Outlining considerations for contract production
For anyone who has thought about raising hogs under contract, getting started can be a daunting task. The good news is that there are many options available today. Even better news is that you don’t have to work through the details alone. Certainly pig suppliers, whether it’s an independent producer or integrator, can provide some guidance and services. But pork production has a vast support system. From finding a pig supplier to building design to permitting to neighbor relations to financing and all the steps along the way, there are experts who can help.
Contract production is not the boogey man that it was perceived to be in the early days. It has a long and stable track record, and both the pig supplier and contract grower know that they depend on each other to accomplish their goals.
“Land and buildings are expensive so the pig supplier can’t feasibly own it all. He needs to spread out production,” says Colin Johnson, Iowa State University Extension swine specialist. “Also, the supplier wants his growers to succeed, be productive and hopefully remain on the team.”
First Step: Think it Through
Many of the steps on the path to raising hogs on contract occur simultaneously. It’s not a clear-cut process of– do A, then B, then C. It’s also a universal truth that for every rule there can be an exception. But the recommendation by most of the participants is to start by sincerely thinking through why you want to contract grow hogs.
The reasons can differ a bit if you are a young person starting out, or a veteran looking to build equity. “For a young farmer, contracting is an income and labor utilization project,” Johnson notes. “For an established farmer with land, the point is to add value to the farming enterprise.”
Some of the benefits of raising hogs on contract include:
• Long-term equity growth: A hog barn is an asset that can hold its value over many years, and it can help build your balance sheet, according to Dustin Compart, associate financial services specialist, with AgStar Financial Services, in Minnesota.
• A transaction/transfer plan: Contract production can provide a way to move assets to the next generation. “It’s a good way to help a family member or young farmer gain access to credit and work toward building a balance sheet,” Compart adds. A few ways to provide such assistance is to gift a few acres of land for a building site, pledge collateral to finance a hog barn, guarantee a loan or assist with a down payment.
• Depreciation/Tax plan: Accelerated depreciation of the barn can help offset other farm income, which can be used as part of a tax plan. However, always consult with your tax professional early on to evaluate your situation.
• Consistent source of income: Raising hogs on contract reduces risk. You are paid a set monthly rate, and you’re not as vulnerable to marketplace volatility.
“This was a big factor for me,” says Caleb Corzine, Assumption, Illinois, who, along with his wife, Tarcie, just finished out their first set of contract pigs. “We have half the cost– the barn, equipment, utilities and chores are my responsibilities. But we don’t have the other risks of hog prices, feed prices or medications on my shoulders.”
At the same time, contract production diversifies the operation, Compart points out. “You’re not dependent just on crops or cattle, for example.”
• Access to manure: This one is often a big driver, especially in the Midwest. Hog manure offers a good source of potassium, nitrogen and phosphorus, as well as micro nutrients and organic matter that improve soil condition.
“There’s great value in the manure compared to pricing commercial fertilizer. You can figure about $5 per pig, net,” says Johnson, “but you have to capitalize it on your land.”
This was another appealing factor to Corzine as he has 240 acres of cropland and helps his father farm many more. Both parties were interested in the hog manure’s fertilizer value, and Corzine handles the land application.
Because contract growing is not a big margin enterprise, that fertilizer value can help with the overall profitability. “Construction costs have crept up over the years, but pig payments haven’t kept the same pace,” Johnson points out. “So the margin is pretty tight, and some money has to go back into the barn.” He says you should account for some income while the barn loan is being paid off, but only about 20 percent.
“During this early thought process, be sure to talk it over with your family and other farming partners before you get too far down the road,” Johnson adds.
Second Step: Identify Pig Suppliers
Once you’ve committed to the idea of contract growing pigs, look around to see who has contract barns in your area. Equally important, who’s growing? The activity will vary by region, as will the number of pig suppliers.
In the hog-dense Midwest, it’s not uncommon to have three, five or more options. Integrators and other large pig suppliers have business development staff, which actively looks for prospective growers. Other ideas can come from the state pork producer association, Farm Bureau, Extension swine specialists and agricultural lenders in the area.
Connecting with the right pig supplier is important for all, because you’ll be in a business partnership for 10-15 years. This is as much about the culture, character and integrity of the pig supplier as the actual production aspects. “Make sure you know who they are and how they present themselves in the community,” Compart says. “Ask yourself, which company best fits me?”
To accomplish this, visit with the pig supplier’s field representative. Talk with others growing for the company and neighbors who live next to their production sites. “Ask growers how they’ve been getting along; have payments come
in on time; has the supplier fulfilled commitments of pig quality and consistency?” Johnson notes.
Make sure the supplier’s philosophy aligns with your own. Will you get technical support or guidance when you need it? This is especially valuable if you’re new to pork production.
Corzine investigated three contractors in his area and settled on The Maschhoffs, whose headquarters are in Carlyle, Illinois, about an hour’s drive from his farm. A company feed mill is within 1.5 hours, and the packer and sow farm are both within 2 hours. “So everything comes from Illinois,” he adds. “They offer good support. You feel at home with them; that you’re part of the company, not just a number.”
Assess the pig supplier’s building design and requirements, the ventilation, feed system and controls, which can affect the overall cost of the facility. Visit the barns of a few growers who have finished out several groups of pigs. Ask them what they like, don’t like and what they would do differently. Think about how you do chores and any scheduling constraints you might face.
You will own the barn, and there will be some flexibility within a range of choices. “But remember that the barn is part of a bigger system,” Compart adds. “The pig supplier has put a lot of time and effort into determining what he wants and what works for him.”
Evaluate the details of the contract to make sure the responsibilities and expectations are clear. “You need to ensure that the arrangement meets your needs as a grower,” Compart says.
What’s a Realistic Timeline?
Like most things, the timeline for a contracting project varies widely. It depends on the parties involved, the facility size, as well as the area, because township, county and state permitting requirements can vary greatly. A veteran farmer with land and cash for a down payment might get a project done in 90 days, according to Johnson. “But that’s
about as fast as it can go.”
A six-to-12-month timeline is more realistic. For his 2,400-head, wean-to-finish project, Corzine began the serious thought process in the fall of 2015, which included convincing his father that he was committed to finishing hogs.
In December 2015, he sat down with three pig suppliers to discuss details and compare notes. In late February 2016, Corzine signed on with The Maschhoffs. Site preparation plans began, followed by the permitting process, which took about three months. Construction began on June 19, 2016. The building was completed on Sept. 5, with an open house on Sept. 8, and pigs moved in on Sept. 21 and 22.
“It took about a year from the time I convinced my dad that I was serious about contract growing to when the pigs arrived,” Corzine relays.
Bottom line, planning is not the place to short change your efforts. A hog barn’s lifespan is 20 to 25 years; 30 years with excellent management and maintenance. The loan typically runs 12 to 15 years, with the contract set for a similar timespan. You want to be sure early on that everyone is on the same page.
Know the Basics
Contract hog production is such a common part of today’s agricultural landscape that it’s easy to take that familiarity for granted. However, it’s important to stop, review and understand a few of the basic points.
The contract grower owns a hog barn, whether it is a nursery, finisher or wean-to-finish facility, and is paid yardage (barn rent) to raise pigs until the pigs are ready to be marketed or moved out. A grower signs a contract to raise pigs for a specific supplier (or integrator), which is an individual or company. The supplier maintains ownership of the pigs throughout and pays the grower a set fee.
The grower and the supplier have different responsibilities within the contract. Dustin Compart with AgStar offers this quick assessment.
Contract grower’s responsibilities include:
• Supply the facility and equipment.
• Provide labor to manage the pigs.
• Pay for all barn-related expenses, such as principle and interest payments, utilities, building repairs, building insurance, real estate taxes, miscellaneous supplies and any additional custom/hired labor.
Pig supplier’s responsibilities include:
• Supply the pigs.
• Pay for all expenses related to the pigs, such as the pig itself, medication, feed, transportation, yardage to the grower.
• Transport pigs to the grower site and to market when ready.
Compart emphasizes that these are general contract assumptions. The exact details and roles of the pig supplier and grower may differ depending on the contract structure.
Building any new hog barn requires many steps just to get the project started, much less to see it through to completion. Building a facility for contract production is slightly different, in that the planning requirements are reduced because the pig supplier has already outlined the barn’s design specifications. But because you own the barn, you do have some flexibility within a range of options, and there are still many decisions to make.
At Farmweld, our goal is to make your equipment decisions easy by providing a package of durable products and dedicated customer service. We can help you work through the equipment selection and installation process and are available to answer your questions every step of the way.
Every producer operates a little differently. That’s why we work with producers to provide products that will best fit their exact needs. Our engineers create drawings for each barn, then the gating is built to meet the layout and room specifications, eliminating the need to weld on-site. It also allows the producer to customize gating, such as placing a sort-gate where it will be most useful.
We work closely with builders as they prepare your building for the arrival of a new set of pigs. Our built-to-fit approach makes the builder’s equipment installation process move smoothly and quickly, which keeps your project timeline on track.
The key to meeting both the producer’s and builder’s needs is our customer service. Our team not only asks the right questions, they listen thoroughly, act on the feedback and deliver the specified product in a timely manner.
Whether you’re a pork producer who’s expanding, a grain farmer who wants to diversify or a young farmer just starting out, Farmweld wants to be your partner today and in the future. We only manufacture swine equipment and pride ourselves on providing durable, high-quality hog products.
If you have any questions, give us a call at 1-800-EAT-PORK (328-7675) or use the contact form or LiveChat on our website.
– Frank Brummer, President, Farmweld, Inc.