In a sign of the times, Iowa Attorney General Tom Miller has proposed legislation to protect farmers growing pigs and poultry under production contracts.

Miller's proposal would allow Iowa farmers to file a lien on the animals in their facilities and the proceeds generated from the sale of the animals.

'Farmers should have the ability to protect themselves in the case of a contractor failing to make payments owed to them under protection contracts,' says Miller. 'We all certainly hope that farmers never will need to use these liens to receive payment, but given the financial pressures that exist today it is important to give farmers access to this type of financial security.'

The proposed legislation also would not allow lien waivers in the production contracts. In many, the farmer is required to sign a clause stating that he agrees to waive any lien rights on the pigs. 'In general, there is a sharp disparity in the bargaining power of the contractor and the individual farmer,' says Miller. 'If we don't prohibit lien waivers, there could be strong pressure on farmers to waive the lien provisions.'

One Iowa contractor questions the wisdom of lien waiver legislation. Not only does he worry about the legal precedence it establishes (allowing the state to rewrite private party financial contracts), but he is also concerned about the possible impact on a contractor's borrowing ability if the contract grower is granted a statutory lien on the contractor's pigs.

This contractor also discounts the idea of farmers needing the state's protection from a contractor. 'The idea that a farmer entering into what is often a $750,000 investment can't understand the terms of the contract is just not true,' he says. He terms the legislation 'a solution in search of a problem.'

Under the attorney general's plan, producers would file a form with the Iowa Secretary of State within 20 days of delivering a group of animals to their facility. The form would ask for the estimated amounts producers would be owed under the contract, the estimated duration that the animals would be at the facility, the name of the contractor and other basic information. A perfected lien would then give producers priority in case a contractor fails to pay them.

The Iowa legislative session begins the second week of January. The language of Miller's proposal is such that it would become effective on enactment.

But, some lenders will caution that bad debt collection is never as easy as it seems. 'There's no question that a lien would leave many in a much better position than they may be currently in, but what teeth the lien would have is the big question. Establishing that your lien has priority and getting your hands on the money are often battles that end up being fought out in court,' says one Minnesota ag lender.

John Schuller, a loan officer with Grundy National Bank, Grundy Center, IA, and a member of the Iowa attorney general's task force, notes that as most of his bank's clients are independent producers, he likes the idea of the proposed legislation if it helps protect borrower's cash flow. But he cautions that the lien may just end up putting additional financial pressure on the large hog operation supplying the pigs.

Schuller explains that if there's a lien on those pigs, the bank cannot use that livestock asset as part of his collateral base. With hogs at record low prices, that collateral is already very tight and an additional lien could create a 'domino effect' that would end up inhibiting contractor's ability to make payments to the contract growers the lien was supposed to protect.