Pig business looks to long-term contracts

By James Garner

MOVES to establish some price stability in the pig market through longer-term contracts are growing, in a bid to ease some effects of the last crisis.

Speaking at the Smithfield Show this week, producer Roger Mercer of Mercer Farms, Staffordshire, said: “We need to focus on developing three-year contracts, that run on a 12-month rolling notice period.

“The contract will be based on a price formula for at least 50% of the pig crop on a cost-plus basis. This would cover cost of production and margin.”

But he said it was unreasonable to expect customers to pay a fixed price for 100% of the time, and that negotiating a price contract for half a units pig crop would take out some market volatility.

Dalehead, based at Linton, Cambridgeshire, already has these types of arrangements with Asda and Waitrose.

Its livestock buying manager Doug Denny said long-term contracts were necessary to wean farmers off windfall profits, which were followed by windfall losses.

In a one-year contract the market could be heavily distorted, but it would even out over a five-year period.

Mr Denny said 50% of pig sales would be based on a cost of production basis.

“This is the minimum price. For the rest of the contract we have to try and get the price up.

“So we use other factors such as the APP or our own pig price.

“If your break-even is 95p/kg, and we are paying 105p/kg, then thats your price.

But if the price went up to 115p/kg, we may only pay you 110p/kg. For the guarantee of no loss, we also share the profits.”

The reward might be a more stable market, but pig farmers had to know their costs inside out. This is an area which needs to be worked on, said Mr Mercer.

“If we are going to develop links further up the chain, we need to be more transparent and honest.”

Working with a supplier of about 1000 pigs/week, Mr Denny said costs can be driven out of the system.

“We may try to increase pig weights from 75kg to 80kg in three years.

“By planning it together it gives the supplier confidence to invest, which again improves efficiency.”