Contract hogs: Inflation, insurance and expenses

Contract hogs: Inflation, insurance and expenses

Part two: Inflation, insurance or expense spikes could cut cash flow margins for contract farm operations

This is the second part of a three-part series. Follow the series using the links at the end of this story.

In part one of this series we introduced you to Levi and his cousin Austin Greuel, two Illinois farmers who are bucking the trend and getting into contract hog production – from scratch. They are working with hog integrator TriOak Food.

What kind of financial risks do they face?

Hog contractors have a variety of setups to offer. "Most bankers find contract feeding appealing because they know the financials of companies like Cargill and TriOak," says Levi. "They know there is risk involved, but not enough to prevent lending money."

Related: A question for the next generation: Why farm?

Inflation, insurance or expense spikes could cut cash flow margins for contract farm operations

In typical hog contracts, production and marketing risk are absorbed by integrators, but there is also some margin risk to the farmer. The Greuels pays taxes, insurance and expenses like propane and electricity. TriOak has so many dollars plugged in to cover those costs over the 10-year contract, based on historical records. If inflation flares or insurance costs go up, that cuts into the Greuels' cash flow margin.

There is some risk the contract won't be renewed in 2018, but Levi appears undaunted. "Right now there is high demand for growing spaces," he says. "People aren't going to stop eating. There will always be some demand. It will be a negotiation situation, but right now a grower has some power to shop around if he wants to.

"We have good relationships with TriOak. They are motivated to keep good growers."

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Levi graduated from college in 2006 with an ag business degree, but he had no livestock experience. That turned out to be an advantage.

"If an older person would get into this system, they would have old habits that are hard to break," he says. "TriOak likes people who don't have a lot of experience, so they can train you to their specs."

In 2012 the Greuels added another 2,480-head barn, and Austin quit his job at John Deere corporate to join Levi at the farm full time. This let both of them focus on their strengths: Levi as operations manager and Austin as the financial lead.

In addition to bringing Austin in full time, Levi's wife was able to stay home with their three children.

Austin and Levi are looking at a 10-year payoff per house. "We're 32 and 33 years old, and all five of these houses will be paid for by our early 40s," says Levi. "Hogs are a great way for a young farmer to build equity fast."

Related: Are you committed to farming?

This spring two more 2,480-head hog houses will go up, bringing their capacity to 12,400 hogs.

"These last two houses cost $600,000 each, so the ROI on these will take about 12 years," says Levi. "Regardless, I'm excited about the technology I'll have in these houses. Pigs like a steady, constant environment. In these new houses, I'll be able to see the barns on my phone and iPad. I'll be able to remotely check water levels and monitor how many amps fan motors are pulling so that I can make proactive repairs."

Grace writes from eastern Tennessee. Read her blog at beefandsweettea.com.


Contract hogs, part I: Young farmers, risk and opportunity
Contract hogs, part II: Inflation, insurance and expenses
Contract hogs, part III: Crops and livestock go together


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