Purdue News
Purdue News
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December 1999 Pork producers should proceed carefully with contractsWEST LAFAYETTE, Ind. – This fall, as more and more farmers feel pressured to enter into contracts for pork production, a Purdue University expert cautions that they shouldn't rush into the first deal that comes along. "One of the greatest motivating factors right now for contracting pork production is the fear that you might be left out if you don't sign a contract," said Ken Foster, associate professor of agricultural economics. He said he believes that every pork producer eventually will need to align his or her operation with a packer, but not before carefully considering the options. Foster said pork producers are flocking to sign contracts with meat packers to ensure that there will be a place for their pigs to be slaughtered. "Some fear that a surplus in hogs this winter could leave some farmers waiting for a place to take their pigs. Even a one-week delay in slaughtering could be very costly," he said. Foster said pork production nationally is quickly moving toward contracting as a means of providing some risk protection for both producers and packers. Last year a survey by researchers at Iowa State University and the University of Missouri estimated that about two-thirds of U.S. pork producers had some kind of a contract arrangement for their operation. Contracts range from simple formula-price agreements with packers to full third-party operation of some farms. Credit lenders also are pushing contracts right now after last year's disastrously low pork prices threatened the solvency of many farming operations. "We've heard of some cases where lenders are not only suggesting farmers enter contracts, they're mandating it," he said. But Foster cautioned lenders not to force clients into arrangements that are not best in the long run. He said contracts provide some safeguards, but as with any legal transaction, they are not to be entered into lightly. "The key is to look for flexibility," he said, and to shop around before locking into a contract. "Right now it looks like hog prices may go up a bit in the spring. If that happens, farmers need to be able to take advantage of the situation. As prices go up, the farmers' bargaining position also improves," he said. Foster also suggested a gradual transition into contracting rather than placing the whole operation into a contract situation all at once. "It might be that a farmer contracts out 30 percent of his operation at first and then gradually increases that amount as prices and circumstances fluctuate," he said. Another way for farmers to get the best deal when contracting may be by cooperating with their neighbors. "If farmers join together to market and produce their hogs, they may find some strength in numbers. A group of farmers will be in a stronger position than a single farmer would be when negotiating with packers for their best terms." Foster said. Source: Ken Foster, (765) 494-1116; foster@agecon.purdue.edu Writer: Beth Forbes, (765) 494-2722, bforbes@aes.purdue.edu Purdue News Service: (765) 494-2096; purduenews@purdue.edu
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