Considering Contract Pig Production?

Mike Yacentiuk P.Ag., Swine Specialist

The rearing of pigs under contract has occurred successfully for many years in the United States and Europe. In fact this method of pig production has probably been the single greatest stimulus to growth in the North Carolina pork industry, propelling that state to second in U.S pig production by the late 1990s. Familiarity by farmers with poultry contracting, from which pig contracting was modeled, and the decline of the tobacco industry have also been identified as factors contributing to the rapid increase of pig contracts in North Carolina.

Contract production is not a new concept to Manitoba, having been utilized in the province for over twenty years. However, it is during the past few of years that this production method has received renewed interest. Many types of contract scenarios are prevalent, the most common being the contracting finishing of feeder pigs. In this type of business arrangement, the contractor usually retains ownership of the pigs, supplying the contract grower with the feeder pig, feed, veterinary consultation and supplies as well as incurring the marketing costs. The contract grower is responsible for the labour, facilities, repairs, utilities, insurance, manure removal and property taxes and is usually paid a fee plus performance bonuses. This model can also be expanded to other facets of the production cycle, including the sow units and nurseries.

Advantages and disadvantages apply to both parties in this type of business arrangement. For the contractor, the main incentive to contract production is that it is a very effective method of reducing capital requirements; possibly by fifty percent. The risk of market fluctuations will always exist; however, this can be managed. Another risk to the contractor is the possibility of aligning with an unsuitable finishing partner.

The main reason for a contract grower entering this type of arrangement is to reduce business risk. A set regular payment to the grower will assist with a more predictable cash flow. In addition, depending on the financial stability of the contractor, lending institutions may view this type of alliance more favorably when approving loans for projects.

The contract fee schedule will have a significant bearing on the feasibility of a proposal, especially for those producers wishing to become independent growers at a point before the facilities have reached the end of their useful life. The length of time in which the contract is in effect is usually negotiable. Most people prefer to base the contract length on the time it will take to repay the facility debt.

It is generally unwise to wait until a difference of opinion between the contractor and the grower stimulates a discussion on the details of the business partnership. Some minor points to consider before entering into an agreement are the specific requirements of each party involved including, the weighing and loading of pigs, site biosecurity and barn cleaning. In terms of payment it should be clarified as to how excessive mortality and poor feed conversions in extraordinary situations will be resolved and how these factors will affect the bonus system of payments. Another area for discussion should be the timing of pig and feed deliveries, as well as the responsibilities of the grower to maintain road access to feed bins and loading areas. Lastly, both parties should establish a dispute mechanism, as well as a clear description of terms for the termination of the contract.

Seeking legal advice before signing a contract is always prudent. Special circumstances may have to be considered when forming a contract with international parties.

Although contract production will not meet the needs of all individuals, it does provide an option for either entering or remaining in the pork industry of the future.