Hogs still pay their way

Consolidation and shifts in the industry have made the pork business different, but many growers find that hogs are a good way to help with on-farm cash flow.

Back when dirt-lot hogs were found on about every farm, they earned that rightful and aptly descriptive nickname, mortgage lifters. The industry has changed considerably since those days, but modern contract hog production still offers an opportunity to boost cash flow on the farm.

While contract agreements vary, the industry is paying good money per pig space. Farmers find that hog production contracts are one way to expand farm income without climbing out on the proverbial economic limb to purchase land. Plus, when combined with a row-crop operation, manure generated in a hog operation is a serious asset.

Since 2006, when a tornado ripped through MFA Incorporated’s swine farm near Marshall, Mo., the cooperative has renewed its commitment to help producers navigate the modern hog market. By rebuilding the facility, MFA continues to offer growing partnerships and provide a swine network that helps independent producers achieve logistical efficiencies in marketing hogs.

“Right now, we have about 45 to 55 contract partners,” said Walt Swier, swine operations director for MFA. “And we’re looking to add more producer partners. We’re not necessarily trying to grow larger, but we are trying to grow more efficient. We want to improve on logistics. One way to do that is to partner with more wean-to-finish houses. That removes one move of the pigs. And we want to keep a production area that fits feed and transportation logistics,” he said.

With a feed mill in Centralia, Mo. and processing plants in northern Illinois and Iowa, Swier said the growing region for MFA doesn’t have absolute borders. But, he added, growers need to be in a general area that is efficient in transport of both feed and hogs. Figure a wide swath from the middle of Missouri running to northeast Missouri.

Success by twos
Fitting squarely in that geographic footprint is David Sudbrock and his wife, Shirley. The Sudbrocks, who farm near Centralia, have partnered with MFA to finish hogs since 2004.

“If you keep a good building and raise good hogs, you don’t have much trouble,” said David Sudbrock. “The benefit I’ve seen through the years is that buildings like this give youa steady and consistent income,” he added, even though he has been through a change in contractor.

Sudbrock’s first contract was with Farmland Industries, which, under financial strain, sold its livestock business to Smithfield. The move left Sudbrock with some uncertainty, but he fit MFA’s partner profile, joined up and has been a solid producer for the cooperative.

One thing David Sudbrock said he would change about his operation is how big he built it.

“I wish I would have built four barns instead of two,” he said.

At the time of construction, with money to be borrowed and the prospect of twice the labor, he played the cautious card. “But once I got into it, it was the only loan I never worried about. Everything is paid for now,” said Sudbrock, who explained that his 2,000-head pig barns require daily chores but also allow him time for his farm and to help a neighbor row crop farmer in the spring and fall.

“The idea that producers wish they would have built another barn early on is something I hear a lot,” said Norm Penton, Field Service and Contract Development Manager for MFA.

Penton said that one of the benefits for producers in a contract situation is that they don’t stand the same risk as an independent producer of a similar size. A contract grower provides capital for the facility, but the provider of the pigs stands the market risk and in turn pays an agreed-upon rate per pig space in the barn.

“MFA offers from 5 to 10 year contracts on new construction. And that depends on what the producer wants. Most producers, if they’re building new facilities, need 10 years. But we sign some 5-year contracts, too. It depends on the needs of the farmer and their equity position and ideas about the future,” said Swier. “Producers should take some time to evaluate who they want to partner with when signing contracts. Make sure the entity is committed to the swine industry and has a strong balance sheet so they’ll be around for the life of the contract, which is usually related to the length of the loan taken for construction,” said Swier.

“From a risk perspective, one thing that has really impacted contracts is building and equipment construction costs. The costs for constructing a facility and purchasing the equipment have increased dramatically in the last few years," said Terry Eidson, Senior Vice President of Credit for FCS Financial.

Eidson said that FCS Financial, which has experience in both poultry and swine contract-production loans, has adjusted loan terms to meet the needs of its customers.

“While terms for building loans generally match the length of the contract-10 years, FCS Financial has offered 12-year notes on operations that might build a new barn on a 10-year contract. The primary reason for extended loan terms is it gives the customer more take-home pay during the initial years of the contract. The downside to the extended loan terms is the increased interest paid over the life of the loan, and potential cash flow issues related to building and equipment depreciation. If you accelerate the depreciation on the buildings and equipment you could run out of depreciation in as few as 7 years, which could increase your tax liability and impact your annual cash flow,” said Eidson.

Barns build farms
In eastern Audrain County, Mo., Jay Wilburn started growing hogs to work his way back onto the family’s diversified farm.

After a couple years of college and a stint at a local fire brick refractory, Wilburn was looking for ways to get back to the family’s 1,200-acre row-crop and hog farm. Hogs had been a long-time component to the farm, historically with a farrowing house, nursery and dirt-lot feeding. But after a fire to one of the buildings in the 1990s, the Wilburns switched to a contract partnership with MFA.

When a nearby farm with five 1,000-head finishing barns came up for sale, Wilburn saw an opportunity.

“I knew I’d need to find a source for more income if I was going to come back and stay on the farm,” he said.

That was about 5 years ago. When he bought the property, the barns were a year old. Wilburn said that he managed to buy the property without bringing much equity to the table but with a good business plan and penciled out cash flow for the hog barns.
“My biggest issue was I didn’t have significant equity at the time, just a potential contract to show the cash flow. I’m not sure [the lender] would have loaned the amount of money I needed [for assets like land],” said Wilburn.

Jay Wilburn’s father Bob, who had grown hogs throughout his time on the farm, said that he’s been pleased with finishing hogs on a contract basis in the two barns he built in the 1990s.

“I like contract feeding a lot better than keeping sows,” he said. “It cuts down on labor. And I’d bet that anyone who has had sows and pigs and farmed crops at the same time will probably agree—the finishing part is a piece of cake compared to the rest. Finishing fits our farm very well.”

“Of course, you’ve got to be willing to work on Sunday night,” said Jay, referring to the need for both farrowers and finishers to keep a tight schedule on hog flow. But he added that the normal day consists of about an hour per barn, with more significant time spent for vaccinations or sorting. And, because the Wilburns operate on an all-in/all-out pig flow, there is considerable time spent washing and sterilizing the buildings between hog shipments.

“I’d say for someone who is interested in an operation like this, some experience with livestock is important. But it’s a good opportunity if you’re willing to stay home and work and if you want to be on the farm. It’s a good way to make a living.”

Jay said that buying the barns has given him a niche on the farm that provides income and will help the transition to becoming primary owner in the future.

“Dad’s going to retire at some point. And we like the size of the farm as it is. With the barns I’ve bought, I’ll get to the point that when they are paid for I’ll need to start buying out dad or start paying significant income tax,” he said.

“Jay is a good example of how some people have been able to build on their existing resources through a growing partnership with MFA,” said Swier. “We hope we can help more people do the same. We just rebuilt our sow farm in Marshall after a tornado wrecked it. As a company, that’s a signal that we’re in the business for the long haul. In this reconstruction, we’ve rebuilt with a model that has 21-day-old pigs going into existing nurseries and new wean-to-finish facilities in northeast Missouri. Along with this, we’ve struck new agreements with other sow operators to increase our volume of weaned pigs that we’d like to flow into wean-to-finish facilities. When we rebuilt, we improved flow to better facilitate all-in-all-out by finishing site. We’re excited about getting the system to its full potential and look forward to working with our existing producers and some new ones in doing it.”

The idea for producers as well as the cooperative is that pigs can help pay the way, said Swier.

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