Normally, lenders allow contract producers with a dependable, modern production system to put up only 15-20% of the new cost of the building as inital equity. This is because the cash flow from the unit is dependable and uniform. Because such a small amount of initial equity is required, returns on equity (ROE), the primary measure of financial outcome tend to be very high for the grower.
As mentioned previously, the payment is calculated to reimburse the grower for all costs including principal and interest on the note at a relatively small initial equity. Returns on equity (ROE) can run in the 40-70% range depending on the length of the contract and the terms of the note. Usually, this return does not calculate or factor in the cost reduction in fertilizer which accrues to those who can use the manure nutrients to offset fertilzer needs on a cash crop such as corn. When these returns are included, net of application cost, the total returns to a contract wean to finish or finishing building become some of the best that can be achieved in agriculture.
The motive to use contract producers has been to spread the investment cost of capital over more entities and because the number of sites required in a typical farrow to finish unit now tend to be greater since most companies only want to put the equivalent of 4-5,000 head of wean to finish or finishing animals on a single site. This reduced number of animals per site not only makes permitting easier but also is more cost effective if a depopulation of the site is necessary to eliminate a disease issue.
An issue which is arising more and more is the attempt to co-permit the site with both the owner of the animals and the land owner co-liable for proper operation and manure use. While this is rarely achieved, there are increasing efforts to demand it by opponents of swine production. If this movement becomes successful, the management of the process must become the joint responsibility of the contractor and the grower. This will increase the cost of production since the grower is compensated for properly utilizing the manure nutrients from the reduced commercial fertilizer costs. If two entities must manage the process, some of the net benefit to the grower will need to be reduced. This has led some companies to simply lease the site and buildings and perform the nutrient management themselves to avoid the double payment for this function.
There are more things to think about too...we will get to these shortly.
