Gary and Kathy Chinn, Clarence MO, utilize contract agreements for nursery and finishing phases of their operation. They have tightened their circle of contract growers to improve pig flow and capture production efficiencies.
As their hog operation evolves, Gary and Kathy Chinn change the way they work with the contract finishers who raise their pigs.
The Clarence, MO, producers, along with their two sons, farrow 1,850 sows. The Chinns rely on contract producers for feeding two-thirds of their nursery pigs. All hogs are finished under production contracts. Chinn Hog Farm produces 36,000 hogs annually.
The Chinns began writing production contracts with other farmers about 10 years ago. They were among the first pork producers in their area to use the agreements.
The contractees' facilities, the contracts written and the relationship with contractees all have changed, according to Gary Chinn.
"We've been adding on with newer facilities and phasing out the old facilities," he says. "It has taken us eight or nine years to get the facilities we need to be modern."
Currently, the Chinns have agreements with 10 contractees. Two nursery contractees operate a 2,000-head and a 4,000-head facility, respectively. The remaining nursery pigs are housed on their son Kevin's farm near Emden, MO. Eight producers manage fifteen 1,000-head finishing barns.
All of the contract farmers' barns are 4 years old or newer, and they all have pull-plug, shallow manure pits. The Chinns require the barns to accommodate split-sex feeding.
Additionally, they must meet the Missouri Department of Natural Resources' engineering regulations and comply with state rules on dead animal disposal and manure application.
When they first began feeding hogs on contracts, the Chinns hauled pigs 120 to 150 miles to find growers who wanted to raise pigs. Now, all of their contractees are located in a 40-mile radius of the home farm.
Gary says it is the people who make contracting work.
"Everyone has to have the same goal in mind," he says. "It's got to be made to work so that everyone can make some money."
The Chinns use a payment system based on pig space - $32/nursery pig space, $33/finishing space. They cut monthly checks to their contractees and pay whether the facilities have pigs or not.
Facility Upgrades The Chinns formerly used contracts with incentives based on feed conversion rates and death loss. The short-term agreements were paid on a per-turn basis to contractees who operated in older swine facilities.
Facility upgrades to the 1,000-head barns brought changes in lender attitudes. The bankers wanted to see fixed payment schedules, Kathy relates.
The feed conversion bonus now offered provides incentives for better management of feeder adjustments and closer attention to sick pigs. Gary says those management factors play a key role in optimizing feed conversion rates.
With the right relationship with the growers, bonuses become less of an issue, Gary believes.
Standard Contracts The Chinn's contracts are standardized for each production phase. The Chinns know their contract payments fall in the mid-range of most that are written. Gary lists a close working relationship with their contractees and less stringent rules as selling points for their program.
Kathy stresses that the contract relationship is based on a farmer-to-farmer connection.
"Quite a few of the folks we have contracting on the finishing end of it are also farmers as well," she says. "They like that as an extra source of income on the farm, so their families can be involved, and they don't have to go off-farm for that income."
In addition to the pigs, the Chinns provide feed, feed processing and delivery, health supplies and veterinarian services. They also provide pig transport between production sites and to market.
Gary talks with most of the growers once or twice a week and visits each of the facilities at least once a month.
Industry Changes Changes in the industry, especially over the past two years, have revised how the Chinns approach their earlier goals to increase production to 4,800 sows.
"We may not be as hands-on as we would have thought," Kathy says. "When we first started out, we thought we would own all of our own finishers. Now we know that contracting is a better way for us to achieve some of our goals."
The goal of controlling the production from 4,800 sows may change over time, Gary stresses. They may move into contracting sows, buying weaned pigs or other options.
For the Chinns, the use of production contracts has been a component to their success.
"Contracting is not for everyone," Gary says. "It has worked great for us and allowed us to grow our operation."
Before a production contract is signed or renewed, many questions need to be answered for both parties involved in the agreement. Iowa Attorney General Tom Miller's production contracts task force developed a checklist to assist producers.
Above all other recommendations, the key is consulting your team of experts before committing to a contract. Your lender, lawyer and accountant all need to fully understand the financial, legal and tax implications.
Other producers who have experience with contracts can be helpful, too. While plenty of the easy questions are usually answered, here are some of the questions you may not have thought of asking:
Facilities *Is the facility standard for the industry? Are you required to pay for future modernization of facilities or equipment?
*Who pays for insurance on the facility? Who pays for insurance on the pigs?
Manure Management *Who is responsible if there are complaints, lawsuits or alleged violations of law involving odor, dust, water quality or other types of nuisance?
*Who is responsible for compliance with new regulations?
*Who owns the manure? Can you sell the manure?
Management/Recordkeeping * Who sets and reviews husbandry practices?
*What production records are required?
Livestock Health *Who checks for livestock health at arrival? Can you reject animals you think are sick?
*Who bears the costs of poor performance due to unhealthy or low-quality livestock?
Payment *Will your lender's name be on the check?
*Will the last payment be made before the livestock leave your facility?
*Do you know your costs of production to determine the profitability of the contract?
Termination *Under what conditions can the contractor terminate the contract? Who determines those conditions?
*How much notice does the contractor have to give you before termination?
*Does the contract excuse non-performance caused by "acts of God" (occurrences out of human control)?
Legal Issues *If the contractor is from another state, does the contract specify the state law that governs?
* Does the contract set a venue for any lawsuit that might be filed?
For a complete copy of the "Livestock Production Contract Checklist," or for more information on the new producer lien law from Iowa Attorney General Miller, contact his office at (515) 281-5351, or visit the department's farm division at www.state.ia.us/government/ag/farm.html.
A change in state laws in both Iowa and Minnesota provides a glimpse into the world of production contracts. The states' legislatures passed bills last spring nullifying confidentiality clauses in production contracts.
Based on that change, the Iowa attorney general's office is asking farmers to submit their contracts for inclusion in a database. The contracts eventually will be included in a Web site. Assistant Attorney General Steve Reno suggests farmers only eliminate their name from a copy of the agreement and leave in any hand-written information.
"We are seeing some contracts where Farmer A lives a mile from Farmer B, and they have identical contracts save for what is written in," Reno says. "It would be interesting to know that the neighbor down the road gets a buck a head more or a buck a head less."
In addition, Iowa farmers now have the benefit of a new state law. The new lien law protects contract producers by giving them secured creditor status. Producers must file the form with the Iowa secretary of state's office within 45 days of receiving the animals. The lien must be re-filed with each turn of the facilities.
For more information on the contract database and state lien law, contact the Iowa attorney general's office at (515) 381-5351 or visit the department's farm division Web site at www.state.ia.us/government/ag/farm.html.
Plenty of issues and challenges lurk in the fine-print section of a contract, Assistant Attorney General Steve Moline says. An important issue is assignment of the contract, which is the transfer of contract obligations from one company or business to another.
"Assignment is a reality in this age of acquisition and merger," he says. "The company you sign your 10-year agreement with might not be the company you work with in years five to 10."
Another key is dispute resolution. Mediation or arbitration may be given as alternative methods of resolving conflicts. Moline asks farmers to consider why those methods are included in an agreement. He suggests questioning where the decision will be rendered.
"My general advice to producers is, the closer to home a decision is rendered on a dispute, the better for you," he says. "I'd be leery about waving my constitutional right to a civil court proceeding."
Paul Strandberg, an attorney for the Minnesota Department of Agriculture (MDA), works with farmers to educate them on contracts. Even with plenty of advantages to contract production, producers need to think about the worst-case scenario, he says. "When evaluating any contract, one of the questions you have to ask yourself is 'what's going to happen if things go wrong?' "
A full evaluation of risk and costs of production is vital to success in contracts. That's why the MDA is offering a new publication - A Producer's Guide to Production Contracts. To order a free copy, contact the MDA at (651) 297-2200 or (800) 967-AGRI, or connect with www.mda.state.mn.us.