Contract vs. Independent Pork Production: Does Financing Matter?

Purdue University 1999 Swine Research Report. The pork production industry continues to change rapidly. The Midwestern hog production industry, in particular, is experiencing a dramatically changing organizational structure due in part to an increasing cost competitiveness as the industry trends towards larger scales of production, increasingly specialized production, and production utilizing the best advantages technology currently makes available. Many Midwestern pork producers are facing an increasing number and complexity of arrangements to produce pork. This changing structure of production comes at a time when the number of producers involved in pork production continues to decline and the volume of hogs produced grows, reflecting the trend toward fewer but larger production operations. Numerous Midwestern pork producers are facing the decision of if and how to remain in pork production. The choices available to a producer vary with individual objectives, situational characteristics, and geographic availability of alternatives. While the set of choices for some producers may include facility modernization or enhancement, the investment opportunities analyzed in this study will be limited to those production alternatives requiring a full investment in facilities and equipment. The options we will consider are traditional independent farrow-tofinish production, and different types of contract finishing production. The one dimension common to all possible routes a producer might choose is that they each entail some degree of risk – either the probability of not being able to make debt repayments, or the probability of not achieving an equity return sufficient to compensate the producer for the opportunity cost of investing.