What should a Producer Consider when going with a Pork Contract?
17 July 2017
Producers who aren’t able to secure the credit they need to continue to operate independently might find contract production the most profitable option left to them, even when it might not pay the full ownership cost. Other pork producers with better balance sheets will be looking for risk management strategies that lead to a stable income. Some pork producers will decide to vertically align their operations because they fear that access to markets will be limited in the future. In an article by Ken Foster of the Agricultural Economics Department at Purdue University, he provides some information to aid those who are considering a pork production or marketing contract.
Advantages to contracting include risk reduction and producer capital requirement reduction. Risk reduction for the producer means most of the market price is taken on by the contractor. The second advantage is producer capital requirement reduction where the contractor adds some of the inputs. This will reduce the operating cost budget of the grower and could increase their ability to obtain financing for the swine facility.
Some disadvantages to pork contracting are producer control reduction, the potential for disease and producer record keeping requirements. Producer control reduction is where the contract reduces the producer’s involvement in management decisions. Producer record keeping requirements will require additional record keeping by the producer which can be complicated. Another setback could be the potential for disease. In order to fill a producer’s buildings, the contractor may find it necessary to commingle groups of hogs from several sources. To see more advantages and disadvantages click here.
There are additional considerations for contract growers. With any contract, producers should read any agreement carefully and consult an attorney. Ken Foster points out several commonly overlooked considerations that should be mentioned before writing a swine production contract. For example, a good question for the producer to ask is whether feed quality is guaranteed?
There are economic incentives for increased coordination at many levels of the pork industry. It’s looking like the Indiana pork production will be coordinated and contracting will be a big part of this. After looking at the advantages and disadvantages it’s up to the producer to decide whether having a contract is a plus or a minus for them.
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