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Know the difference between marketing and production contracts

by 5m Editor
24 July 2001, at 12:00am

By Gene Tinker, University of Minnesota Extension Service - Many people talk about hog production and marketing contracts as though they're interchangeable. But they're two very different issues, says Gene Tinker, swine business management educator with the University of Minnesota Extension Service. This brief article looks at those differences.

The marketing contract stipulates the producer will still own his or her own pigs, but will market a certain percentage to strictly one packer. Marketing contracts are often long-term-from five to seven years. In addition, Tinker says the packer may include some provisions that impact how the producer operates.

A production contract involves the producer raising pigs for someone else in the producer's own facilities. The owner of the pigs pays expenses such as feed and veterinary costs, and the producer pays operating costs that include facilities and repairs. A set rate of so much per pig or pig area is paid for the animals raised.

An overall advantage of contracts is that they generally decrease the risk a producer is exposed to, Tinker says. Those risks range from just price risk to production risk, depending on the type of contract.

Disadvantages of contracts that Tinker lists include:
  • You're locked into production for a specified period of time, regardless of changes in life or lifestyle.
  • Changes in other costs, such as fuel, can turn a good financial agreement into a bad one.
  • The contract may be voided due to poor production or quality of animals delivered.
"Know your cost of production before signing a contract," Tinker says. "Evaluate how the contract will impact the operation under different scenarios. And play the devil's advocate."

Look for more advice on any contract from your accountant, attorney and Extension educator. You can also contact Tinker at (507) 835-3620, [email protected].

Source: University of Minnesota Extension Service - July 2001
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