From his yard, Jeff Berkland can look across the road to a field he farms. This field is different from the other land Berkland farms. He doesn't own the high-oil corn he grows there, or the fertilizer or chemicals he applies. And in the fall, he'll store the grain that is not his to sell until the owner asks him to deliver it.
Berkland represents the tip of what some industry analysts think will become a strong trend. He is contracting specialty corn production for the first time this year on 300 acres, or about 20 percent of his operation. The Cylinder, IA, farmer provides land, labor, equipment and storage. The contractor, Land O' Lakes, provides the seed, fertilizer and chemicals.
In this year's poor commodity market, Berkland's venture into contract crop production looks profitable. If the crop continues to thrive, his profits will roughly equal those he nets at 2.40 dollars/bu. corn. Considering that cash prices have dropped below 2 dollars /bu., Berkland's contract decision looks wise.
Some experts predict that the contract production method, widely used in poultry and pork, will take hold in grain. Contracts with a farmer to raise the crop have been used mainly in the seed business, not for commodity production.
But times change. Today, farmers and their bankers are seeking ways to reduce financial risks. And contracts can do that. Roger Ginder, Iowa State University ag economist, says that more farmers may look to these contracts as a way to avoid borrowing money for inputs. "But without knowing much about the contracts, I'd say the capacity of companies to take on that risk might be kind of limited," he adds.
Limiting exposure. Berkland signed his contract to reduce his risk. He added 650 acres of ground rented at a very competitive price to bring his total acreage to 1,650 acres. A production contract on a portion of the ground helps reduce his financial exposure.
"Plus, I'd just as soon know what I'm going to be paid ahead of time," Berkland says. "I don't think people should be scared to look at contracts. They are just another tool to try and make a living."
Berkland speaks from experience. He raises hogs under a production contract with Land O' Lakes in a 1,200-sow, farrow-to-feeder pig operation. He's in the fourth year of a 10-yr. contract with the cooperative and is satisfied with the arrangement. He borrowed the money in a 10-yr. loan for the facility on the basis of the contract.
Familiar and comfortable with contracts, he did not hesitate to investigate a crop production agreement when he heard Land O' Lakes was looking for farmers. Last year, the cooperative contracted for only 2,000 acres under these agreements. This year, it expanded the program to include about 75 farmers through five local Iowa cooperatives.
"We are in the process of fine-tuning our program to take out this fall to our producers," reports Bruce Drzycimski of Land O' Lakes' Croplan Genetics. He expects the program to double in size next year.
Land O' Lakes looks at the agreements as a way to move quickly into new technologies. "Maybe we can react a little quicker," Drzycimski says. "We have the ability to change the corn plant to produce specific ingredients for specific markets. The ability to identity preserve and originate that grain then becomes very critical."
Complete control. The agreements are one part of an emerging system that controls production and inputs from the farm to the animal to the consumer. This allows the cooperative to assure quality of the product.
Land O' Lakes is working with Optimum Quality Grains (a Pioneer/DuPont venture) for the seed planted by contract on the Iowa farms. After harvest, the high-oil corn is milled and fed to Land O' Lakes hogs like those on Berkland's farm. These hogs could be targeted for a specific market requiring high-quality, uniform pork.
A farmer-owned cooperative, Land O' Lakes also takes the stance that contracts reduce farmer risk. "I believe the whole driving force [behind this] is you can only withstand so much risk," Drzycimski says. Under the agreements, "producers get paid for what they do best. And what does a producer do best? He raises crops.
"We're trying to develop a model and work through this as a risk management tool," he says.
Contract details. Berkland signed a one-year contract with Land O' Lakes. He is paid on a per-bushel basis with prices substantially increasing for production over 125 bu./acre. Average corn yields in this area run 150 bu./acre with top yields reaching 180 bu.
Berkland says that, before signing the contract, he compared the contract's performance with his traditional corn production costs using his banker's computer spreadsheet program. The contract was profitable at yields of 75 bu. or more. It also paid better--up to 2.40 dollars/bu. The agreement clearly performed better with low crop prices.
When setting up the payment schedule, Drzycimski says the company considered the 10-yr. corn average. "But it's tough to manage risk on a 10-yr. average," he adds. This year is a case in point with the unexpected low corn prices.
Berkland is responsible for planting and tending the crop. The cooperative did not object to his planting in 36-in. rows, which he uses instead of 30-in. rows.
Stateline Cooperative at Burt, IA, developed and administers the farm plan for Berkland's contract. The cooperative custom applies fertilizer and chemicals, saving Berkland time and money. The cooperative also sent out an agronomy specialist to scout the contract fields. The specialist spotted a problem in a noncontract field that Berkland says he overlooked. He appreciated the extra eyes and new information.
Under this contract, Berkland is required to harvest, dry, store and preserve the identity of the crop. He feels these terms pose no problems because he has raised waxy and high-oil corn in the past. Berkland will deliver the grain to a feed mill about 12 miles away when asked.
Eligibility for programs. Important to these arrangements is keeping the farmer eligible for federal crop programs. "We're trying to get all our programs so that the farmers are still looked upon as producers of that crop so they can utilize any programs that may come down," Drzycimski says.
In the future, he expects the production agreements to become more popular, as well as other contracts for raising value-added crops. "We're going to see a lot more co-ops going on their own, developing their own contracts and converting their mills to some of these specialty grains as well," he says. "Our system will have a lot of different avenues to contract these specialty grains."