Production Contracts, Risk Shifting, and Relative Performance Payments in the Pork Industry

Abstract

Actual performance records of production contract farmers are used to assess the extent to which contract production reduces the risk borne by pork producers. Comparisons of contracting relative to independent market production reveal that farmers who enter into production contracts based on absolute performance measures reduce risks associated with variable income. Weak evidence is found that relative performance contracts, similar to those used in the broiler chicken industry, further reduce income variability. The effectiveness of such relative performance contracts will rely on several factors; among these are increased contract production and a more uniform pork production and processing system.

Food Quality: The Design of Incentive Contracts

“…Martin (1997) compares her findings for the pork industry withKnoeber & Thurman's (1995) findings for the broiler industry. Relative compensation provisions transfer an even larger share of revenue risk from the farmer to the broiler processor.…”

“…Kliebstein & Lawrence (1995) identify access to genetic lines that enable the production of uniform, high-quality hogs as an advantage of vertical coordination, although they emphasize that increased farmer productivity is associated with the choice of a greater degree of coordination. Martin (1997) links greater uniformity to increased risk protection provided to farmers by relative compensation provisions in production contracts. 3 Lawrence et al (1997) discuss 1994 survey results that indicate that a guaranteed market and reduced risk (for producers) and consistent supply and increased volume (for packers), as well as quality considerations for packers were important factors driving increased coordination.…”

Optimal incentives under moral hazard and heterogeneous agents: Evidence from production contracts data

“…The data set used in this study is an unbalanced panel from Martin (1997). It contains a sample of contract settlement data for individual growers who contracted the finishing stage of hog production with an integrator in North Carolina.…”

“…However, such data is not available. Instead we use the regional market prices for feed, feeder pigs and finished hogs, also obtained from Martin (1997). The feed prices are quarterly figures for the Appalachian region, the feeder pig prices are monthly observations for North Carolina and the market prices for 4 There are three types of feeder pigs in the data set.…”

Animal Welfare and Livestock Production in a Postindustrial Milieu

“…Thus, changes in regulations for animal production-including changes intended to improve welfare-that require replacement or refitting of capital equipment can lead to financial losses for these operators (Kunkel, 2000;Martin, 1997). However, although families continue to supply most of the labor for many Midwestern grain farms, animal production increasingly depends on the availability of low-wage hired labor, although there is considerable variation in this dependence from region to region and commodity to commodity.…”