Generally, the commodities market is rife with uncertainty. But the risks and uncertainty are amplified in newly established commodities industries like the hemp CBD industry. From inclement weather, trade disputes, regulatory changes to low yields, the risks abound.
In more established commodities market places, buyers and sellers rely on several devises to reduce some of the inherent risk factors of the general industry. Examples include, the use of cash forward contracts, marketing agreements, futures contracts, etc.
While all of these devices are commonly used to hedge against downside risk, Agricultural Production Contracts has seen an increase in use in the last three decades. Further, because of its flexibility and malleability, it is bound to be an even more important tool for risk management between producers of Hemp CBD and their buyers.
An agricultural production contract is a contract between a producer and buyer for a specific agricultural product. It is like any other contract but with terms that aim to address industry specific risks.
Some key components of agricultural production contracts include: (1) title to the product is transferred to the buyer before production; (2) buyers tend to have more control over the production, cultivation, and harvesting of the product; and (3) predetermined amount of product to be delivered.
Hemp CBD Industry and Use of Agricultural Production Contracts
With the growing season now underway in the Midwest, farmers in Wisconsin are expected to plant and cultivate hemp in record numbers thanks to the new regulations under state and federal law legalizing production of hemp and the manufacture of products containing CBD for commercial use.
Growers, processors, and distributors may well find it advisable to follow in the footsteps of other dealers in commodities markets and enter into agricultural production contracts or similar instruments to lessen their market exposure.
Agricultural production contracts will hold a significant place in the hemp growing industry as it continues to expand. Because of the rapid growth and endless changes in in the market conditions, price fluctuation, regulatory changes, among other factors are very real concerns for growers and buyers of hemp commodities.
These industry specific contracts can address some of these risks, or at least reduce them, by allowing the parties agree to a fixed price upfront, and tailor their contractual relationship to allocate and account for identifiable and applicable risks.
These contracts should typically account for: quality of the produce, production methods, supply considerations, intellectual property protections, unauthorized reproductions, dispute resolution mechanisms, sudden changes to regulatory climate, responsibility for the cost of production, financing, payment terms, etc.
Special considerations to keep in mind
Additionally, here are some key factors/deal points to keep in mind when structuring, negotiating, and drafting an agricultural production contract:
State laws that restrict or regulate the terms of agricultural production contracts. Although growing hemp is now legal in a majority of states, the laws between states vary considerable and the analysis should be tailored to the specific states that your business will be operating in.
Contractual and regulatory consequences for noncompliance. In Wisconsin, there is immunity from criminal penalties for processors who act in good faith and are not knowingly in violation of the permissible levels of THC in hemp and hemp-derived products such as CBD. However, allocating for this risk between a processor and a manufacturer would be an important consideration when drafting/negotiating an agricultural production contract.
Changes in the regulatory landscape. It is no secrete. the hemp/CBD landscape is in constant flux. In Wisconsin, there is still so much left to be done from a regulatory standpoint. So accounting for a sudden change in regulations mid contact would be wise to consider.
Testing and Chain of Custody Risks Accounting for what happens if the hemp harvest fails to satisfy pre-harvest and post-harvest THC testing might also be important. How is the hemp chain-of-custody maintained and documented, who is responsible for this, what are the repercussions if something goes awry? Also accounting for how testing is to be done for CBD might also create more clarity between the parties.
These are just a few considerations parties to agricultural production contracts might want to account for in their negotiations and contracts.
Like any other contract-like mechanisms, agricultural production contracts, at their core, are risk management tools. And as the Wisconsin hemp/CBD industry continues to grow, the use of these types of contracts are bound to become commonplace.