Dairy Heifer Contracting Fundamentals

Dairy January 18, 2011 Print Friendly and PDF

Contents

Introduction

The custom heifer industry in the United States continues to grow and develop. An understanding of the importance of a written contract and its components is essential for custom heifer growers and for the dairy producers planning to employ these services.

In the past, agricultural producers tended to shy away from written contracts; for example, in the 2002 Farm Credit Northeast Dairy Farm Summary, only 17 percent of the herds that contracted heifers utilized a contract agreement. In today’s world, contracts are just as necessary in agriculture as they are in any other business.

The advantages of using a contract far outweigh the disadvantages of having one. When the future of a dairy herd is riding on whether heifers are being raised properly, a detailed, written agreement should be considered an essential component of the relationship between the heifer grower and the dairy producer.

The purpose of this paper is to outline the advantages of using contracts and to describe the components that custom heifer growers may want to include in their own contracts. We provide some example contracts that can be used for reference when drawing up your own. Please note that we are not dispensing legal advice. Everything presented here is for educational purposes only.

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Advantages of Using a Written Contract

The primary advantage of a written contract is its clear description or outline of each party’s responsibilities. This document specifies what the dairy producer expects of the custom grower - and vice versa - in animal outcomes and economic terms. It’s a document that can be referred to whenever questions arise. Periodic review of the agreement allows each party to refresh his memory as to what his responsibilities are and offers the opportunity to make needed changes.

Signed contracts also provide a form of protection should a disagreement ever result in a lawsuit. If you have the unfortunate experience of having a lawsuit filed against you in relation to your work, a contract can help protect your interests and potentially keep your business from experiencing a significant financial loss. Along the same lines, the terms of a contract specify how and when the agreement can be terminated, thus providing stability for your business. A well-written, comprehensive contract that spells out each party’s responsibilities makes it clear who was negligent or responsible for a certain outcome.

Types of Contracts

There are at least five types of contract agreements that are commonly used. Each one differs in how charges are calculated and ownership of animals. The one that you decide to use will depend on both your preferences and those of the producer you grow for. It may be helpful to discuss contract choice with each client.

  1. Full Contract - Under a full contract, the producer pays the heifer grower a set fee to raise the animals for a specific length of time. The contract period may be set by the calendar, as in 12 months, or it may depend on animal development, growth stages, breeding age, or perhaps calving. This type of contract rewards the grower for returning heifers that meet the contract’s specifications in a timely fashion and is highly recommended for this reason.
  2. Daily Charge (per head per day) – This type of contract charges the dairy producer a set amount per day for each animal. The longer the animal remains in the grower’s care, the more the producer pays in total. This type of contract rewards the grower for low rates of gain and for keeping heifers longer than needed. This option should include specific growth parameters listed in the contract to keep heifers on track with an appropriate growth regimen.
  3. Per Pound of Gain – Gain-based contracts charge a set fee for each pound of weight gain that the animal has while in the grower’s care. This requires the grower to handle each animal several times to measure weight. This type of contract is not recommended for dairy heifers unless it also specifies a corresponding measure of structural growth, such as withers height or hip height. Merely having a set level of body weight does not constitute good growth for the dairy heifer and encourages the grower to raise fat heifers.
  4. Feed plus Yardage – Under this payment option the producer pays for the cost of feed plus an additional set charge to cover all other expenses, such as labor, overhead, and management. Thus, feed becomes a variable expense, changing as the animal eats more or as more expensive feeds are provided. Because feed is the largest component of raising a heifer, and often quite variable from year to year, this type of contract may be logical in some instances. However, this option may encourage the use of cheap feeds at the expense of heifer performance.
  5. Sell/Buy Back – With a sell/buy back agreement, the producer sells young heifers to the grower with the option to repurchase animals prior to calving. Ownership of the heifers is transferred to the grower. This arrangement completely relieves the dairy producer of any liability related to the animal; however, the dairy producer also completely gives up control of any decisions related to the care of the heifers.

Contract Contents

Some of the items that should be addressed in a written contract for custom heifer-growing services can be grouped into five categories and are outlined as follows:

Time Period

  • Time Frame – You and each producer for whom you will be raising heifers will need to agree on the age of animals/maturity at which they come and go from your operation. This will be determined mostly by your skills, the type of facilities you have, the type of feeds you are able to provide, and the specific needs of the producer.

Billing and Payment

  • Payment Calculation – Once a contract type has been chosen, make sure to clearly spell out how charges will be calculated. If you use any type of formula, it may be a good idea to include that in the contract. Everyone signing the contract needs to understand how payment amounts are calculated.
  • Payment Method and Timing – Determine how and when payments will be made. Do you want to be paid by cash or check, or is some sort of barter acceptable? When do you want to be paid? There are many options, including: weekly, biweekly, monthly, and half up front and half when heifers return to the producer. Before you decide, analyze your expected costs and cash flow. You should make sure that you are receiving payments often enough to cash flow your business and meet family living expenses.
  • Nonpayment – You should also include in the contract how nonpayments will be handled. Perhaps there will be a period of time after the payment due date where the producer can still pay without incurring a penalty. If nonpayment is a recurring problem or if payments are routinely months late, you may want to incorporate a penalty charge into your fee structure. For producers who still do not pay for your services you may need to specify the option to take over ownership of the number of animals that will satisfy your bill.
  • Last Payment – Determine a procedure for obtaining last payments after the contract is terminated. Perhaps you will want to refrain from returning a number of animals valued at the payment amount until payment is made. Decide the date payment is due when the decision is made to terminate the contract.

Responsibilities

  • Entrance Requirements – Establish standards for animals entering your facility and criteria for rejecting animals if necessary. Some factors to consider include: health status, vaccination history, and previous performance. Decide if and how you will alter your charges and/or performance standards for animals that fail to meet entrance requirements.
  • Performance/Quality Standards – Determine what the producer’s standards are for animal performance. Where do heifers need to be in respect to age, weight, structural growth, body condition, and reproductive status when they return to the home farm? Spell out how agreed-upon performance standards will be measured and how often.
  • Monitoring and Reporting – Once performance and quality standards have been set, a procedure for monitoring and reporting heifer performance should be determined. For instance, will you need to weigh and measure height monthly? How and when will you report progress to the producer? Is a simple phone call or e-mail assuring them of satisfactory progress sufficient? Perhaps the producer would rather receive a detailed report on each animal indicating how well they meet performance standards, as well as all health procedures, such as vaccinations, that have been performed. Reporting should also include death losses and major health events where a veterinarian has been called in or an animal suffers a problem that has long-term implications. Reports need to be made periodically - at least quarterly, if not monthly. One possibility is to send reports with billing statements and use the time interval dictated by billing.
  • Health Practices – Do you have a health protocol that will be followed for all animals in your care, or will you customize health care to each producer’s preferences? Whose veterinarian will be employed: yours or the producer’s? You may also want to include in the contract who performs what health practices and who pays the vet bills.
  • Breeding – Who is responsible for seeing that the heifer is bred? What bulls will be used and what mating programs employed? Who pays for breeding and semen? Also, how many times will heifers be inseminated before it is determined that they cannot be bred?
  • Death Losses – Acceptable levels of loss and who incurs the loss when deaths occur need to be specified. This is determined, in part, by the type of contract that is in effect.
  • Transportation – Identify how, how often, and by whom animals will be transported to and from the producer’s farm.
  • Animal Identification – If you are raising heifers for more than one producer, you will need to think about how animals belonging to one producer will be distinguished from those belonging to the others. Decide how animals will be identified and who will be responsible for getting it done.
  • Animal Nonperformance – Who will determine whether heifers are meeting performance standards? If an animal is not making the grade, who will decide whether the heifer should be removed from the herd or if the contract should be terminated? If heifers are sold, how will the proceeds be distributed?
  • Insurance – Whose insurance covers the loss and liability of the animals while they are being raised by the contract grower? Again, this is determined, in part, by the type of contract that is in effect.
  • Reassignment of Duties – Consider what would happen if you suffer a long-term illness, become injured or disabled, or die. Is there someone who could step into your place and take over management of the business and/or care of the animals? If you have a plan to cover these incidences, discuss them with each producer to make sure they agree with your plans, and then write them into the contract.

Amendments, Renegotiations, and Renewal

  • Arbitration – Arbitration procedures should be written into the contract to solve disagreements that cannot be settled quickly and easily. This may include how mediators will be chosen and how long arbitration will last.
  • Renegotiation – Guidelines for renegotiation of contract components should be spelled out, too. If renegotiation of responsibilities is to occur, you may want to make this part of the renewal process. Fees and charges may also need to be renegotiated from time to time. If you feel that markets are volatile, you may want to renegotiate fees more often.
  • Contract Renewal – Included in the contract should be start and end dates (contract length), as well as when negotiations for renewal of the contract will take place. The renewal process should begin far enough in advance of the current contract’s ending date to allow for other arrangements in case it is determined that renewal should not be pursued.

Termination

  • Contract Termination – Contract termination can sometimes be a painful process. However, if the heifer-raising partnership is not working successfully for either party, it is best to have a mechanism in place to allow for the contract to end before business success or relationships are endangered. In cases of contract termination, refer to your procedure for last payments.

Summary

Contracting is a necessary part of doing business. As a heifer grower, the first step to successfully employing the use of contracts is learning the pieces that should be written into one. This paper has listed the components for a comprehensive contract and should assist you in developing your own contract.

Sources

  1. Beiler, Joseph. “Dairy Heifer Contracting: Motives, Forms, and Arrangements.” Ohio State University Factsheet, AS-0005-00
  2. Karszes, Jason, and Roger A. Cady. “Contracts and Agreements for Custom Dairy Heifer Growing.” Cornell University. Department of Agricultural, Resource, and Managerial Economics. Publication EB2000-10.
  3. Mongeon, M., J. Rodenburg, C. Russwurm, and M. Werry. “Considerations for Custom Raising Dairy Heifers.” Ontario Ministry of Agriculture, Food and Rural Affairs. Order No. 98-059, July 1998, AGDEX 412.
  4. Roth, S. and J. Hyde. “Dairy Farm Business: Making Custom Work Profitable.” CAT UA383. College of Agricultural Sciences. Agricultural Research and Cooperative Extension. Pennsylvania State University, University Park, PA, 8pp.

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Direct Contract for Raising Replacements

________________ COUNTY ____________________ DAIRYMAN

___________________________ GROWER

CLAUSE I: PARTIES INVOLVED: This contract is entered into this ______ day of ________, 20_____; between ______________, the grower of ________________, County of ________________, State of _________________; and ___________________, the dairyman of ___________________, County of _____________, State of ________________.

CLAUSE II: TERM OF CONTRACT: The term of this contract shall be from the ______ day of ______, 20____, to the _______ day of ______, 20____, and shall be automatically renewed from year to year unless otherwise terminated in accordance with the provisions herein or amended in writing as mutually agree upon.

The dairyman agrees to furnish the grower with the heifer calves listed on the description sheet attached hereto and made a part hereof.

The dairyman agrees to assume all legal responsibility as owner of the animals listed on the attached Description Sheet and will not hold the grower liable for injury or death losses to the animals, except those due to negligence on the part of the grower.

CLAUSE III: TERMINATION OF CONTRACT: This contract may be terminated at any time by mutual agreement in writing or by at least three months written notice from either party prior to the annual renewal date. The animals on hand will be finished out or disposed of by the written terms in the contract.

CLAUSE IV: ARBITRATION: Any dispute arising under the terms of this contract may be referred by the parties hereto to an arbitrator, or if one person cannot be found who is acceptable to both parties, then each shall choose an arbitrator and the two chosen shall select a third. The majority decision of the arbitrator(s) shall be presented to both parties in writing. The arbitrator(s) shall have the power to make an award or determination on any issue which arises out of the contract and it shall be binding on both parties. The expense of the arbitrator(s) shall be divided equally between the parties. Pending final decision of a dispute hereunder, the parties hereto shall proceed diligently with the performance of the contract.

CLAUSE V: THE GROWER: The grower agrees to pick up the heifer calves at _______ days of age. These animals will be listed on the description sheet.

CLAUSE VI: ADDITIONAL ANIMALS: Additional animals may be added to this contract and all conditions of the contract shall apply to the additions. Both parties shall initial entries and exits on the description sheet of all original and additional animals.

CLAUSE VII: OTHER CONSIDERATIONS: The DAIRYMAN further agrees to:

  1. Pay for all registration costs and retain registration certificates when registered animals are involved.
  2. Bear the transportation expenses of moving the heifers from the grower’s farm to the dairyman’s farm.

The GROWER further agrees to:

  1. Bear transportation expenses of moving the heifers from the dairyman’s farm to the grower’s farm.
  2. Pay veterinarian fees and medication bills for nonroutine treatment.
  3. Have heifers vaccinated if requested by the dairyman.
  4. Dehorn all animals at earliest convenience.
  5. In case of death (of an animal listed on the description sheet) for any reason not covered by insurance, the grower will credit the dairyman with 100 percent of total fee paid by the dairyman on said animal. This clause is null and void if the animal is not picked up by specified time.

The dairyman shall have the privilege of inspecting the growing animal at regular intervals convenient to both parties.

CLAUSE VIII: PICKUP OF HEIFERS: The dairyman shall pick up said animals at approximately ____ months of age. The date of pickup will be established for both parties by using the birth date of the calf and monthly payment will be handled in this manner: The dairyman will pay the grower at a rate of _____ per day, payable at ______ per month. Payment is to be made on _____ of each month.




Witness the hand of the undersigned parties of this

__________ day of ____________, _______

___________________________________ GROWER

___________________________________ DAIRYMAN


Heifer Raising Agreement

Name of Heifer Grower Business
Address and Phone Number(s)

AND _________________________________________ (hereafter referred to as Owner)

  1. ___________ (Name of Heifer Grower Business) AGREES TO PROVIDE THE FOLLOWING:
    1. Care and housing for up to ____ head of heifers at any one time between weaning age and a period approximately two weeks prior to projected freshening date.
    2. Heifers will be fed a ration based on generally accepted standards published by the USDA and the National Research Council (NRC) with a goal of achieving a pre-freshening weight of approximately ___ lbs by 24 months of age. This ration will consist of forages, pasture when available, and grains as determined by _____ (Heifer Grower Business).
    3. Heifers will be vaccinated when received, and each fall thereafter for IBR, BVD, PI3, Lepto, and Haemophilus. In addition each heifer will receive one vaccination for rabies.
    4. All heifers will be wormed in October and April of each year using Safeguard Wormer Pellets.
    5. Heifers, which are open, will be bred at the owner’s expense to a bull of the owners choosing from Genex, Sire Power, or another mutually agreed upon bull stud. Pregnancy exams, synchronizing shots, and implants given specific animals will be billed at cost to the owner of the heifer.
    6. Heifers will be weighed upon arrival at the farm and thereafter within the last five days of each month on a farm scale maintained by _____ (Heifer Grower Business), and the weights of each heifer reported to the owner. A final weight will be obtained on the day heifers are loaded to return to the owner. Owner agrees to accept the weights obtained by this procedure and as provided by _____ (Heifer Grower Business).
    7. ______ (Heifer Grower Business) will provide the best care possible, but does not warrant that each heifer will become pregnant. In addition we accept no liability for animals which become injured or must be culled for other reasons. If an animal is culled, the owner will receive the cull sales value as determined by sale at auction of said animal less cost of trucking, auction costs, and veterinarian costs associated with treatment of said animal.
  1. OWNER AGREES TO THE FOLLOWING
    1. To provide disease free heifers with adequate identification including health papers and estimated or exact date of birth. Owner warrants that he/she is sole owner of said heifer(s).
    2. Not to sell or transfer ownership of the animal while it is being raised under this agreement and stabled at the _____ (Heifer Grower Business) farm.
    3. To hold _____ (Heifer Grower Business) harmless and free of liability for economic losses to said heifer(s) resulting from sickness, death or disabling injury, and for any current or future value this animal may have including but not limited to: pedigree value, future milk production, future offspring, etc.
    4. To accept owner’s animals back within four weeks of notification of intent by _____ (Heifer Grower Business) to discontinue the above agreement to raise heifers.
    5. To pay all AI and veterinarian expenses associated with synchronizing, breeding, and checking animals for pregnancy. Such expenses will be limited to actual charges made by Dr. _____, his employee, or another veterinarian of _____ (Heifer Grower Business) choosing. These bills will be presented on a monthly basis.
    6. To pay the following fees as billed within 30 days of billing date:
      1. $15 per head admission fee for each heifer admitted into this program. This is a one time only fee for each heifer.
      2. To pay $1.00 per lb of body weight gain for heifers weighting up to 500 lb.
      3. To pay $0.80 per lb of body weight gain for heifers weighing between 501 and 900 lb.
      4. To pay $0.85 per lb of body weight gain for heifers weighing between 901 and 1,300 lb.
      5. To pay $2.50 per day of care for dry cows. All dry cows must be picked up within two weeks of projected due date, or within three days after notification by _____ (Heifer Grower Business) that birth is impending.

All fees for admission must be paid on date of arrival. Monthly weight gain or daily fee will be billed by statement on the first day of each month following the month gain was recorded. Payment will be due and payable by the end of each month. All terms are Net 30 Days with no discounts applicable. Overdue accounts will be subject to standard terms and conditions shown on the back of all _____ (Heifer Grower Business) invoices (see attached). All accounts must be current before heifers/cows will be released to return to owners. If accounts become 120 days or greater overdue, owner agrees to provide heifers as collateral toward the payment of such fees, and surrender ownership of heifers of equivalent value until such bills are paid.

FOR _____ (NAME OF HEIFER GROWER BUSINESS) FOR OWNER

____________________________________________ _________________


DATE_____________

Author Information

Sarah Roth
Jud Heinrichs
Coleen Jones
The Pennsylvania State University

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This work is supported by the USDA National Institute of Food and Agriculture, New Technologies for Ag Extension project.