contract production swine

SwineCast 0446 Show Notes:

• Some swine integrators are looking to vacate Iowa production contracts due to unforeseen circumstances like County Of Origin Labeling and the H1N1 disaster. 
• Read more at Force Majeure – Is "Swine Flu" and/or Mandatory COOL An Excuse For Non-Performance Under a Hog Production Contract? by Roger McEowen & Erin Herbold, Center for Agricultural Law and Taxation, Iowa State University of Science and Technology.

     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. 

     The principal motivation for contract swine production by those who employ it has been to allow the growth of the operation.  The owner of the animals typically invests in the sow farm, animals, feed mill and related capital items and lets contracts for the facilities post-weaning.  By inviting investment in the very capital intensive production process by others, added scale can be achieved.

     I'm not sure anyone has ever thought that contract production was a low cost method of production but it allows additional scale to be achieved which offsets some of the added cost associated with it.