Structure of the hog industry

• Many, small operations used to raise hogs from start to finish

• Hogs were raised where near large supplies of corn.

• Hog farmers typically fed corn and other farm by-products from their own operation as an inexpensive feed

• Hogs were sold at local markets for a negotiated price

Structure has changed dramatically

• Rapid transition to large specialized operations

• Most hogs are raised in buildings, with specialized, environmentally modified facilities.

• Allows closer watch of animals for nutritional needs and disease prevention

• Confinement production allows year-round production

Hogs are produced in 3 types of specialized enterprises

• Farrow-to-finish operations – raise hogs from birth to slaughter weight,

about 110-125KG (4.5-6 months)

• Feeder pig producers – raise pigs from birth to 4-28 KG, then

generally sell them for finishing.

• Feeder pig finishers – buy feeder pigs and grow them to slaughter

weight.

Change to more specialized operations

• Farrow-to-finish operations were the main type of hog farm in the 1980s

• Operations have been more specialized, dividing each stage of production

• Most hogs produced under production or marketing contracts

Economies of size drove the change

• Larger operations can spread fixed costs over more animals

• Low-cost operations can survive periods of low prices easier than high-cost

• Contract production allowed farms to specialize and reduce risk

• Increased capital requirements

Contracting has changed the industry

• Contract production is an arrangement between a pig owner (the contractor) and a producer (the grower)

• Producer cares for the pig in the producer's facilities.

• The producer is paid a fee for the service provided.

• An integrator may have contracts with many growers to produce hogs.

• Farmers can also be contractors

Contracting has changed the industry (continued)

• Decision making is divided between farmer and contractor

• Day-to-day management is key to returns to farmers

• Financial management, acquiring other inputs, allocation of time and management

• Farmers don’t have a role in other production practices (such as raising feed) and marketing role is limited

Why would farmers use contracts?

• Reduce risk of price swings

• Stabilize cash flow

• Share production costs

• Assure access to market

• Access to expert advice

• Expand scale of operation

Why would farmers use contracts?

• Reduce input risk– Assure access to product– Control quality and quantity

• Diversify operations

• Ease inventory management problems

• Establish product identity

Contracting allowed the application of technology in new ways

• Technology applied to each production stage – Automated feeding and watering system reduced

costs

– Increase pigs per litter and weight per hog

– Management systems became more specialized

– Advantage of economies of size

• Location of farms moved to non-traditional areas, led by North Carolina. Other growth areas--Oklahoma, Missouri, and Utah.

Large operations means more manure

• More animals, more manure in one location

• With higher fertilizer costs, there is a new interest in using manure in the Corn Belt state

• Hog finishing facilities are directly tied to location of cropland (where the feed is located and where the manure can be spread)

Two types of contracts

• Market contracts-- setting price before delivery

• Production contracts-- agreement to produce a particular product for a known outlet for a fee

• Production contracts used more in livestock

• 68 billion or 36 percent of ag production

Production contracts Marketing

contracts

Breeding/farrowing

Nursery

Processor

Retailer

Consumer

Feed Mill

Finishing

Stages of production and the use of contracting

Increases in hog contracting occurred quickly

Contracting Vertical integration Open market

With contracting, herds got larger

• On farms with more than 1,000 head– 37 percent of swine population in 1987– 47 percent in 1992– 71 percent in 1997

• On farms with more than 2,000 head– 29 percent in 1992– 55 percent in 1997

Why were contracts so popular?

• Application of new technology

• More closely coordinated stages of production to meet demand

• Allowed American to have preferred food year round

• Contracting assures a given supply and quality at stable prices and better manages risk

Contracting changes production

• Is agriculture going thru stages?

– Autonomous, small, wholly owned and operated, self and local markets

– Rent or lease resources, cash market

– Multiple cooperative agreements, including marketing contracts

– Consolidated, highly integrated, complex organization

Contracting changes the market

• Prices not visible

• Fewer buyers

• Eliminate stages of transfer (markets)

• Market risk is exchanged for contract risk