Agriculture Reference
In-Depth Information
popular choice among crop producers, as noted
in the existing literature. Among all the crop
commodities in Table 12.3, the percentage of
farmers using production contracts is less
than 1%.
Crop contractors produce significantly
greater quantities of the commodities con-
tracted than independents, as was true in live-
stock markets, but the average differences are
considerably smaller in magnitude. Among
crop contractors, commodity sales exceed
those of independents by 55.5% on average,
while the equivalent margin for livestock pro-
ducers is 94%. In turn, crop contractors are
more specialized than are independent crop
producers, but crop contractors are more likely
than livestock contractors to rely on some
combination of contracting and diversification
to manage risk.
Formal hypothesis testing on the financial
net benefits of contracting is not possible with
the limited data available, but our preliminary
empirical results suggest that crop contractors
reap greater benefits from production contract-
ing than do livestock contractors. This may
reflect the difference in producer bargaining
power in livestock versus crop markets, with
crop producers having more products made
from their commodity, thus having more buyers
available to them than do livestock producers.
Risk, as measured by the debt-to-asset ratio,
appears to be a significant motivating factor in
favour of using production contracts in the case
of livestock producers, but the same cannot be
said for crop producers. Finally, these and other
circumstances have changed across commodity
markets over the past decade as markets have
become increasingly concentrated, especially
within the livestock sector. Thus, this study has
raised many hypotheses to be tested in the
future as more data on production contracting
become available.
used here to illustrate the relationship between
livestock production contractors and independ-
ent producers.
The most important observation is that
over the period 1996-2004, the percentage of
hog producers using production contracts has
increased steadily. The share of total hog pro-
duction under contract increased even more
drastically, reaching 87% in 2004. As produc-
tion contracting increased in scale, the diversifi-
cation of the hog contractors decreased steadily,
both in absolute terms and relative to independ-
ent hog producers. This means that the shift in
hog industry structure toward most farm-level
output being under production contract appears
to have had the effect of substituting contracts
for diversification as a risk management strategy
for most hog producers. This may partly explain
why production contractors had higher debt
ratios than independents over most years.
Although the data cannot answer the question
of whether contractors have higher debts
because they think that contracts reduce their
financial risk exposure, or whether the higher
debt ratios reflect the higher capital require-
ments of a larger, more-specialized hog opera-
tion, it is expected that both explanations are
partly accurate.
The financial performance data available
contradict the hypothesis that contracts reduce
producers' financial risk exposure. During most
years in the 1996-2004 period, contractors and
independent hog producers were statistically
equivalent in terms of average Net Farm Income.
However, despite significantly higher sales of
hogs and total farm sales, the average farm net
worth of contractors has never significantly
exceeded that of independents. Thus, produc-
tion contracts have not led to higher wealth.
Also, the fact that hog production contractors
are steadily decreasing their share of off-farm
income, indicates that the larger scale of opera-
tions needed under contract has led to more spe-
cialized hog operations, leaving less time for
off-farm income opportunities. This combined
degree of household income specialization may
give contract hog producers a
higher
degree of
financial risk exposure than that faced by inde-
pendent hog producers. This is apparent when
comparing the standard deviations of the aver-
age Net Farm Income over the 9 years: it is
US$48,260 for contractors and US$15,016 for
Hog Case Study Results
The hog industry has been the subject of much
research on changes in livestock industry struc-
ture and the trend toward increased production
contracting (e.g. Martin, 1997; Bessler and
Akleman, 1998; Martinez, 1999; Key and
McBride, 2003; Ollinger
et al
., 2005). Thus, it is
