One of the consequences of moving to a new equilibrium trading range for commodities is that most of the contracts which define the relationships among cooperative producers have become woefully inadequate and are in need of major revision.
Among others, these contracts include weaned pig purchasing agreements, production contracts where the grower supplies feed, many packer contracts (at least those with a price risk management feature) and contracts which include a "basis" calculation to establish a price.
The typical forms of the weaned pig purchasing contract are 1) a flat fee with a trading range to establish a minimum and maximum and 2) some factor times the deferred lean hog contract. The permanent escalation of feed ingredient costs now make these contracts inadequate to properly compensate the parties.
SwineCast 0486
