Agriculture Reference
In-Depth Information
3 The Simplicity of Agricultural Contracts
It is a common scene in U.S. agriculture: A landowner and a tenant talk for a few minutes over a
cup of coffee, then shake hands to clinch a one-year deal to rent a farm or piece of land. No fuss, no
bother, no paperwork.
—Jonathan Knutson, Ag Week , Dec. 11, 1980
In many settings, exchanges are governed by rather complicated contracts that explicitly de-
note dates, individuals, locations, prices, products, qualities, quantities, and contingencies
for changing conditions. Contracts often extend for many years and may have complicated
procedures in case of breach or dissolution. In agriculture, however, contracts are often
surprisingly simple oral agreements lasting only a year. In this chapter, we examine why
contracts should be so simple even though the value of the assets at stake is quite large. 1
Contracts for Farmland
As noted in the introduction, farmers, large and small, routinely rent land. In stark contrast
to the size and methods of modern farming, farmland leases are simple and informal. Rarely
are they lengthy, detailed documents, and in many cases they are not even written. Using our
Nebraska-South Dakota data we find that 58 percent of all contracts are oral. From the 1992
British Columbia-Louisiana data, we find that 54 percent of all contracts are oral. 2 Those
leases that are written tend to be simple one- or two-page documents that specify only the
names of the farmer and the landowner, the dates during which the contract is binding, the
location of the land, the terms of the lease in dollars or shares, and possibly conditions for
contract renewal. 3 Figure 3.1 shows a typical written Great Plains cash rent contract, this
one from central North Dakota. In a few cases the contracts are more detailed and specify
such responsibilities as paying land taxes, controlling noxious weeds, issuing penalties for
defaulting, renewal conditions, and the fraction of the land that must lie fallow.
Notably, farmland contracts tend not to stipulate in detail how the land will be farmed;
rather, they require the farmer use the land in a “thorough and farmer-like” or a “good and
husband-like” manner. Farmland contracts are most often annual agreements subject to au-
tomatic renewal unless one party makes an early commitment not to renew. In our Nebraska-
South Dakota data 65 percent of the contracts are annual, while for our Louisiana-British
Columbia data 59 percent are annual. Sometimes the agreements are for several years, but
rarely are they longer than five years. They are, however, typically renewed for extended
periods, even up to thirty years. The markets that bring farmers and landowners together
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