Contract production was little more than a blip on the radar just 20 years ago. Today, it’s a significant and viable way of doing business in the pork production industry.
In 1987, when Pork magazine first embarked on the Pork Industry Structure Study, only 11 percent of the hogs that U.S. producers finished out was through contract production. In the current Pork Industry Structure Study, that figure increased to 41 percent of all U.S. hogs finished in 2003. You can expect that figure to grow.
This installment of the 2004 Pork Industry Structure Study will look at production-contract trends for producers in three size groups: 1,000 to 49,999, 50,000 to 499,999 and 500,000+.
“Contract production is an awfully important part of the pork industry now,” says Glenn Grimes, University of Missouri agricultural economist. “It provides capital, labor and a place to go with the affluent.”
Contract production is an offshoot of the trend toward large pork operations. “The decade of the 1990s was when big production came in,” notes Grimes. It’s also when most growers first signed a contract — 27 percent began contract production in 1990 to 1994, another 47 percent started in 1995 to 1999. In the last four years, 18 percent more growers have gotten into the act.
What’s more, the mentality about raising hogs on contract has changed — it’s a more acceptable, even preferred, option these days. “Those involved with contract production are happy with it,” notes Grimes. “Those people who are not into contract production are the ones who criticize it.”
Ever since 1987, when the survey first asked about contract production, growers and contractors have always rated it high. This survey was no different. However, even the owners — or contractors — said they are happy. Rated on a score of 6 = very satisfied to 1 = not at all satisfied, here are the average scores of the various producer groups:
Contract growers: 4.9
General producers: 3.7
“I was a bit surprised that the contractors’ response came in as high it did because of the profit stress that they’ve been under,” notes Grimes. “But in some cases, if the producer wants to raise hogs, contract production is really his only choice.”
So, what is the status of hogs raised on contract today?
More hogs are farrowed and finished via contract production today than in 1997; and producers involved in the business arrangement produce more hogs in general.
“The total number of hogs that contractors raise just keeps growing” says Grimes.
In 1997, producers involved in contract production finished 45 percent of all the U.S. hogs. In 2003, that number increased to 64 percent. As for farrowing, the numbers shifted from 40 percent to 68 percent during that same time period.
Looking at it from a share of U.S. domestic hog production, 40 million hogs were finished through contract arrangements in 2003. (See charts No. 1 and No. 2.) That compares with about 9 million in 1987.
Just as pork producers in general plan to expand, so do those involved in contracting. “I would be surprised if in five years there were not more hogs produced under contract than there are now,” says Grimes. “That has been the case every time we’ve measured it.”
While most contractors said they plan to hold their contract production mix to current levels, several in all of the size groups said they plan to expand the contracting portion of their production.
But what do the growers have in mind?
Asked what they have planned after their current contract expires, roughly 90 percent said they would continue raising hogs on contract. Here’s the breakout:
Continue with the same company = 80 percent
Contract with a different company = 9 percent
Become independent = 4 percent
Stop producing hogs = 2 percent
Other = 5 percent
The response to “becoming independent” always ranks low. “These numbers confirm the happiness of the arrangement, and how satisfied growers are,” notes Grimes.
Generally speaking, growers team up with one company — 80 percent committed to one firm in the last five years; 15 percent with two firms; 4 percent with three contractors.
Some of that has to do with the contract’s length, most are in the 4- to 5-year range. (See chart No. 3.)
Who calls the shots, is a question often raised when talking about contract production. It’s increasingly evident that the grower has to make several decisions. After all, he or she is the one who sees the pigs everyday.
“The smaller contractors want growers with experience in working with hogs,” notes Grimes. “The larger contractors prefer to train people to run their system.”
Here’s what the contractors said about their training protocols:
Of the contractors raising 1,000 to 49,999 hogs annually, 20 percent said they train and supervise growers closely; 76 percent of the contractors in the 50,000+ group said the same.
“Find experienced producers who need little training or supervision,” 68 percent of the smallest contractors preferred this route; only 8 percent of the contractors in the 50,000+ group agreed.
The remaining percentages fell into the classification of “train briefly and supervise little.”
What could change the trend of contracting hogs?
“If contracts became less advantageous, growers would be less willing to do it,” notes Grimes.
It should come as no surprise that some contractors would like to lower the payment. After all, growers have faired better than owners during the last five years. But, the competition for growers and contract lengths may keep that from happening.
“If we put together a few years of good profits, I would expect the pressure to reduce the growers’ payments to go away,” says Grimes. “But, if conditions like we’ve had in the last five years continue, the pressure to lower payments will increase.”
In the end, Grimes says: “From a grower standpoint, contract production should continue to be pretty good. It just takes so much capital to put up buildings and raise hogs on your own.”
Contract production is here to stay, and it will grow. It’s evident that both parties involved like it, and both parties depend on it.
Editor’s Note: More information about the 2004 Pork Industry Structure Study can be found in the June and July 2004 issues of Pork magazine, and on the Web site at www.porkmag.com
Getting the Job Done
Providing financial support for this year’s research: the National Pork Board, PIC, Monsanto Choice Genetics, Land O’ Lakes and Pork magazine. University of Missouri and Iowa State University agricultural economists conducted the survey and analyzed results.