Contracts

As it often goes with farming, the weather interfered a bit with Farm Science Review this year.  We missed seeing farmers and students from across the state gather for the show on Wednesday.  But even wind and rain didn’t stop our Farm Office team, above, from presenting Farm Office Live from the Review on Thursday.   I gave an update on Ohio legislation, as Ohio’s legislature is back from its summer break.   Here’s a summary of the legislation I discussed at our Farm Science Review program.

Bills passed and soon effective

S.B. 52 – Solar and wind facilities.  S.B. 52 passed several months ago and will be effective on October 11, 2021.  The new law will allow counties to designate “restricted areas” in a county where wind and solar projects may not locate and creates a county referendum process for a public vote on restricted area designation.  The law will also require developers to hold a public meeting in the county where a facility is proposed at least 90 days before applying for project approval with the Ohio Power Siting Board.  After the meeting, the county commissioner may choose to prohibit or limit the proposed project.  Another provision of the new law appoints 2 local officials from the proposed location to serve on the OPSB board that reviews a project.  And importantly for landowners, the new law requires a developer to submit a decommissioning plan to OPSB for approval with the application and to post and regularly update a performance bond for the amount of decommissioning costs.  Watch for our new law bulletins on S.B. 52, which we’ll publish soon.

Bills on the move

H.B. 30 – Slow-moving vehicles.  The bill passed the House on June 23, 2021, and just received its second hearing before the Senate Transportation on September 22, 2021.  It proposes revisions to marking and lighting requirements for animal-drawn vehicles to make the vehicles more visible and reduce roadway accidents.

H.B. 95 – Beginning farmers.   We’ve been hoping this bill aiding beginning farmers would continue to receive attention.  It would allow individuals to be certified as beginning farmers and create income tax credits for owners who sell land and agricultural assets to certified beginning farmers and for beginning farmers who attend approved financial management programs.  The bill passed the House on June 28, 2021 and was referred to the Senate Ways and Means Committee on September 8, 2021.

S.B. 47 – Overtime pay.  The Senate passed S.B. 47 on September 22, soon after returning from break.  It would exempt an employer from paying overtime wages for certain activities, including traveling to the workplace, actions before or after beginning principal work activities, or “de minimus” acts requiring insignificant time.  The bill sponsors state that it will bring necessary clarity to overtime pay in the era of more employees working unsupervised from home.

Bills newly introduced

H.B. 397 – Termination of Agricultural Lease.  A bill that aims to bring certainty to farmland leases was introduced in the House on August 24, 2021 and referred to the Agriculture and Conservation Committee.  The proposal states that where a farm lease agreement does not provide for a termination date or a method for giving notice of termination, a landlord who wants to terminate that agreement must do so in writing by September 1.   Unless otherwise agreed in writing, the termination date would be either the date harvest or removal of the crops is complete or December 31, whichever is earlier.

H.B. 385 – Municipal waste discharges to Lake Erie western basin  Municipalities would be prohibited from discharging waste from treatment plants into Lake Erie under a new bill proposed by Rep. Jon Cross (R-Kenton).  The bill would require the Ohio EPA to revoke all existing NPDES permits for municipal treatment works or sewerage systems to in the western basin and prohibit any additional permits for that purpose.  It would also fine municipalities up to $250,000 per day for knowingly discharging waste into Lake Erie on the first offense and $1,000 per day for subsequent offenses, or to fine $100 million if the discharge amount exceeds 100 million gallons in a 12-month period. Introduced on August 6, 2021, the bill has been referred to the House Agriculture and Conservation Committee.

Catch a replay Farm Office Live from Farm Science Review at https://farmoffice.osu.edu/farmofficelive.  Register at that site to join us for the next Farm Office Live on October 13 at 7 p.m. or a repeat on October 15 at 10 a.m., whern the Farm Office team will digest the latest news and information on agricultural law and farm management issues that affect Ohio’s farm offices.

“Carbon farming” is a term that came and went about a decade ago, but it’s back and gaining traction.  Ohio farmers now have opportunities to engage in the carbon farming market and receive payments for generating “carbon credits” through farming practices that reduce carbon emissions or capture atmospheric carbon.   As with any emerging market, there are many uncertainties about the carbon market that require a cautious approach.  And as we’d expect, there are legal issues that arise with carbon farming.

Some of those legal issues center on carbon agreements--the legal instruments that document the terms of a carbon farming relationship.  Each carbon market program has its own carbon agreement, so the terms of those agreements vary from program to program.  Even so, understanding the basics of this unique legal agreement is a necessity. 

Here’s what we know at this point about carbon agreements and the legal issues they may raise.

New terminology.  Carbon markets and carbon agreements speak a new language, containing many terms we don’t ordinarily use in the agricultural arena.  The terms are not fully standardized, and their meanings may differ from one program to another.  Understanding these new terms and their legal significance to the carbon agreement relationship is important.  Common terms to know are below but check each program to clarify its definitions for these terms.

• Carbon practices.  Farming practices that have the potential to reduce carbon emissions or sequester carbon.
• Carbon sequestration.  The process of capturing and storing atmospheric carbon.
• Carbon credit.  A measurable, quantifiable unit representing a reduction of carbon dioxide emissions that can be transferred from one entity to another.  A credit typically represents one metric ton of “carbon dioxide equivalent, which is a metric that standardizes the global warming potential of all greenhouse gases by converting methane, nitrous oxide and fluorinated gases to the equivalent global warming potential of carbon dioxide.
• Carbon offset.  Using a carbon credit generated by another entity to offset the emissions of an entity that emits carbon elsewhere.
• Carbon inset.  A reduction of carbon within a specific supply chain that emits carbon, accomplished by adopting practices within that supply chain.
• Carbon registry.  An entity that oversees the registration and verification of carbon credits and offsets.
• Verification.  The process of confirming carbon reduction benefits, typically performed by a third-party that reviews the carbon practices and the accounting of carbon credits generated by the practices.
• Additionality.  Carbon reduction that results from carbon practices incentivized by the carbon agreement and that would not have occurred in the absence of the incentive.
• Permanence.  The longevity of a carbon reduction, which may be enhanced by a requirement that carbon practices remain in place over a long period of time and steps are taken to reduce the risk of reversal of the carbon reduction.
• Reversal risk.  Risk that a carbon reduction will be reversed by future actions such as changing tillage or harvesting the trees or vegetation planted to generate the carbon reduction.

Initial eligibility criteria.  Each carbon program has specific requirements for participating in the program.  Two common eligibility criteria are:

• Location.  The program may be open only to farmers in a particular geographic location, such as within a specified watershed, region, or state.
• Acreage.  A minimum acreage requirement often exists, although that can vary from 10 acres to 1,000 or more acres.  Some projects may allow adjacent landowners to aggregate to meet the minimum acreage requirement, but that can raise questions of ineligibility should one landowner leave the program.
• Land control.  If the farmer doesn’t own the land on which carbon practices will occur, an initial requirement may be to offer proof that the farmer will have legal control over the land for the period of the agreement, such as a written lease agreement or certification by the tenant farmer.

Payment.  While the goal of a carbon agreement is often to generate carbon credits to be traded in the carbon market, there are varied ways of paying a farmer for adopting the practices that create those credits.  One is a per-acre payment for the practices adopted, with the payment amount tied to the reduction of carbon resulting from the adopted practices.   Another approach incorporates the carbon market—a guaranteed payment that can increase according to market conditions.  Concerns about market transparency abound here.  Yet another method is to calculate the payment after verification and quantification by a third-party.  For each of these different approaches, the amount could be based upon a model, actual soil sampling, or a combination of the two.  Payments may be annual or every several years.  Another consideration is the form of payment, which could be cash, company credits, or “cryptocurrency”—digital money that can be used for certain purposes.  Also be aware that some carbon agreements prohibit “payment stacking,” or receiving payments for the same carbon practices from multiple private or public sources.

Acceptable carbon practices.   Carbon practices are the foundation for generating carbon credits.  An agreement might outline acceptable carbon practices a farmer must adopt as the basis for the carbon credit, such as NRCS Conservation Practices.  Alternatively, an agreement might allow flexibility in determining which carbon practices to use or could state practices that are not acceptable.  Typical carbon practices include planting cover crops, using no-till or reduced tillage practices, changing fertilizer use, rotating or diversifying crops, planting trees, and retiring land from production. 

Additionality.  Many agreements require “additionality,” which means there must be new or “additional” carbon reductions that occur because of the carbon agreement, which would not have occurred in the absence of the agreement.  On the other hand, some agreements accept past carbon practices up to a certain period of time, such as within the past two years.  This is a tricky term to navigate for farmers who have engaged in acceptable practices in the past.  An agreement may address whether those practices count toward the generation of a carbon credit or for payment purposes.

Time periods.  Two time periods might exist in an agreement.  The first is the required length of time for participation in the program, which may vary from one year to ten or more years.  The second relates to the concept of “permanence,” or long-term carbon reductions.  To ensure permanence and reduce the risk that gains in one year could be lost by changes in the next year, the agreement may require continuation of the carbon practices for a certain time period after the agreement ends, such as five or ten years.

Verification and certification.  Here’s an important question—how do we know whether the carbon practices do generate carbon reductions that translate into actual carbon credits?  Verification and certification help provide an answer.  But verification is a testy topic because there is uncertainty about how to identify and measure carbon reductions resulting from different practices on different soils in different settings.   Predictions that are based upon models are common, but there is disagreement over appropriate and accurate methodology for the models.   Some programs may also verify practices with data acquisition and on-the-ground monitoring activities and soil tests.  And it’s common to require that an independent third party verify and certify the practices and carbon credits, raising additional questions of which verifiers are acceptable.  A final concern:  who pays the costs of verification and certification?

Data rights and ownership.  The verification question naturally leads us to a host of data questions.  Data is critical to understanding and verifying carbon practices, and every agreement should include data sharing and ownership provisions.  What data must be shared, who has access to the data, how will data be used, and who owns the data are questions in need of clear answers in the agreement.

Legal remedies.  There’s always the risk that a contract will go bad in some way, whether due to non-performance, non-payment, or disputes about performance and payment.  A carbon agreement could include provisions that outline how the parties will remedy these problems.  An agreement might define circumstances that constitute a breach and the actions one party may take if breach conditions occur.  An agreement could also list reasons for withholding payment from a farmer; one concern is that insufficient data or proof of carbon reductions or carbon credit generation could be a basis for withholding payment.  There could also be penalties for early withdrawal from the program or early termination of the agreement.   It’s important to decipher any legal remedies that are contained within a carbon agreement.

We’ve heard of carbon farming before, but today it raises new uncertainties.  Caution and careful consideration of a carbon agreement should address some of those uncertainties.  Our list offers a starting point, but it’s not yet a complete list.  As we learn more about the developing carbon farming market, we’ll continue to raise and hopefully resolve the legal issues it can present.

For more information on carbon agreements, see this listing from the Ohio Soybean Council of programs available to Ohio farmers with a side-by-side comparison of those programs, and this report on How to Grow and Sell Carbon Credits in US Agriculture from Iowa State University Extension..

There’s a lot of talk about carbon markets and agriculture these days.  While carbon markets aren’t new, recent proposals in Congress and announcements by the Biden administration are raising new interests in them.  Some companies are actively pursuing carbon trading agreements with farmers, further fueling the discussion in the agricultural community. 

As is common for any new opportunity, the talk on carbon markets may be tinged with a bit of skepticism and a lot of questions.  Do carbon sequestration practices have real potential as an agricultural commodity?  That’s a tough question and the answer isn’t yet clear.  There are answers for other questions, though, as well as resources that may be helpful for those considering carbon markets for the first time.  Here’s a sampling.

What is a carbon market?   A carbon market revolves around carbon credits generated by carbon reduction practices.  In the farm setting, a producer who either lowers the farm’s carbon emissions or captures carbon through “sequestration” practices can earn carbon credits.  Like other markets, a carbon market involves a transaction between a seller and a buyer.  The seller sells a carbon credit to a buyer who can use the carbon credit to offset or reduce its carbon emissions.

Do carbon markets already exist?  Yes, although they may be private markets with varying names occurring in different regions.  For example, Bayer Crop Sciences began its Carbon Initiative last year, paying producers for adopting carbon reduction practices that will help Bayer reach its goal of reducing its greenhouse gas emissions by 30% in 2030.  Indigo Ag began entering into long-term carbon agreements with producers in 2019, paying $15 per ton for carbon sequestration practices.  Food companies and agribusinesses including McDonald’s, Cargill, and General Mills formed the Ecosystem Services Market Consortium, which will fully open its private carbon market in 2022.

Are legal agreements involved?  Yes.  Using a written agreement is a common practice in carbon market transactions, but the agreements can vary from market to market.  Provisions might address acceptable practices, calculating and verifying carbon reductions including third-party verification, sharing data and records, pricing, costs of practices, minimum acreage, and contract period.  As with other legal contracts, reviewing a carbon agreement with an attorney is a wise decision.  Watch for more details about carbon agreements as we share our analysis of them in future blog posts.

What is President Biden considering for carbon markets?  The Biden administration has expressed interest in developing a federal carbon bank that would pay producers and foresters for carbon reduction practices.  The USDA would administer the bank with funding from the Commodity Credit Corporation.  Rumors are that the bank would begin with at least $1 billion to purchase carbon credits from producers for $20 per ton.  The proposal is one of several ideas for the USDA outlined in the administration’s Climate 21 Project.

What is Congress proposing for carbon markets?  The bipartisan Growing Climate Solutions Act would require USDA to assess the market for carbon credits, establish a third-party verifier certification program overseen by an advisory council, establish an online website with information for producers, and regularly report to Congress on market performance, challenges for producers, and barriers to market entry.  An initial $4.1 million program allocation would be supplemented with $1 million per year for the next five years.  The Senate Agriculture, Nutrition and Forestry Committee has already passed the bill.  The Rural Forest Markets Act, also a bipartisan bill, would help small-scale private forest landowners by guaranteeing financing for markets for forest carbon reduction practices.

Is there opposition to carbon markets?  Yes, and skepticism also.  For example, a recent letter from dozens of organizations urged Congress to “oppose carbon offset scams like the Growing Climate Solutions Act” and argued that agricultural offsets are ineffective, incompatible with sustainable agriculture, may further consolidate agriculture and will increase hazardous pollution, especially in environmental justice communities.  The Institute for Agriculture & Trade Policy also criticizes carbon markets, claiming that emission credit prices are too low and volatile, leakages and offsets can lead to accountability and fraud issues, measurement tools are inadequate, soil carbon storage is impermanent, and the markets undermine more effective and holistic practices.  Almost half of the farmers in the 2020 Iowa Farm and Rural Life Poll were uncertain about earning money for carbon credits while 17% said carbon markets should not be developed.

To learn more about carbon markets, drop into an upcoming webinar by our partner, the National Agricultural Law Center.  “Considering Carbon:  The Evolution and Operation of Carbon Markets” on May 19, 2021 at Noon will feature Chandler Van Voorhis, a leading expert in conservation and ecological markets.  The Center also has a recording of last month’s webinar on “Opportunities and Challenges Agriculture Faces in the Climate Debate,” featuring Andrew Walmsley, Director of Congressional Relations and Shelby Swain Myers, Economist, both with American Farm Bureau.  A new series by the Center on Considering Carbon will focus on legal issues with the carbon industry and will complement our upcoming project on “The Conservation Movement:  Legal Needs for Farm and Forest Landowners.”  There’s still more talking to do on carbon markets.

A new rule proposed by the USDA Agricultural Marketing Service (AMS) covers a topic that has been up in the air for more than a decade.  The 2008 Farm Bill called on the Secretary of Agriculture to create regulations meant to guide the USDA in determining whether or not a packer, swine contractor, or live poultry dealer gave a person or locality “any undue or unreasonable preference or advantage” when purchasing livestock and meat products. The Secretary of Agriculture entrusted the rulemaking to USDA’s Grain Inspection, Packers and Stockyards Administration (GIPSA).  GIPSA did propose versions of the rule in 2010 and 2016, but neither ever went into effect due to congressional prohibitions on such rulemaking and a presidential transition, respectively. (The anticipated regulations have long been referred to as the “Farmer Fair Practice Rules.”) Once Trump came into office, his administration did away with GIPSA and gave its responsibilities to AMS, further delaying the rulemaking. 

After all this time, what does AMS propose for the Farmer Fair Practice Rules?  On January 13, AMS published its proposed rule in the Federal Register.  AMS would add a section to the Packers & Stockyards regulations, which would allow the Secretary of Agriculture to “consider one or more criteria” when deciding whether a packer, swine contractor, or live poultry dealer unfairly favored any person or locality over another in their dealings.  AMS developed four criteria to be considered when determining whether a packer, contractor, or dealer’s actions were unfair.  Actions would be deemed unfair when they:

1. Cannot be justified on the basis of cost savings related to dealing with different producers, sellers, or growers;
2. Cannot be justified on the basis of meeting a competitor’s prices;
3. Cannot be justified on the basis of meeting other terms offered by a competitor; and
4. Cannot be justified as a reasonable business decision that would be customary in the industry. 

In the rulemaking, AMS provides several examples of fair and unfair practices. AMS also emphasizes several times that the Secretary of Agriculture would not be limited to considering just those four criteria when making a decision, as each situation is unique.  In essence, the proposed language is meant to guide the Secretary’s thinking when making a determination about whether or not an action is unfair.

 If you would like to read more about this proposed rule it is available in its entirety here.  Information about submitting comments on the rule is available at the same link.  Comments on the rule may be submitted up until March, 13, 2020.  Will this version of the elusive Farmer Fair Practice Rules finally stick?  We will have to wait and see.