Hog contracts

[lang]

We have started to see a lot of interest in the new hog marketing contracts that have fixed or floating windows for price. These are long term contracts from 5 to 10 years and I am wondering if you see any drawbacks or opportunities. Are any of the banks giving any value to these contracts and if so how?

[tdarling]

It seems to me that a long term contract like this would help provide a much better level of security from the bank's point of view. A new feeding barn is perhaps a 20 year asset. A 5 or 10 year contract should be benificial to everyone. On the other hand, pricing formulas are going to have to be well thought out, and/or renegotiated each year or so. Anyone else have ideas or experience in this area?

[pigpen]

The banks like long term contracts, the contract provides stability to to operation and guarenteed profit on animals shipped. The only variable is production

[purdy]

As with any contract,that is signed, sealed, and delivered,much ofd the price risk movement is mitigated. Having said that, the value of the contract is also rated along with the company supplying the contract. Will they be around for the length of the contract, how solvent are they? What is their financial strength? The longer the contract the more comfort, but there are other uncertainties. Regards Ross