MARKETING
PIH-6
pork industry handbook
PURDUE UNIVERSITY • COOPERATIVE EXTENSION SERVICE • WEST LAFAYETTE, INDIANA
Producing and Marketing Hogs Under Contract
Authors
John D. Lawrence, Iowa State University
Marvin Hayenga, Iowa State University
James Kliebenstein, Iowa State University
V. James Rhodes, University of Missouri
Reviewers
John C. McKissick, University of Georgia
Dale Lattz, University of Illinois
Kevin and Audrey Rohrer, Manheim, Pennsylvania
Clem E. Ward, Oklahoma State University
There is increasing interest in hog contracting, due in part to the difficulty for many producers to obtain adequate financing. Contracting also is being used to coordinate pork production from genetics and nutrition to the retail meat counter. Currently, a small but growing percentage of hogs are produced, fed, or marketed under contract. It is estimated that about 14% to 16% are under production contracts, and a smaller percentage under marketing contracts.

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

Production contracts for market hog finishing are relatively new but are increasing in the Midwest. However, they have been used for some time in portions of the Southeast where contract hog production is more widely accepted. Feeder pig production contracts are not as popular in the Midwest.

The following is an overview of the most common contracts 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 normally will have taken an opposite position in the futures market to offset any price fluctuations between the signing of the contract and the delivery date. To cover margin and commission, the contract price offered by the packer may be lower than futures adjusted for expected basis. Terms typically found in a forward contract include:
• The quantity to be delivered, with the minimum amount varying anywhere from 5,000 lb to 40,000 lb (40,000 lb equals 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 fixed 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 normally deducts 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 may 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 production risks, other than the selling price, under a fixed price 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 producer to lock in a particular selling price, it may cause him to miss out on greater profits if prices rise. Thus, the decision to contract must be based upon each producer’s willingness or ability to bear the risk of price uncertainty. Some producers may be forced to contract due to a lack of diversification, indebtedness, or at the request of creditors, while other more financially stable or diversified producers may be in a better position to withstand the risk of price

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. We adhere to the policy that all persons shall have equal opportunity and access to our programs and facilities.