An Alberta, Canada, couple is prospering from the guaranteed price they receive for their hogs in a “fixed window” contract.
Darrel Mulder is the envy of his neighbors. While his neighbors struggled to survive last year's downturn in pork prices, Darrell Mulder steadily sold his hogs to Olymel Foods' nearby Red Deer, Alberta, facility for a base price of $1.42 Can$/kg (about 49¢ US$/lb.)
Normal premiums based on index and loineye depth still apply. Better still, the Blackfalds, Alberta pork producer has something most hog producers can only dream of — price stability. Mulder is guaranteed this price for the next eight years.
Mulder is one of 17 central Alberta pork producers under long-term contract with Rocky Mountain Pork (RMP) to supply hogs to Olymel Foods for set prices. Two years into his 10-year contract, he is happy with his decision.
“My friends wish they had the same contract I do,” Mulder says. “While they are getting further and further behind, losing money with every pig they sell, we've never had a bad month. Even when we've been at our basement, we've always broken even.”
Mulder was on a fixed-price contract for a year, but since then has been on the “fixed window” contract. During the last couple of years, when prices have been low, the RMP base price has been high due to high feed prices. Therefore, Mulder would have been getting a minimum of 49¢ (US$) anyway.
Pooling Is the Key
Rocky Mountain Pork co-founder Tony Mould credits pooling the production from 17 farms, equalling 12,000 sows, for the company's success. Herd sizes vary from 150 sows to 2,000 sows. They plan to expand the pool to 25,000 sows.
The volume attracted Olymel's attention and allowed the negotiation of the long-term supply/pricing contract.
“If you go to a packer with 300-400 pigs to contract, you are offered a cup of coffee,” says Mould. “When we told them we were setting up a system that could offer 10,000 head a week, we were invited to come to Vancouver for dinner.”
Three Contract Options
Rocky Mountain Pork has three types of supply contracts:
A one-year, “fixed price” contract for start-ups;
A long-term, “fixed window” contract with defined minimum and maximum prices; and
A long-term, “shared window” contract where the producer and processor share equally the upside potential or downside risk outside the price window.
Terms vary from five years up to 15 years and provide security, allowing capital or operating loans to be paid back over the contract period. Features include (US$): a price window of 44¢ to 58¢/lb., a fixed-price option at 49¢/lb. based on a 10-year price average, normal premiums based on index, bonuses based on loineye depth and adjustment to the window if feed prices change. To cover the overhead, fees are built into the contract by means of a checkoff of 94¢ (US$)/hog.
Contract prices are based on long-term average hog prices. Besides normal quality bonuses and an adjustment formula for increased feed costs, there are no special premiums.
“It was evident to us that packers weren't going to pay premiums,” Mould says. “They just wanted to average prices out. While you will never have 80¢ with our contract, you will never get $2 either. You are going to get the average of the average.
“In 2001, our first year, producers received less than market price and were behind. Since then, that money has been gained back and more as the market has been glutted with the bovine spongiform encephalopathy (BSE) crisis. We ended up with a fair contract that took out market risk,” he adds.
Knowing what price they will get for an animal in advance injects stability into an otherwise volatile marketplace. Mulder sites the financial stability offered by the RMP contract as the reason he got into the hog business.
“There is a lot less stress,” Mulder says. “But at least we're not bleeding with every pig we sell. With good production, a guy can do all right or at least stay ahead of the game with this contract price.”
Contracts Cover Cross-Section
Farms under RMP contract represent a cross-section of independently owned pork operations.
“Some are farrow-to-finish barns, while others are contract-finishing farms,” Mould says. “While systems in the U.S. take a cookie-cutter approach, we tried to tailor our services to individual needs. One thing won't work for everyone.”
Contract producers turn to RMP for a wide range of managerial skills and technical services in all aspects of production. A special herd recording and benchmarking system has allowed members to identify strong and weak areas and has helped deliver quality hogs. Advice and information are offered through farm visits and newsletters. RMP also conducts seminars that give producers opportunities to share knowledge.
They also offer a unique training program that provides a structured career path to new employees and helps retain experienced staff within the group.
Quantity Buying Is a Big Perk
Cost reduction is also a big perk for members. A centralized purchasing system allows for substantial savings for inputs and related procurements, which can lead to reduced production costs.
RMP also runs a specialized hog transport service, added assurance to members and outsiders that strict health protocols are observed when pigs are shipped to processing plants.
“RMP is a fee-for-service operation; it is not a co-op,” Mould says. “Producers pay RMP a checkoff of $1.25 Can$/hog (96¢ US$/hog) to cover the overhead. While we've gone into partnership with some producers and (we) outright own three or four (operations), most member farms are personally owned. We offer services, but individual producers maintain ownership.”
Overall, Mould feels that RMP has created friendly, rather than negative, competition and has even made it easier for members to expand. Farm Credit Canada (FCC), the farm lending institution owned by the federal government, views producers with RMP contracts as safe investments.
“FCC is supportive because RMP contracts alleviated market swings,” says Mould. “It would also be interesting to calculate how much producers have saved after five years in terms of improved genetics, health benefits and reduced operating costs. The contracts obviously work because our producers are all still in business.”