultural production by commodity, contract type,

and year, 1991-2003

Item 1991-93 1994-95 1996-97 1998-2000 2001-02 2003

Percent of production value

Commodities produced under 

marketing contract 

All commodities 17.0 21.2 21.5 20.4 19.7 21.7

Crops 22.8 24.0 21.1 22.5 24.7 29.7

Corn 10.2 13.8 12.9 12.6 14.7 13.8

Soybeans 9.6 9.8 13.2 9.7 9.5 13.6

Wheat 5.8 6.2 9.0 6.9 6.4 7.5

Sugar beets 88.5 83.7 74.6 83.1 95.8 95.1

Rice 19.7 25.2 25.8 30.5 38.6 51.8

Peanuts 45.2 58.3 34.2 44.9 27.9 53.3

Tobacco 0.3 0.6 0.3 1.9 52.6 54.8

Cotton 30.4 44.4 33.8 42.9 52.6 50.9

Fruit na 61.0 54.3 63.3 60.1 67.2

Vegetables na 45.3 32.3 27.3 31.5 36.4

Other crops 6.3 14.0 18.7 21.2 30.9 44.7

Livestock 11.6 18.2 22.0 18.4 14.5 13.7

Cattle na 4.3 5.9 4.6 2.7 3.4

Hogs na 2.4 2.7 9.1 6.1 6.8

Poultry and eggs 5.9 3.4 4.0 3.9 4.2 1.1

Dairy 36.6 56.7 58.0 53.4 48.0 50.5

Other livestock 0.1 6.8 4.9 10.7 3.5 7.4

Commodities produced under 

production contract 

All commodities 11.8 13.0 10.6 16.9 18.0 17.5

Crops 1.9 1.9 1.8 4.2 3.1 1.1

Vegetables na 9.7 6.1 12.4 10.6 6.3

Livestock 21.1 24.7 22.9 29.6 33.8 33.7

Cattle na 14.7 11.1 19.7 18.3 25.4

Hogs na 28.7 31.5 46.0 56.5 50.4

Poultry and eggs 82.8 81.2 80.1 84.9 88.1 87.2

Dairy 0.2 na 0.1 0.2 0.7 0.1

Other livestock 0.1 2.6 na na 5.5 na

Note. na indicates value is not available due to no observations, an undefined statistic, or reliability concerns.

Source: Compiled by USDA’s Economic Research Service using data from the 1991, 1994, 1996, 1998, 2001, and 2003

USDA Farm Costs and Returns Survey/Agricultural Resource Management Survey.
which likely helps account for the growth in hog marketing contracts.10 In

fed cattle production, feedlots frequently feed cattle under a production

contract with cattle owners and may rely on marketing contracts or spot

markets to govern sales to meatpackers.11

Since 1991-93, the mix of agricultural production under contract has remained

steady at about 60 percent livestock and 40 percent crops. Over the same

period, however, marketing contracts have fallen as a share of all contract

production, from 59 percent in 1991-93 to 55 percent in 2003 (table 6). 

The use of contracting can vary sharply across regions (figs. 2 and 3). For

example, contracts covered 89 percent of rice production in the Fruitful Rim

in 2003, up from 78 percent in 2001-02 and 41 percent 10 years earlier. In

contrast, contracts covered a much smaller share (16 percent) of rice

production in the Mississippi Portal in 2003, with no clear growth over

recent years. Contracting covered 85 percent of tobacco production in the

Mississippi Portal in 2003, but only half in the Southern Seaboard. Contract

coverage of hog production in the Heartland (41 percent) remains substan13

Agricultural Contracting Update: Contracts in 2003 / EIB-9

Economic Research Service/USDA

Table 6

Share of total contract value by commodity and contract type, 1991-2003

Item 1991-93 1994-95 1996-97 1998-2000 2001-02 2003

Percent of contract value

All contracts:

All commodities 100.0 100.0 100.0 100.0 100.0 100.0

Crops 41.5 38.5 41.3 36.0 37.7 39.2

Corn 3.5 3.9 5.1 3.1 3.5 3.8

Soybeans 2.6 2.3 4.0 2.1 1.8 2.8

Fruit 11.6 10.8 10.5 10.3 9.3 12.3

Vegetables 9.8 10.0 8.1 5.6 6.5 5.9

Livestock 58.5 61.5 58.7 64.0 62.3 60.8

Cattle 18.6 10.2 7.5 12.2 10.2 16.2

Hogs 2.8 5.7 5.0 7.7 10.9 8.4

Poultry and eggs 20.4 23.0 21.3 24.1 25.7 21.8

Dairy 16.6 22.1 24.6 19.3 15.2 14.0

Marketing contracts:

All commodities 59.1 61.9 66.9 54.8 52.2 55.3

Crops 38.3 35.8 38.1 30.3 33.5 37.8

Corn 3.1 3.9 5.1 3.0 3.4 3.6

Soybeans 2.5 2.3 3.9 2.0 1.7 2.7

Fruit 11.2 10.2 10.1 9.9 9.0 12.1

Vegetables 8.3 8.2 6.8 3.9 4.9 5.0

Livestock 20.8 26.1 28.8 24.5 18.7 17.5

Dairy 16.5 22.1 24.5 19.3 15.0 13.9

Production contracts:

All commodities 40.9 38.1 33.1 45.2 47.8 44.7

Crops 3.2 2.8 3.2 5.7 4.2 1.4

Vegetables 1.5 1.8 1.3 1.8 1.6 0.9

Livestock 37.8 35.4 29.9 39.5 43.6 43.2

Cattle 16.1 7.9 4.9 9.9 8.9 14.3

Hogs 2.4 5.2 4.6 6.4 9.8 7.4

Poultry and eggs 19.0 22.1 20.3 23.1 24.5 21.5

Source: Compiled by USDA’s Economic Research Service using data from the 1991, 1994, 1996, 1998, 2001, and 2003

USDA Farm Costs and Returns Survey/Agricultural Resource Management Survey.

10Unless they also operate farms,

integrators are not surveyed by ARMS,

and we cannot capture data on their

marketing contracts. In addition, some

meatpackers operate their own production facilities and organize some hog

production through vertical integration. 

11At the cattle feeding stage, the

“cattle owners” who hold production

contracts constitute a diverse group,

and they may include farmers and

ranchers, meatpackers, and many other

firms and individuals.
14

Agricultural Contracting Update: Contracts in 2003 / EIB-9

Economic Research Service/USDA

Figure 2

U.S. farm resource regions

Fruitful Rim

Prairie Gateway

Eastern Uplands

Mississippi Portal

Northern Great Plains

Northern Crescent

Basin and Range

Southern Seaboard

Heartland

Source: USDA’s Economic Research Service.

Figure 3

Regional differences in contracting 

Share of value of production

Source: Compiled by USDA’s Economic Research Service using data from the 1991 Farm Costs and Returns Survey, the 2001 and 2003 

Agricultural Resource Management Survey, and the Census of Agriculture.

1991-93

1996-97

0

20

40

60

80

100

120

Mississippi Portal, 

rice

Fruitful Rim, 

rice

Mississippi Portal, 

tobacco

Southern Seaboard, 

tobacco

Heartland,

hogs

Southern Seaboard,

hogs

2001-02

2003

Region, commodity
tially below that in the Southern Seaboard (97 percent). While differences in

specific commodity characteristics may account for some of the regional

differences, it is also likely that regional differences in the number of buyers

and in the design of specific institutions affect contracting. For example, the

Heartland has more packers available to purchase hogs, along with a set of

reporting and marketing institutions to support a spot market, while the

Southern Seaboard has fewer buyers and as a newer production region, a

more limited set of existing institutions. Thus, contracting may have facilitated the expansion of hog production in the Southern Seaboard.

In summary, contracting covers a growing share of U.S. agricultural production, with that share (39 percent) increasing over the long term. Contracting

is concentrated among the largest enterprises, which account for a growing

share of production. While contracting appears to be growing steadily in the

aggregate, sharp jumps are evident within regions and among certain

commodities. 

15

Agricultural Contracting Update: Contracts in 2003 / EIB-9

Economic Research Service/USDA
Prices, Fees, and Terms in 

Agricultural Contracts

The 2003 ARMS included questions on the prices and fees farmers received

under contracts, the process used to determine prices and fees, and contract

terms—the length of time covered under a contract, as well as the quantities

and the set of production tasks farmers commit to under contract.12 The

appendix lists specific questions included in the 2003 survey.

Marketing contracts for field crops

Table 7 summarizes some fundamental characteristics of marketing

contracts and allows for a comparison of contract prices with average

USDA/NASS marketing prices.13 Each of the five selected field crops represented in the table—corn, cotton, rice, soybeans, and wheat—had significant

volumes produced under spot markets and under contract. In 2001, mean

contract prices were above mean USDA/NASS prices for each commodity,

by 6-8 percent for wheat and cotton, 10-12 percent for corn and soybeans,

and 26 percent for rice (MacDonald et al., 2004). 

16

Agricultural Contracting Update: Contracts in 2003 / EIB-9

Economic Research Service/USDA

12Producers receive prices for their

commodities transferred under marketing contracts, while they receive fees

for the services that they provide

under production contracts. 

13Average USDA/NASS prices

should reflect mean prices across contract and spot market sales.

Table 7

Characteristics of marketing contracts for selected field crops, 2003

Commodity

Item Corn Cotton Rice Soybeans Wheat

Total number of farms 44,212 11,353 3,402 44,674 9,692

Dollars

Price received per unit:

USDA/NASS mean, all sales 2.25 0.52 2.60 6.19 3.27

Mean 2.32 0.62 4.22 6.19 3.27

25th percentile 2.17 0.56 3.60 5.50 3.01

75th percentile 2.44 0.68 4.95 6.80 3.50

Bu. Lb. Bu. Bu. Bu.

Quantity marketed through contract:

Median 10,000 180,000 na 3,000 6,375

25th percentile 5,000 76,000 na 1,500 3,000

75th percentile 26,000 402,500 na 9,000 16,220

Contract terms:

Median years with contractor 1 3 12 5 2

Median length of contract (months) 4 12 12 4 4

Percent

Share of contracts with the following attributes:

Price received based on single price 69.2 12.1 16.1 72.9 69.2

Price received based on formula 23.5 53.1 30.5 8.1 6.5

Price received was negotiated 3.6 34.8 43.5 3.3 12.2

Price received other 3.7 0.0 10.0 15.8 12.0

Delivery has no quantity specified 19.2 64.1 71.6 23.5 39.4

Delivery has a specified quantity or range 79.5 15.0 10.6 73.6 59.2

Delivery harvest from specified acreage 0.8 20.7 17.0 1.9 0.9

No contract length reported 29.9 22.9 16.4 23.4 29.2

Another contractor for this commodity in area 90.3 83.9 79.7 90.6 85.9

Note: na indicates value is not available due to no observations, an undefined statistic, or reliability concerns.

Source: Compiled by USDA’s Economic Research Service using data from the 2003 USDA Agricultural Resource Management Survey.
Crop prices were relatively low in 2001, and the risk-reduction features of

many marketing contracts may have insulated producers against some of the

price decline, leaving contract producers with higher average prices than

noncontract producers. Crop prices rose substantially by 2003; if contracts

serve primarily to limit price swings for farmers, then contract prices should

have fallen below USDA/NASS mean prices in 2003. Instead, mean contract

prices matched average USDA/NASS prices for soybean and wheat

producers and exceeded the average USDA/NASS marketing-year average

prices for corn (3 percent), cotton (19 percent), and rice (62 percent).

Indeed, contract cotton and rice producers with relatively low contract

prices (25th percentile) still received prices above mean USDA/NASS

prices.14

In the case of rice, several factors may have affected prices received by

farmers. First, the NASS monthly prices for 2003 trended sharply upward

toward the end of the calendar year, from a low of $1.90 at the beginning of

the year. If contract products were delivered toward the end of the year, the

trend alone might suggest higher prices. Second, most of the farmers who

reported rice contracts reported that they used a contracting agent or cooperative to negotiate a price for their contracts. Under such an arrangement,

often called a marketing pool, producers commit production to an agent

who negotiates with buyers on their behalf. These agents or co-ops may

have been more effective in securing higher prices for their commodities

than did most farm operators on their own.

Marketing contracts for field crops do not tie contractors and farmers

together in long-term relations—instead, farmers contract only parts of

their crop and often review contracts and contractors on an annual basis

(see table 7). The median quantity in a corn contract was 10,000 bushels in

2003, with the interquartile range extending from 5,000 to 26,000

bushels.15 At yields of 142 bushels per acre (the national average in 2003),

a farmer would have to commit just 70 corn acres to meet the typical

contract, with 35-185 acres enough to meet the interquartile range of

contract quantities.16 Farmers commit to small contract quantities for

several reasons. Many producers combine marketing contracts with spot

market sales, storage, and hedging as part of an overall marketing strategy.

Also, marketing contracts for field crops sometimes are designed to cover

specialized varieties of a commodity, such as high-oil corn or food-grade

soybeans, that are only a part of a farm’s production. 

Many crop contracts do not specify a duration, and of those that do, the

median length ranges from 4 months (corn) to 12 months (cotton); that is,

contracts typically cover part of one harvest’s production. While rice farmers

typically deal with the same contractor for many years (half of contract

respondents had stayed with the same contractor for at least 12 years),

producers of other crops do not. Half of the corn producers responding to the

survey had dealt with their current contractor for 1 year or less. Among

respondents who produce cotton or wheat, half had dealt with their current

contractor for less than 3 years and less than 2 years, respectively.

As shown in the table, contract terms can exhibit striking differences across

commodities. ARMS respondents report that about 70 percent of corn,

wheat, and soybean contracts specify a single price in the contract.17 In

17Typically, rather than specify an

actual price, the contract will state that

the base price to be paid will be a

posted spot or futures market price,

with premiums or discounts from that

price tied to commodity characteristics.

14The 25th percentile of a distribution is the point at which 25 percent of

observations have lower values and 75

percent have higher. With the 25th 

percentile value exceeding the mean

NASS price for cotton and rice, at

least 75 percent of sample cotton and

rice contract producers received 2003

prices above the overall USDA/NASS

mean.

17

Agricultural Contracting Update: Contracts in 2003 / EIB-9

Economic Research Service/USDA

15The interquartile range is a 

measure of the spread of values in a

distribution, and is the difference

between the values at the 25th and

75th percentiles. 

16Similarly, at national average

yields, it would take 45 acres of soybeans, 64 of wheat, and 105 of cotton

to fulfill the median contract quantities.
contrast, cotton and rice contracts frequently do not specify any price at all;

instead, the contract calls for the contractor to negotiate for a price on the

producer’s behalf (“price received was negotiated”), which is typical of

marketing pools. Similarly, cotton and rice contracts usually either do not

specify a quantity or specify that the contract is to cover the harvest from a

particular acreage. Corn, soybean, and wheat contracts are more likely to

specify a precise quantity or a range of quantities. Finally, most producers

reported having another contractor for a particular commodity in their area.

The share of respondents reporting no other contractor available ranged

from 10 percent of corn and soybean producers to 20 percent of rice

producers. 

Production contracts for broilers and hogs

ARMS data include large samples of production contracts for two

commodities, broilers and market hogs (table 8). In each case, the fees

received by farm operators ranged widely, with interquartile ranges of 19 to

29 cents a head for broilers and $10 to $12 a head for hogs.18

During 2003, the average price for hogs was $39.75 a hundredweight, or

$107.33 for a 270-pound hog. Fees for hog producers thus ranged from 10

to 12 percent of market value; similarly, at a market value of 30 cents a

pound for broilers, average fees for broiler producers would amount to 16

percent of the market value of a 5-pound broiler. As stated earlier, contractors usually provide feed, chicks or feeder pigs, veterinary services, and

18

Agricultural Contracting Update: Contracts in 2003 / EIB-9

Economic Research Service/USDA

18The range could reflect differences in products (for example, larger

birds increase farmer costs) and could

also reflect differences in markets for

growers.

Table 8

Characteristics of production contracts by commodity, 2003

Commodity

Item Broilers Market hogs

Total number of farms 17,467 4,945

Dollars per head

Prices:

Mean 0.24 12.04

25th percentile 0.19 10.00

75th percentile 0.29 12.00

Number of head

Contract quantiles:

Median 345,000 4,555

25th percentile 210,000 1,689

75th percentile 582,000 9,600

Median years with contractor 10 4

Median length of contract (months) 12 12

Percent of contracts

Contract term characteristics:

Fee is determined by a formula 91.6 54.3

Fee is linked to performance 98.3 na

Premium tied to attributes of delivered commodity 71.3 20.4

Requires use of specific equipment or structure 91.9 57.0

Manure management responsibilities 96.5 86.7

Specifies amount of land for manure distribution 34.9 53.8

Another contractor for this commodity in area 68.7 81.7

Note: na indicates value is not available due to no observations, an undefined statistic, or reliability concerns.

Source: Compiled by USDA's Economic Research Service using data from the 2003 USDA Agricultural Resource Management Survey.
transport services, and the services that producers provide (labor, housing,

energy, and equipment) usually account for only a small share of the

commodity’s total cost. Table 9 details operating expenses for farms with

broiler and market hog production contracts. Contractors pay for 80 percent

of estimated operating expenses at farms with broiler production contracts,

and 71 percent at farms with hog production contracts. Feed accounts for

the largest share of operating expenses on each type of farm, and contractors

pay for 96 percent of total feed expenses. Contractors also handle large

shares of livestock and poultry purchases, medical expenses, and custom

work, while the operators pay for labor and energy expenses, in addition to

providing capital and operator household labor.

Production contracts typically commit broiler and hog farmers to large

annual production volumes and substantial investments. The median annual

quantity in a hog contract is over 4,500 hogs, with an interquartile range of

1,700-9,600 hogs (see table 8). The median and 75th percentile quantities of

hogs were 25 percent higher in 2001, suggesting that production contracts

may be settling on a narrower range of facility sizes. For broilers, the

median contract quantity of 345,000 birds, and the interquartile range of

210,000-582,000 birds, is quite close to the values for 2001 (MacDonald et

al., 2004). 

Compensation arrangements in hog and broiler contracts differ considerably.

Over 90 percent of broiler contracts specify a formula for determining a fee,

and most of those base the formula on the producer’s relative performance,

compared with that of a group of other producers. In contrast, just over half

of hog contract fees are based on a formula, and few use relative performance features.19

Manure management issues are of growing concern on large livestock and

poultry operations because of expanded environmental regulation and

lawsuits over odors and pollution.20 Because integrators may be at some risk

of liability for events that take place on contractees’ operations, some

production contracts may contain clauses dealing with issues such as

manure management. In nearly all broiler contracts (97 percent), the farm

operator is responsible for manure management. In one of seven hog

contracts, manure management is assigned to someone else—that is, some

19

Agricultural Contracting Update: Contracts in 2003 / EIB-9

Economic Research Service/USDA

Table 9

Expenses among farms holding broiler or market hog production contracts, 2003

Farms with broiler contracts Farms with market hog contracts

Operating expense category Expenses Contractor share Expenses Contractor share

Millions($) Percent Millions($) Percent

Total 8,814 80.4 4,134 71.1

Feed 4,879 96.1 1,547 96.3

Livestock 745 100.0 287 89.4

Medical 97 88.7 63 87.4

Custom work 325 94.8 45 62.7

Cash wages 117 18.0 102 1.6

Natural gas 20 8.6 2 3.6

Electricity 90 0.6 12 8.3

Note: Expenses in each category are summed over all farms with broiler or market hog production contracts.

Source: Compiled by USDA’s Economic Research Service using data from the 2003 Agricultural Resource Management Survey.

19Nearly half of hog contracts specified a single fee in the contract,

instead of a formula.

20A recent ERS analysis of the

issue can be found in Aillery et al.

(2005).
production arrangements now set up separate contracts for hog production

and for manure management at the same site. For those hog producers that

retain manure management responsibilities, just over half of the contracts

also contain explicit terms requiring the producer to have access to a certain

amount of land for manure management. With the increased focus on environmental issues, future livestock production contracts are likely to continue

to include guidelines on manure management. 

In contrast to crop marketing contracts, hog and broiler production contracts

generally tie producers and contractors (the integrators) together in longterm relationships. On average, broiler producers have worked with their

current contractor for 10 years, while hog producers have worked with their

current contractor for 4 years. The endurance of these business relationships

may stem in part from the lack of alternative contractors available to hog

and broiler producers. According to ARMS data, over 30 percent of broiler

producers and almost 20 percent of hog producers report having no other

contractor in the area.

Despite long-term working relationships, and in spite of the substantial

financial investments that operators make in production contracts, many

contracts specify very short durations—the median length of contract is just

12 months for each commodity (thus, broiler producers typically recontract

each year with the same contractor). However, specified contract durations

vary widely among producers of each commodity (table 10). Over 20

percent of broiler contracts and over 30 percent of market hog contracts do

not specify a length.21 Such contracts typically cover a single flock of

broilers or a single group of feeder pigs delivered to the producer. Over half

of broiler contracts and over a quarter of hog contracts specify a short-term

contract of less than a year. Many producers have contracts with long durations; about 15 percent of broiler producers and about 37 percent of hog

producers specify contract durations of 5 years or more. Several sample

broiler contracts report 15-year durations. 

Moreover, larger producers tend to have longer contracts. While only 37

percent of contract hog producers reported that they had a contract of at

least 5 years’ duration, those operations accounted for more than half (56

20

Agricultural Contracting Update: Contracts in 2003 / EIB-9

Economic Research Service/USDA

Table 10

Duration of production contracts for broilers and market hogs, 2003

Commodity under contract

Length of contract Broilers Market hogs

Total number of farms 17,467 4,945

Percent of contracts

No length specified 21.5 30.1

Short term: 12 months or less 55.7 27.9

Medium term: 13-59 months 8.1 5.1

Long term: 60 months or more 14.7 36.9

Percent of contract production

No length specified 20.9 19.4

Short term: 12 months or less 46.3 21.1

Medium term: 13-59 months 8.9 3.5

Long term: 60 months or more 23.8 56.0

Source: Compiled by USDA’s Economic Research Service using data from the 2003 Agricultural Resource Management Survey.

21ARMS asked respondents to state

the length of their contract, in months,

and to report zero for those contracts

that did not specify a length.
percent) of contract hog production. Similarly, while one-seventh of contract

broiler producers held long-term contracts, those operations accounted for

almost a quarter of contract broiler production. Nevertheless, most broiler

contracts, covering two-thirds of contract production, are covered by

contracts for a single flock or for short specified durations of less than a

year. Since each producer makes substantial long-term investments in structures and equipment (note that over 90 percent of poultry contracts have

specific equipment investments specified in the contract), the short term

specified in many contracts, the wide range of observed durations, and the

differences between broiler and hog contracts are quite striking.

21

Agricultural Contracting Update: Contracts in 2003 / EIB-9

Economic Research Service/USDA
Conclusions

By 2003, contracts covered 39 percent of U.S. agricultural production, up

from 36 percent in 2001. The increase over the 2-year period continues the

steady growth trend extending back to 1969. However, the share of farms

that hold contracts shows little growth, in contrast to the share of production

that is under contract. The largest farms use contracting far more extensively

than other farms, and as production shifts to larger farms, shifts to more

contract production will likely follow. 

Far more heterogeneity in contracting exists among specific commodities

than is apparent in the aggregate data. Contract coverage varies widely

across commodities, from less than 10 percent of wheat production to more

than 90 percent of sugar beets. Some commodities show sharp jumps in

contract coverage in just a few years. Prices and fees received under

contracts vary widely across producers of the same commodity, and contract

durations also vary widely, particularly among livestock production

contracts. 

Contract terms are evolving to cover new and often unforeseen developments. Some livestock production contracts include more explicit clauses

designed to address environmental concerns, and there is evidence of a

greater reliance on simple marketing pools for some commodities. In the

future, contracts may change to facilitate greater traceability of products and

to allow new forms of risk-sharing and input provision. Designing future

surveys to track such shifts would enable policymakers and stakeholders to

better understand the determinants and effects of agricultural contracts. 

22

Agricultural Contracting Update: Contracts in 2003 / EIB-9

Economic Research Service/USDA
References

Aillery, Marcel, Noel Gollehon, Robert Johansson, Jonathan Kaplan, Nigel

Key, and Marc Ribaudo. Managing Manure To Improve Air and Water

Quality. Economic Research Report No. 9. U.S. Department of

Agriculture, Economic Research Service. September 2005.

MacDonald, James, Janet Perry, Mary Ahearn, David Banker, William

Chambers, Carolyn Dimitri, Nigel Key, Kenneth Nelson, and Leland

Southard. Contracts, Markets, and Prices: Organizing the Production

and Use of Agricultural Commodities. Agricultural Economic Report No.

837. U.S. Department of Agriculture, Economic Research Service.

November 2004. 

Mighell, Ronald L., and Lawrence A. Jones. Vertical Coordination in

Agriculture. Agricultural Economic Report No. 19. U.S. Department of

Agriculture, Economic Research Service. February 1963.

Perry, Janet, David Banker, Mitch Morehart, and James Johnson. Farmers’

Use of Marketing and Production Contracts. Agricultural Economic

Report No. 747. U.S. Department of Agriculture, Economic Research

Service. December 1996. 

23

Agricultural Contracting Update: Contracts in 2003 / EIB-9

Economic Research Service/USDA
Appendix: Contract questions in the 2003

Agricultural Resource Management Survey

Survey documentation, including copies of the questionnaire, can be found

at www.ers.usda.gov/data/arms/GlobalDocumentation.htm. The exact 

questions corresponding to the shorter phrases used in tables 7, 8, and 10

are as follows:

24

Agricultural Contracting Update: Contracts in 2003 / EIB-9

Economic Research Service/USDA

Table item Survey question Answer choices

Median years with 

contractor:

For how long have you had contracts for this commodity with this

contractor? 

Years

Median length of 

contract:

How long is the length of the contract?Months; zero if contract does not specify a month

Price received: How is the final price in the contract

determined?

(1) The contract specifies a single price to be paid

for the commodity;( 2) The contract contains a formula for determining the price and/or a set of

prices to be paid according to the attributes of the

commodity; (3) The contract contains no price or

pricing formula, but the contractor negotiated for a

price on my behalf; (4) Other

Quantity specified: Does the contract specify a quantity

to be delivered to the contractor?

(1) No quantity; (2) Specified quantity or range; (3)

Harvest from specified acreage; (4) Percent of

grower’s production; (5) Other

Another contractor for this commodity in area:Is there another contractor for this

commodity in your area?

Yes-No

Fee is determined by formula: Does the contract specify a formula

for determining the final fee

received?

Yes-No

Fee is linked to 

performance:

Does the contract’s formula base

the final fee on your performance,

relative to other contract growers?

Yes-No

Requires use of specific 

equipment or structure:

Does the contract require you to

use specific types of equipment or

structures?

Yes-No

Manure management 

responsibilities:

Are you responsible for manure

management?

Yes-No

Specifies amount of land for

manure management:

Does the contract require you to

commit a specified amount of land

for manure management?

Yes-No