Agricultural contracts are risk management tools available to peach producers and other specialty or value-added crop producers. Contracts are a good risk management option because these specialty producers typically do not have as much variety in the crop insurance products available to them and using futures markets is not an option, as is the case for producers of major commodities such as corn, soybeans and wheat.
A contract is usually defined as a written or oral agreement between two or more parties involving an enforceable commitment to do or refrain from doing something. In agriculture, contracts between farmers and agribusinesses specify certain conditions associated with producing or marketing an agricultural product. By combining various market functions, contracting generally reduces participants’ exposure to risk. In addition to specifying certain quality requirements, contracts also can specify price, quantities to be produced and services to be provided. Contracts may address various elements of marketing risk, including price risk, “placement risk” and quality compensation risk. Contracts also may address production risk.