10 May 2002

IRONOUTUNPROFITABILITY WITH THE RIGHT CONTRACT

The past five years have seen

great volatility on the

pig markets. Peter Crichton

looks at different contracts,

which could pave the way

for a more stable future

AT THE start of 1999, the UKAESA stood at just 66p/kg. During the overall five-year period the lowest point was just 60p/kg, with a high of 1.05p/kg.

Because the UK herd is still suffering the effects of PDNS and PMWS, in spite of lower feed prices, producer returns have been little more than breakeven and for most of the period heavy losses have resulted.

One result of this negative output is the decline in slaughter pigs available. The weekly kill is now quoted at 195,000 head, compared with 310,000 in the late 1990s.

The low value of the k has also contributed to unsatisfactory returns and with the k still quoted at about 62p, there are fears that it will continue to be valued at historically low levels.

On the plus side, producers are feeling the benefit of lower feed prices, with off the combine quotes for this harvest struggling to hit £60/t.

One way in which finishers can try and insure against further periods of unprofitable production is to lock into cost of production-related finished pig contracts. These aim to iron out variability in the market and streamline the supply chain.

Probably the best known is the Dalehead Link contract, which includes three elements to arrive at the base value price paid to producers. These include a monthly UKAESA element, a cost of production figure linked to feed and other costs, and a retail pricing input tied to point of sale retail pork prices.

Common spec

Producers are also required to tie into a common specification for genetics, feeding, welfare and herd health. The Dalehead contract includes the use of AI and dedicated PIC/Dalehead breeding boars as part of a move to improve carcass quality.

A high scoring Link producer can earn between 15p and 18p above average weekly contract prices, but for those who fail to meet grades, contracts of this type may not be the answer.

Other major processors are also reported to be looking at similar cost of production-related contracts, where pricing is made up of a fixed pre-agreed figure and a floating UKAESA related element.

Providing that finishers can contain pig production costs, contracts of this type are probably the nearest to some form of guaranteed return.

Another type of contract worth considering is a floor and ceiling arrangement where the producer and processor agree on minimum and maximum figures of, say, 95p and 115p/kg. This price is generally UKAESA-linked and if it moves outside the upper or lower bands it can either be capped at these levels or alternatively producer and abattoir share the difference.

If there is a 95p/kg price limit and the UKAESA falls to 80p/kg, payment would be made on the average of the two – 87.5p. When the upper limit is exceeded, the same averaging would apply.

However, producers should read the small print of all contracts closely. Some will be for a fixed term, but generally do not go beyond 30 months. Notice periods are usually included and producers must be aware of legal and contractural issues arising.

Force majure will normally allow either party to rescind the contract, including in the case of notifiable disease. Clauses which allow the buyer to terminate contracts for economic reasons only should be avoided.

Producers should ask their solicitor or pig adviser to look at all contract terms before signing, because this represents a long term commitment either way.

If a producer fails to deliver according to the terms of the contract, the abattoir could look to them for financial restitution. A long term contract would also stop producers from scaling down or leaving the business until the contract period was over.

When agreeing contractural numbers, allow for wasting disease mortality rather than suffering penalties because of under supplying agreed numbers.

With pig numbers continuing to shrink, the spot market will become more volatile in the months ahead, making contracts a better long term return for large scale finishers. However, another option is selling 50-75% of production onto a good contract, with the remainder on the spot market.

Another factor

Payment terms are another consideration when choosing a contract. Many large scale abattoirs are now prepared to make BACS payments direct into producers bank accounts, within a 10-15 working day period.

The pig shortage is also lifting upper weight limits. Providing there are no harsh trading penalties, producers with the space to take pigs on to heavier weights will earn a premium.

Heavy pig production has rescued many continental producers and, with low feed costs, most live weights can be put on at less than 30p/kg. With heavy pig liveweight prices currently double this figure, it is an attractive option. &#42

To stabilise producer returns, finished pig contracts could reduce variability in the market and streamline the supply chain. But read the small print to be aware of legal and contractual issues, warns Peter Crichton.

&#8226 Reliable returns.

&#8226 Read the small print.

&#8226 Heavy pig production?