On the surface, most people think of contract production in swine as a low cost method of production. In fact it is in most cases the opposite. It has been employed primarily to allow added scale to achieve other cost reduction goals and to preserve limited capital.
As costs of facilities have risen, the amortization options have been extended by lenders to 12 and 15 years from the traditional 10 year paydown on modern swine buildilngs. As previously mentioned, a 10 year payoff of a 25+ year asset imposes cashflow strains that increase the opportunity cost and the actual cost of this method of production. The grower expenses the asset based on its useful life while achieving a paydown in less than half of that time. That's called a windfall gain.
SwineCast 0418
