FIVE-YEAR CONTRACT OFFERS MARKET STABILITY
By Wendy Owen
A NEW, formalised five year contract where finished pig prices are linked to fixed farm costs has been taken up by 10 of the largest producers in the country.
They are currently supplying 5500 pigs a week to processors, Glanbia, in a deal which has been set up by BOCM Pauls marketing division, Porcofram.
The contract is a four-part agreement drawn up by solicitors, with half of producers returns calculated on raw material prices and other fixed farm costs.
Recalculated twice yearly, the raw material price allows a feed cost/pig to be built in to the pricing system. A cost of production element is added to allow for labour, electricity and depreciation. There is also a calculation which provides for a nominal return on investment.
But the other 50% of the contract price fluctuates according to the average all pigs price (AAP) and the returns being offered by Glanbia to its other suppliers. In addition, there are bonuses for producers who meet a high percentage of committed pig numbers.
Among those signed up to the new contract is the JSR Group. In June they started sending 650 pigs a week – 35% of its slaughter pig total – to Glanbia abattoirs in either West Bromwich in the Midlands or to Gainsborough, Lincolnshire.
JSR pig production managing director, Glenn Dams, says the contract is attractive for several reasons. "The stability it brings is one of its most valuable elements. It is legally binding and the built-in production cost element gives us a degree of protection which other contracts dont offer. When pig prices peak, we do not necessarily benefit from those top prices, but we are protected to an extent when returns are at their lowest.
"By meeting regularly with the processor and other suppliers, we are pooling our expertise. So far, these talks have been highly productive. We also have a greater degree of access to Glanbias customers, which helps us understand market requirements and opportunities," adds Mr Dams.
Another advantage is as an existing BOCM Pauls customer, buying large amounts of pigfeed, JSR already had links with the company and was looking to strengthen working partnerships between other allied industries. This contract has provided that opportunity.
Mr Dams predicts similar contracts will be drawn up between other producer groups and processors. "It is the only way to bring enough stability to the industry to encourage much-needed investment."
But he admits larger companies like JSR find it easier to fill this type of order, given the large numbers of pigs it produces each week.
In all, JSR owns more than a dozen pig units, but the farms chosen to supply the new contract are those closest to the Glanbia abattoirs. The animals are generally Large White/Landrace crosses produced by the multiplication herds.
Previously, these pigs would have been sold along with other finished animals to any one of several other large processors on shorter-term contracts.
The contract does not restrict production methods other than requiring good husbandry and meeting British Assurance Standards. The contract specification for pigs is fairly standard, with weights set at 65-85kg deadweight and a P2 probe of 12mm.
BOCM Pauls director of pig marketing, Tony Suckling, says one objective of the contract is to identify and develop new concepts to improve the quality of supply and returns to producers. "By working as a group and becoming more focused, I think we can gain a further 1-2p/kg from the potential return available by consistently hitting targets.
"There will also be a benefit gained from pooling information and increased security for both sides," adds Mr Suckling.
He says it took several months of negotiation before the framework for the new contract was finalised. "From the beginning, the emphasis has been on co-operation between producer and processor.
"The model for this supply group can be seen in a number of countries which compete for pigmeat sales in the UK. We want to bring more professionalism into pig marketing and create an industry where both the producer and processor can invest with confidence."
Mr Suckling also stresses the income taken by BOCM Pauls from both producer and processor is performance-related. "This type of accountability is a relatively new concept in the industry, but it has helped to focus all those involved on getting higher returns." *
Contracts between producer groups and processors is the only way to bring enough stability to the pig industry to encourage investment, says JSKs Glenn Davis.
To compete against cheap pigmeat imports, UK pig marketing must become more professional, increasing finishing returns.
• Price linked to fixed costs.
• Brings price stability.
• Partnership and co-operation.