By Steven Okonek
Contract hog feeding is an arrangement where one entity contracts with another entity to provide daily care for hogs in various production phases. The most common arrangement, and the arrangement we will discuss here, is a wean-to-finish arrangement where one entity provides weaned pigs, feed, transportation of feed and pigs, and veterinary services and medicine. The farmer provides housing, labor, and utilities for a fee paid by the owner of the pigs. Housing can vary from inside, heated, and ventilated production, to outdoor production. In a wean-to-finish production system, weaned pigs arrive at the finishing site and spend the next five to six months in the same barn, until the pigs are sent to a harvest facility.
Payments to the farmer providing the barn, labor, and utilities can be based on pig space per year, or based on pigs marketed, or a combination of factors. Rate of payment will vary depending on age of facility, the area of the country and competition for facilities, and the negotiation ability of the farmer and contractor. Experience in the hog industry is a plus for people looking to contract feed hogs.
Below are various questions to consider before becoming a contract hog feeder.
Is contract feeding hogs a good fit for you and your farm business?
There are several questions you need to ask before starting a new farm enterprise. Do you have experience working with hogs? Do you and other team members want to work with pigs? If the answer to those two questions is yes, then proceed on.
Would hog feeding be a compliment to your farm business?
A complementary enterprise is an enterprise that adds to an existing business by better utilizing existing resources or providing resources to the existing business that do not currently exist. A hog enterprise could be complementary to an existing farm by better employing existing labor, providing manure nutrients to a cropping enterprise, utilizing existing buildings, or adding value to grain produced on-farm. A competing enterprise will compete for limited resources on a farm. Hog feeding would be a competing enterprise if labor is in short supply, land base is already being utilized to apply nutrients, and capital or credit is not available to build facilities.
When considering contract feeding, there are some points to consider. First, do you have hog facilities on your farm? If you do, will the buildings need remodeling to meet the needs of the contractor? Will new facilities need to be built? Will the contract payments cover principal, interest, utilities (heat and electricity), insurance, property taxes, and payment to labor and management? If you have the cash to build or remodel, you still need to charge interest and principal in your modeling exercise to ensure you get your money back and a reasonable return on your money.
Who owns manure and other byproducts?
Contract hog feeding may produce mortality compost in addition to manure. A question that needs to be answered is who owns the manure produced from the contracted pigs or who is responsible for the proper utilization of the manure? Hog manure and mortality compost contains valuable nutrients that must be taken into account when looking at adding a contract feeding operation. Do you have land for the proper use of the manure? Is there another farm that wants to purchase the manure? Rates of manure to apply per acre can vary depending on soil test nutrient levels, crops to be grown, and rotation of crops. Work with your county extension educator or nutrient management planning specialist to determine how many acres you may need for the size operation you are considering.
Does the contractor have the right to view livestock?
Most contracts state that the contractor has the right to enter facilities at any time. Does the contract state that notice must be given to the farmer that the contractor or contractor’s agent is coming to observe livestock? A lot can be learned and improvements can be made if the farmer is present when the contractor comes through to observe the pigs.
Are third-party audits expected or a part of the production process?
Will the contractor help the farmer meet the needs of the audit? Meeting the needs of a third-party audit will often improve the performance of the farmer and the livestock feeding operation.
What are the performance parameters within contracts?
Death loss and the performance of the pigs are criteria used to judge the performance of a farmer and barn. Some contracts will base payment on death loss and percent cull pigs (pigs that don’t make good slaughter hog criteria), days to market, and feed efficiency. While there are many factors that affect this, it is important that farmers getting paid on these parameters have input into factors affecting them. Does the farmer have the right to cull pigs as the pigs arrive at the farmer’s facility? Poor-condition pigs arriving at a wean-to-finish site seldom turn into good-performing pigs. Does the farmer have any input into administering medications or other inputs that may impact pig performance?
How will payment occur?
Payments from the contractor to the farmer can occur monthly or once a group of pigs exits the barn or a combination of the two methods. Most contracts have a clause allowing the contractor to take control of and manage the barn if performance falls below a certain level. Contractor taking control of the barn results in a lower payment to the barn owner. Would the lower payment cover principal, interest, taxes, and insurance? Who pays utility bills and repairs to the barn in the event the contractor takes control? Of course, no one plans to lose control of their barn, but this situation needs to be planned for as unforeseen circumstances can come at any time. Be certain to have an attorney review any contracts you are considering entering into.
Do you have financial capacity?
The last factor you need to consider is your borrowing capacity and your lender’s criteria for financing a contract feeding operation. Be certain to include your lender early in your consideration of a contract hog-feeding enterprise.
There are many questions to ask yourself and your farm management team before you launch a contract hog-feeding enterprise. Hog feeding can be a complementary or competing enterprise on your farm, depending on how your farm business is arranged. Available labor and management on your farm as well as land available for manure application all need to be considered. Be certain you understand the contract and all clauses in the contract before you sign the contract. Contract hog feeding can be a viable business option to add to your farm if you ask the right questions and understand what you are entering into.
Source : wisc.edu