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Production Contracts May Help Small Hog Farms Grow in Size

20 February 2014

USDA Economic Research Service

Production contracts may have helped smaller-scale pig operations in the US to expand. Nigel Key of the USDA Economic Research Service analyses the changes and explains the possible reasons for this development in 'Amber Waves'.

In the US hog sector, production contracts — under which farm operators agree to raise hogs owned by contractors — are becoming increasingly common: the share of market hogs grown under a production contract increased from five per cent in 1992 to over 70 per cent in 2009.

Under a typical contract to finish hogs, the farm operator provides labour, equipment and housing while the contractor provides feed, feeder pigs and veterinary and transportation services.

The growth in the use of production contracts has been accompanied by pronounced increases in the size of farms producing hogs. Between 1992 and 2009, the average number of market hogs sold or removed from contract per farm yearly increased from 945 to 8,390 head.

Recent USDA Economic Research Service (ERS) research examined whether production contracts have facilitated this growth in hog farm size.

Using Census of Agriculture data, farm size changes of feeder pig-to-finish hog operations that used or adopted a production contract were compared to those that produced independently.

Feeder-to-finish operations are those on which feeder pigs (weighing 30 to 80 lbs) are obtained from outside the operation, either purchased or placed under contract, and then finished to a slaughter weight of 225 to 300 lbs.

Production contracts are associated with increased hog production
 All continuing farmsContinuing farms without production contract in 2002
Initial farm size (head removed in 2002)No production contract in 2002Used production contract in 2002Did not adopt contract by 2007Adopted contract by 2007
Percentage change in number of head removed, 2002-07
Small (100-999) 57.0 82.9 43.5 172.1
Medium (1,000-2,499) 25.1 49.2 11.6 91.9
Large (2,500-4,999) 11.2 24.6 8.1 26.4
Very large (5,000+) 8.9 7.0 9.4 7.1
A continuing farm is one that sold or removed hogs in 2002 and 2007. Only feeder to finish operations - those that specialise in raising feeder pigs (weighing 30-80 lbs) to market weight (typically 225-300 lbs are analysed.
Source: USDA, Economic Research Service using 2002 and 2007 Census of Agriculture

In the three smallest farm size categories considered, operations using production contracts in 2002 grew more in size by 2007 than operations that did not initially use production contracts. In contrast, the largest farms (at least 5,000 head) with production contracts grew no faster than those without contracts.

A similar story emerges when comparing the growth of farms that started using a contract between 2002 and 2007 to farms that remained independent over this period. Among smaller scale operations not using a production contract in 2002, those that started contracting by 2007 experienced faster growth than operations that never used a contract. In contrast, for larger farms there was no significant difference between contract adopters and non-adopters.

"It is likely that, beyond a certain size, economies of scale in hog production are limited."

There are several possible reasons why production contracts may have helped smaller-scale operations expand production.

By reducing producer input expenditures, production contracts may have allowed operators with limited financial resources to operate on a larger scale.

Production contracts may have also allowed small-scale producers to obtain more credit for facility expansion than they would have been able to otherwise if such contracts substantially reduce farm income risk.

Alternatively, contracts might facilitate the transfer and adoption of new production technologies that allow smaller operations to grow by producing more efficiently and profitably.

In contrast, for large farms, neither contract use nor adoption was associated with an increase in the scale of production.

It is likely that, beyond a certain size, economies of scale in hog production are limited. Hence, large-scale operations would not need to take advantage of scale-enhancing benefits provided by contracts.

February 2014

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