MARKETING
PIH-6
pork industry handbook
PURDUE UNIVERSITY • COOPERATIVE EXTENSION SERVICE • WEST LAFAYETTE, INDIANA
Producing and Marketing Hogs Under Contract
Authors
John S. McDaniel, Iowa State University
Marvin Hayenga, Iowa State University
Earl Mobley, Iowa State University
V. James Rhodes, University of Missouri
Reviewers
Bruce B. Bainbridge, Virginia Polytechic Inst./State Univ.
Robert Koehler, University of Minnesota
John C. McKissick, University of Georgia
Clem Ward, Oklahoma State University
There has been increasing interest in hog contracting in recent years, due in part to the high cost of capital and the difficulty for many producers in obtaining adequate financing. Despite the recent interest only a small percentage of hogs are produced, fed, or marketed under contract. It is estimated that about 8 to 10% are under production contracts, and less under marketing contracts.

Forward pricing (marketing) contracts for market hogs have been available from most major meat packers for a number of years and are the most commonly used marketing contracts in the industry.

Production contracts for market hog finishing are relatively new but increasing in number in the Midwest. However, they have been used for some time in the Southeast where contract hog production is more widely accepted. Feeder pig production contracts are also relatively common in the Southeast, but are seldom found in the Midwest.

Following is an overview of the contracts which presently appear to be most common in the pork industry.
Marketing Contracts
Market Hogs. The forward sale contract is a contract between a buyer (normally a meat packer or a marketing agent) and a seller (normally a producer), where the producer agrees to sell, at a future date, a specified number of hogs to a buyer for a certain price. The buyer will normally have taken an opposite position in the futures market to offset any price fluctuations between the signing of the contract and the delivery date.
Terms typically found in a forward contract include:
•	The quantity to be delivered, with the minimum amount varying anywhere from 5,000 lbs. to 30,000 lbs. (30,000 lbs. being one live hog futures contract.)
•	The date and location of delivery. The delivery date may normally be changed by mutual agreement. The seller may have the option of selecting the delivery date within a specified time interval.
•	Acceptable weights and grades, including provisions for premiums and discounts.
•	A description of the pricing mechanism, either base price or formula price. Some contracts now price the hogs on a grade and yield basis to reward better producers, who would otherwise be less inclined to contract.
•	Provisions for non-deliverable hogs and unacceptable carcasses. The buyer will normally deduct from the seller’s receipts for unacceptable hogs and carcasses.
•	Provisions outlining the credit requirements of the seller and inspection of the hogs by the buyer. The buyer often will request to inspect the hogs while on the seller’s premises.
•	A provision dealing with breach of contract. Typically, the seller is liable for all losses incurred by the buyer when the seller is in breach of contract.

The producer retains all risks of production, other than selling price, under a forward sale contract.

A producer uses a forward sale contract to reduce the risk of price fluctuations and to lock in an acceptable selling price. While the forward sale contract allows the pro-

Cooperative Extension work in Agriculture and Home Economics, state of Indiana, Purdue University and U. S. Department of Agriculture cooperating. H. A. Wadsworth, Director, West Lafayette, IN. Issued in furtherance of the acts of May 8 and June 30, 1914. The Purdue University Cooperative Extension Service is an affirmative action/equal opportunity institution.