Production and Marketing Characteristics
The 2004 Pork Industry Structure Study

Contract production in the U.S. swine industry continues to expand.  Beginning with the 1997 Industry Structure Study, we have attempted to measure the scale and scope of contract production.  For this discussion we refer to the parties involved in the contracting transaction as the “contractor” and the “grower”.  The contractor is the party that typically owns the animals, pays for the feed and healthcare, and takes the market risk associated with owning the animals.  The grower is the party that typically owns the facilities, provides labor to care for the animals, and pays fixed and variable expenses associated with owning and operating the facilities, such as taxes, utilities, and hired labor in return for a known payment (or payment schedule).  

Table 25 provides information on firms that are involved in hog production and that also accomplish some or all of this production through contractual arrangements with growers.  The percentages in Table 25 represent the portion of all slaughter hogs in the U.S. raised by these firms from 1997 through 2003 for various sizes of operations.  The farrowings are as a percentage of all farrowings reported by USDA.  The size categories are based on the annual marketings of these firms and reflect the fact that firms of various sizes engage in contracting activities.  In the middle farrowing section, for example, it can be seen that of all slaughter hogs marketed in the U.S. in 2003, 15 percent were farrowed by sows owned by firms that marketed between one and fifty thousand head and engage in contracting transactions.  In total for 2003, 68 percent of the hogs raised in the U.S. were farrowed by contracting firms, up from 39 percent in 2000. 

The right hand section of Table 25 presents the extent of U.S. hog production that is finished by contracting firms.  Again, the percentages represent the proportion of all U.S. slaughter hogs marketed by these firms, some of which were raised in facilities owned by the contractors (i.e. not finished under a contract) and/or finished by growers in relationship with the contractor firm.  In 2003, 13 percent of U.S. hogs were raised by contracting firms that sold less than 50 thousand head per year, which was slightly higher than the proportion raised by firms in the 50 to 500 thousand head category.  In total for 2003, 64 percent of U.S. hogs were raised by contracting firms. 

Table 25.   Percent of U.S. Hogs Raised by Firms That Are Contractors, 1997-2003

Firm Size (thousand head mktd)

Farrowed by contractors

Finished by contractors

1997

2000

2003

1997

2000

2003

1 - 50

10%

  5%

15%

14%

  9%

13%

50 - 500

  8

  8

13

  9

13

12

500+

22

26

40

22

33

39

Total

40

39

68

45

55

64

Table 26 is related to Table 25 in that it reflects the proportion of all U.S. hogs sold by contractors that are actually raised by growers under a production contract.  In terms of contract farrowing, 29 percent of all hogs farrowed in the U.S. were farrowed in a facility owned by a contract grower.  This number relates to Table 25 in that while 68 percent of U.S. hogs are farrowed by contractors (Table 25), 29 percent, or less than half, are from sows on grower farms, farrowed under a contract. 

On the finishing side, 41 percent of U.S. hogs were finished under a contract in 2003 which is up from 30 percent in 1997.  The most significant growth was by contractor firms in the 500+ thousand hogs marketed, referring to the size of the contractor firm or firm that owned the pigs.

Table 26.   Percent of U.S. Hogs Raised under Contract, 1997-2003

Firm Size  (thousand head mktd)

Farrowed

Finished

1997

2000

2003

1997

2000

2003

1 - 50

  1%

  2%

  7%

  8%

  3%

  5%

50 - 500

  4

  7

  5

  7

10

11

500+

11

13

17

16

21

25

Total

17

22

29

30

34

41

The length of contracts offered by contractors to growers varies depending on the size of the firm and contract enterprise type (Table 27).  In general it appears that smaller firms offer shorter contracts.  The firms selling between one and fifty thousand hogs per year had standard contract lengths of fewer than four years on average for the nursery and finishing phase of production and slightly over four years for farrowing or farrow-finish contracts.  The average length contract for the larger firms was similar for both the larger firm size categories for the finishing, farrowing, and farrow-finish contracts. 

Table 27.   Average Length of Production Contracts     

 

Firm Size (thousand head mktd)

1 - 50

50 - 500

500+

Finishing

41 mo.

68 mo.

69 mo.

Nursery

46 mo.

68 mo.

54 mo.

Farrow or farrow-finish

49 mo.

62 mo.

64 mo.

Nursery-finishing

29 mo.

53 mo.

63 mo.

Contracting firms were asked to describe the level of training supervision they provide for growers.  The results in Table 28 show that over three-quarters of larger firms provide training and close supervision.  The smaller contracting firms appear to rely on finding experienced producers who need little training and supervision.  Over two-thirds of these firms indicated that they find experienced growers and only 20 percent said they train and supervise closely.

Table 28.   Training and Supervision Provided by Contractors to Growers                         

 

Percent of Reponses by Firm Size (thousand head mktd)

1 - 50

50 - 500

500+

Train and supervise closely

20%

76%

76%

Train briefly and supervise little

8

16

16

Find experienced producers  who need little training or supervision

68

8

8

Most of the growers began contracting in the last ten years (Table 29).  Almost half (47%) of respondents started producing hogs for another party between 1995 and 1999, while 18 percent began after 1999.  Only eight percent of respondents started before 1990.

Table 29.   When Growers Began Contract Production

 

Percent of Growers

Before 1985

3%

1985 – 1989

5

1990 – 1994

27

1995 - 1999

47

2000 - 2004

18

The overwhelming majority of contract growers intend to continue with contract production when their current contract expires (Table 30).  Eighty percent indicated that they would continue with the same firm and nine percent said they would contract with a different company.  While the question was posed prior to the recent run-up in prices, only four percent said they would become independent. 

Perhaps not surprising given the response to grower plans, there appears to be little turnover with respect to contractor firms and growers.  Most growers have been with the same contractor for the last 5 years (Table 31).  Slightly more than an eighth of the grower respondents indicated that they have worked with two contractors and only four percent had worked with three.

Table 30.   Grower Plans after Current Contract Expires

 

Percent of Growers

Stop producing hogs

2%

Contract a different company

9%

Continue with same company

80%

Become independent

4%

Other

5%

Table 31.   Number of Contractors Per Grower in Last 5 Years

 

Percent of growers

1 contractor

80%

2 contractors

15%

3 contractors

4%

Contractors were asked to indicate if they planned to expand contract production, reduce contract production, or keep their mix steady over the next five years.  The percent of responses for each strategy are presented in Table 32.  For the largest firms (500+ thousand head marketed per year), slightly more than half said they would keep the mix steady and about a quarter said they would either reduce or expand contract production.

A similar proportion of contractors selling 50 to 500 thousand head said they would keep their mix steady, but slightly more (30%) said they would expand.  Almost three-fourths of the smallest contracting firms plan to keep their production mix steady.

Table 32.   Contractors’ Expectations for Next 5 Years   

 

Percent of Responses by Firm Size

(thousand head mktd)

1 - 50

50 - 500

500+

Expand their contract production

16%

30%

24%

Reduce their contract production

13

15

24

Keep their mix steady

71

56

52