Contract Production Benefits Pork Industry

March 20, 2000

A new study from USDA’s Economic Research Service shows contract production and vertical integration may be controversial, but they lead to lower production and slaughter costs, lower consumer prices and improved product quality.

The study compares vertical coordination in the pork and broiler industries and suggests that production contracts facilitate rapid growth in new geographical areas by shifting price and production risk to firms better able to manage risk and by sharing input costs between integrators and growers.

"Production contracts between growers and integrators reduce capital constraints and improve production practices," the study says. "These contracts facilitate the rapid and thorough adoption of cost-reducing technology."

Another conclusion of the study is that increased control over production through contract arrangements "results in the uniform, high quality broilers and hogs necessary for further processing, branding and large scale specification buying by restaurants and supermarket chains."

By raising the quality of animals produced, contracting and integration can lower costs of measuring and sorting broilers and hogs when they are marketed, the study says.

If the pork industry continues to follow the trend set by the broiler industry, the study continues, lower production and slaughter costs, lower consumer prices and improved product quality will result. The broiler industry has emphasized quality, variety, convenience, uniformity and affordability in its product offerings. Consequently retail chicken prices have declined and per capital consumption has increased, the study notes.

The study is available on the Internet at http://www.econ.ag.gov/epubs/pdf/aib747/aib74702.pdf