| Industrialization of agriculture has inspired questions regarding future developments in the hog sector. Among these questions is the impact of production contracts on the risk, return and financing of hog growers. This research investigates the impact on the Midwest hog-finishing sector of hog production contracts. The production contract analyzed is one in which the integrator owns the livestock and supplies feed, herd health inputs, and supervision; while the grower provides the capital facilities, labor and management. The study also identifies and discusses the contractual relationships between the integrator, lender and grower/borrower in a principal-agent framework.;A lender survey was conducted in August, 1996 to determine differences in financing for a case farm under the alternative business structures of non-contract and contract hog finishing, and with two expansion sizes, identified in the study as small farm and large farm. Results of the survey were used as initial financing in stochastic simulation of the four options; ( i) small non-contract, (ii) small contract, (iii) large non-contract, and (iv) large contract.;Survey results indicate lenders, on average, offer more generous financing terms, defined as a higher debt-to-asset ratio and/or lower interest rate, to contract than to non-contract hog growers. Results also indicate that the relative importance of contract hog production increases as the size and financing requirements of the farm increase.;Stochastic simulation results indicate that contract hog production conforms to portfolio theory with reduced returns and risk. Contract production reduces the impact on returns of negative and positive changes in interest and inflation rates.;Research results indicate that growers wishing to enter the hog finishing sector, or expand an existing operation, will be able to do so with relatively less equity than would be possible without a production contract. Alternatively, capital constrained growers can invest in relatively larger facilities with a production contract than as a non-contract grower. Risk averse growers are able to finish hogs under contract profitably with less risk than is possible without a contract. |
