Monday, July 27, 2009
Are COOL And “Swine Flu” Really Acts Of God When They Reduce Pork Profits For Integrators?
Row crop and small grains producers are familiar with “Acts of God” that can devastate fields with either too much or too little water, and that is why crop insurance is popular in territories with great vagaries in the weather. But on the other side of the fence is the livestock producer, whose insurance opportunities have been limited to changes in revenue that are more manmade than “Acts of God.” But are there “Acts of God” that can be brought into livestock production contracts that benefit the integrator?“Acts of God” are included in a more broad legal term called Force Majeure, a French term meaning a greater force than which can be reasonably controlled. And Force Majeure defenses are designed to get one party out of a contract requirement. With the increasing amount of pork production that is under contract, integrators usually retain title to the livestock, and contract with livestock producers to raise the hogs and prepare them for delivery to the market. But agricultural law specialists Roger A. McEowen and Erin C. Herbold at Iowa State University report that some integrators with Force Majeure clauses in their contract have been using that to protect themselves against adverse market conditions, such as “swine flu” or Country of Origin Labeling. Their recent newsletter reports that some hog integrators have claimed those factors have affected the market and have attempted to terminate or renegotiate their contracts with farmers.
Over time, typical examples of Force Majeure have included, flooding, earthquakes, volcanoes, acts of war, riots, crime, and other factors of similar serious ilk. The writer of the contract is usually the integrator, and rarely are any parts of it negotiable. Sometimes the company which has written the contract has used a Force Majeure clause to get out of a contract that has not been as profitable as they anticipated. McEowen and Herbold report a frequently used Force Majeure clause in Iowa pork contracts ends with the phrase, “or change in governmental regulations or laws making this agreement illegal.” But they question whether swine flu or COOL is really included.
Pork profits have been non-existent for nearly everyone in the industry due to high feed costs and the decline in the export market connected to the swine flu (H1N1) outbreak. Iowa State livestock economists report monthly losses for the past 18 months on many types of pork operations, which began prior to the COOL law being implemented, as well as the outbreak of swine flu. And the ag law specialists say “It is not an “act of God” that constitutes a force majeure event.”
The Mandatory COOL program, which covered many types of meat other than pork, became effective in mid-March of 2009, and market observers indicated the reduced flow of Canadian origin pigs impacted pricing and availability. McEowen and Herbold say termination letters, sent by integrators refer to the new law as resulting in a situation where the integrator is forced into a contract that is impossible to implement from their side. McEowen and Herbold say the integrators appear to be trying to renegotiate pork contracts that would pay farmers a lower rate, which they add does not fit within the definition of a Force Majeure event.
What does a producer do? While McEowen and Herbold address the laws of Iowa, beware that the growth of popularity of production contracts in the past ten years to manage risk has resulted in several Cornbelt states taking proactive positions to address contract production. Farmers with specific questions may find helpful information from their attorney general or consumer affairs agency, as well as attorneys well versed in agricultural production and contract law. In some states, the farmer who has been raising hogs for the contractor is in a position to file a lien, as a building contractor or mechanic would for unpaid work.
Summary:
Many contracts allow one party to escape their required performance with an “Act of God” clause, which is a portion of Force Majeure that frees a party of a contract from performance because of forces out of their control. However, the long running unprofitability of pork production has resulted in some integrators claiming Force Majeure to escape their obligation to farmers, or at least forcing renegotiation of contracts at lower prices paid to the farmer. Ag law specialists are advising farmers that such practices may not fit the legal definition of Force Majeure.
Posted by Stu Ellis on 07/27 at 01:06 AM | Permalink