Evolution of Available Swine Production Contracts
Livestock Update, August 1997
Allen Harper, Extension Animal Scientist-Swine, Virginia Tech
Producing hogs under production contract arrangements has increased steadily over the past 15 years. Estimates vary but livestock economists indicate conservatively that at least 20% of U.S. slaughter hogs are produced under some form of production contract. In states like North Carolina and Oklahoma, where hog production has expanded in recent years, use of production contracts is commonplace.
A general presumption is that contract production will involve a major swine production company such as Murphy Family Farms, Carroll's Foods or Tyson's as the "contractor" with full or part-time farmers as the "growers". While such companies are heavily involved in contract production, there are also a significant number of feed company to farmer and independent farmer to farmer contracting relationships in the industry.
Another common presumption is that contract swine production is following the exact model that has become fully established in the poultry industry. Certainly there are many similarities but one distinction is that the majority of pork processors, unlike poultry processors, do not serve directly as the contractor or owner of the animals being produced. In this sense pork production has not shifted fully to vertical integration. However, pork production is certainly becoming more coordinated between pork packers and larger producers, many of whom are involved in contract production. An important consequence of this distinction between the poultry and pork industries is that opportunities for fully independent swine producers still exist. But to be competitive, independents will have to efficiently and regularly produce the quality of hogs their packer-buyer wants to purchase.
The shift from single site, farrow-to-finish production units to multiple site production units has impacted contract production. Two-site production with farrowing at one farm location and feeder pig finishing at another has become common. Recently, three-site production with farrow-to-weanling pig production at one site, rearing of weanling (nursery) pigs at another site and finishing at a third farm site has been increasing. Reported advantages of three-site production include the ability to maintain a better health status of pigs in different stages of production and the ability to distribute manure management needs over a broader range of farming land. This trend has resulted in more types of production contracts becoming available within the industry. In addition to traditional farrow-to-feeder pig and hog finishing contracts, farrow-to-weaned pig and nursery pig contracts have become available to contract growers.
From the farmer or grower's perspective, an important advantage of contract production is that the risk of hog prices moving to low levels and feed process to higher levels is transferred to the contractor. Conversely, when hog prices move to higher levels or feed prices to low levels, the grower generally does not experience increased financial returns. However, understanding the terms and expectations of a swine production contract is more complex than simply knowing the per pig payment schedule offered by the contractor. Efficiency bonuses, source and quality of breeding stock or feeder pigs, facility expectations, termination clauses and contract duration are just a few of the important considerations when evaluating a contract.
Potential contract growers should seek out and carefully evaluate reliable information when considering swine contracting. Sources include hog contractors and the sample contract and proforma statements which they can provide. It is important to recognize that a proforma statement is an estimate, not a guarantee, of the expected costs and financial return that can be realized from a contract production arrangement.
Another information source to consider is the experience that existing contract growers are willing to share. Actually, it is reasonable that a contractor provide some grower references to potential contract growers that they are negotiating with.
General publications on contracting include the Pork Industry Handbook Fact Sheet 6 "Producing and Marketing Hogs Under Contract" which, along with other publications, can be obtained from state or local Extension offices. Recently, the National Pork Producers Council published an in depth "Guide To Contracting". This guide may be ordered as publication NPPC-04235 for $15.00 from the National Pork Producer Council's Order Department, P.O. Box 10383, Des Moines, Iowa 50306, telephone 515-223-2600, extension 621.