Source: Saskatchewan Agriculture and Food
Agricultural producers looking at on-farm diversification activities might want to take another look at contract finishing arrangements, says Saskatchewan Agriculture and Food Business Attraction and Investment Consultant Monique Lischynski.
“It seems there are a number of developers and producers interested in contract finishing hogs in the province. As a result, we are starting to receive more inquiries on the subject,” Lischynski says. “Contract finishing typically involves an agreement between an owner of pigs and an owner of a pig barn. The agreement outlines the details under which the owner of the barn will care for and manage the pigs on behalf of the livestock owner.”
Contract finishing has been used extensively in Manitoba and various parts of the United States, and is currently gaining in interest in Saskatchewan. Some contracts are structured so that the barn owner purchases the hogs but markets the animals under agreement with the seller of the hogs.
“There are several reasons why both parties may choose to enter into a contract finishing agreement,” explains Lischynski. “The owner of the pigs may choose to contract finish his animals in order to reduce the capital requirement, operational costs and/or the financial risk to the business, or to reduce the input requirements and the work associated with hiring labour and maintaining the facility and site.”
The owner of the facility may choose to contract finish animals in order to avoid the risks of buying feed and of selling weanlings and market hogs on the open market.
“If the facility owner is new to the business, contract finishing can reduce the management risk associated with a new venture, which can also assist in securing financing for the business. In other words, it is a good way to share the risk between operators—especially for someone who is just starting.”
Many factors will influence the decision to contract finish, but key considerations include the expectation of financial returns and of reduced risk. “In addition to understanding the fixed and variable costs of either contract finishing or finishing your animals yourself, you will need to consider the following: generally, ownership provides better returns, but the risks are greater. In effect, through contract finishing, you are exchanging a portion of financial return for risk reduction,” clarifies Lischynski.
“A written contract is essential to any contract finishing arrangement because it details the responsibilities and expectations of both parties. The specifics of any contract will vary, depending on the circumstances of the individual parties, but there are a number of standard issues that need to be considered when drawing up a contract.”
The contract needs to clearly define the services that will be provided by the pig owner and by the barn owner. Typically, the barn owner provides the barn, utilities and water, labour, manure removal, maintenance and barn supplies; while the owner of the pigs provides the animal management, health and marketing protocol, medical supplies, feed and nutritional program, veterinary services and supplies (drugs and needles), dead-stock disposal plan, transportation/assembly and marketing costs.
“The contract should cover information about the pigs that the pig owner will provide: for example, the source, weight and health status of incoming animals. The contract should reflect the production, marketing, biosecurity and other related routines that are to be followed by the barn owner in caring for the pigs.”
Accurate record keeping is essential to the success of any livestock operation. Knowing what kind of records the barn owner will be expected to keep on the pigs (i.e. treatments, mortality, weights, production performance, Canadian Quality Assurance, etc.), and how often this information will be required is important.
“Disagreements over money have ended many successful business agreements, so it is essential that monetary issues are clearly addressed in the contract. What will the barn owner receive for payment? How often will payments be made and what affects the amount? Will payment be made on a per-pig or a per-pig-space basis? Will pig performance, mortality, market results or other production performance measures affect the amount paid?
“These are all factors that need to be addressed,” adds Lischynski, “as well as contract duration, renewal and extension options, and circumstances that could change the duration or negate the contract: for example, a natural disaster like a fire or tornado that damages the barn and prevents the housing of pigs, or a disease outbreak that prevents the livestock owner from supplying pigs.”
In addition to these specific questions, it is important to understand the history, motives and business practices of the group with which you are contracting. It is important to understand what the livestock or barn owner wants to achieve and how the contract agreement fits with that. This type of understanding is important in the development of any business relationship or business arrangement.
Getting it right the first time is always the preferred option. Now, if only that could be written into the contract.
For more information, contact:
Monique Lischynski
Livestock Development Specialist
Saskatchewan Agriculture and Food
(306) 933-5096
Comments