Economic and Marketing Information                                                                                                                                                                                      FOR INDIANA  FARMERS          
Prepared by the Agricultural Staff of Purdue University, Lafayette, Indiana       FOR
December 31,   1959
finishing Hogs on Contract in Indiana
by JEAN P. COLEMAN and J. H. ATKINSON, Agricultural Economics Based on Purdue AES Research Project Num-
ber   1047.
If OUR MAJOR TYPES of hog
finishing contracts were available in Indiana in 1959. All contracts were between the supplier
of certain production items and
the hog producer. The first three
contracts discussed below contain
more elements of integration than
the final contract, a financing or
carrying arrangement. The four
types of contracts are referred to
as: O Financing Limited Management Contract, © "Profit" Share
Contract, Q Unit Guarantee Contract, and © Feeding Contract.
More Integrated Contracts
An estimated 100,000 hogs, representing about 1.5 % of Indiana's
total, were finished and marketed
under one of the first three types
of contracts during the year ending July 1959. One northern Indiana county had about 24,000
hogs under contract. This was
15.7% of the county's total hogs.
During the year July 1958-July
1959, 19 Indiana farm suppliers
were studied who had contracts
with an average of 10 producers
each. However, by July 1959, only
1' of these suppliers were still
contracting—with an average of
six producers per supplier. Many
of these 17 indicated they would
soon discontinue contracting because of low hog prices. Others
said they would continue contracting only with their best producers
during the low price period of the
cycle.
Twenty-eight separate contracts
f the first three types had 13 variations or modifications. One sup
plier offered four contract variations alone. Some of these 28 contracts were soon discontinued and
replaced by others deemed more
satisfactory. A description of the
most common contracts follows.
Financing-Limited Management
The most common contract of
this type is an arrangement in
which the supplier agrees to provide and sell feeder pigs, feed, and
medication to the producer and to
secure the financing for these by
co-signing the producer's note
held by a lending institution. However, the supplier requires certain
management practices of the producer and also gives recommendations which he would like the producer to follow. The supplier receives a return for his services
only from profits on inputs sold to
the producer.
In case the producer does not
repay the loan, the supplier pays
the lender the amount owed. Under the terms of the contract, the
producer then becomes liable to
the supplier. In this event, the
supplier usually chooses to put
another run of hogs in the producer's hands in an effort to get
him out of debt.
"Profit" Share Contract
The producer and supplier in a
typical share contract divide
equally the "profit." The "profit"
in this contract is defined as sale
proceeds minus the supplier's
costs (retail level) of livestock,
feed, medication, interest and tax
es on hogs, feed processing, veterinary, miscellaneous, and overhead.
The producer provides the facilities and labor for his share of
the "profit." If a loss occurs, the
producer loses the cost of his facilities' use and labor, but no
more. The supplier in this contract
owns the pigs, provides the feed,
and takes any loss coming from
death, disease or poor prices. In
this type of contract, the supplier
demands definite managerial practices. He also stipulates that his
own feed, pigs, and possibly equipment be used. His gains or losses
depend on the profitability of the
enterprise—aside from what he
gains from the "sale" (markup
from wholesale to retail) of feed,
pigs, and equipment. Consequently, even in break-even situations,
he may continue to contract with
producers, so that he can continue
to move supplies.
Unit Guarantee Contract
The most common Unit Guarantee Contract was one in which the
producer received 2 cents per
pound of gain in weight of the
hogs. The producer supplies the
labor and facilities in this contract,
but is assured of the same income
regardless whether the supplier
profits or loses. Management requirements in this type of contract
are usually very strict since the
supplier takes all chance of loss.
Only one supplier offering this
type of contract made it for longer
than one feeding period. Thus, a
producer with a large investment