Proceedings

PR – A Feasibility Study Of Contract Finishing Of Hogs

A multi year financial model was used to evaluate the economics of contract finishing of hogs. The model includes projected income statements, balance sheets, and cash flow statements, as well as the calculation of the Internal Rate of Return (IRR) using discounted after tax cash flows. The model uses contract fees and incentive schemes, and the evaluation of manure and how much of it can be captured as income. It uses depreciation on capital investment (which affects the amount of income taxes paid), interest costs on borrowed capital, labor, utilities, insurance, maintenance, property taxes, and the cost of spreading the manure as expenses. The effect of an injection of patient capital was also calculated. The calculations were done for a 20 year period, from the time the facility is built and stocked with hogs to the end of the serviceable life of the barn. The results indicate that there are at least three conditions within the barn enterprise that have to be met in order for it to become economically viable. The first condition is the life of the contract. If the barn has a serviceable life of 20 years, it must be full of pigs for all or most of that time to generate competitive rates of return. The second condition is the capture of the nutrient value of the manure. The hog owners have not been able to capture the nutrient value of the manure because they don’t usually own the land surrounding their enterprises, that is to say stand alone barns have not been able to sell the manure at its full nutrient value. However, a contract feeder of hogs can locate the barn in the middle of their own land and take full advantage of the nutrient value of the manure through their cropping enterprises. The third condition is financial leverage. If the first two conditions are met and interest rates are below 8%, contract finishers of hogs can use financial leverage to their advantage. The addition of a 10% patient capital also helps the economic viability of the enterprise.

Keywords: financial model, contract finishing of hogs.

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Author(s): Brown, B., Ferguson, M., Painter, M.

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Organizations(s): Dept. of Agricultural Economics, College of Agriculture and Bioresources, Dept. of Management and Marketing, College of Commerce, - University of Saskatchewan, Industry and Policy Analysis, ‘Sask Pork’, - Saskatoon