Contract and Exit Decisions in Finisher Hog Production

Fengxia Dong, David A. Hennessy, Helen H. Jensen
June 2008  [08-WP 469]

Finisher hog production in North America has seen a shift toward larger production units and contract-organized production since around 1990. Given the efficiency gains and conversion costs associated with contract production, growers may have to choose between long-term commitment through investments and atrophy with intent to exit in the intermediate term. A model is developed to show that growers with any of three efficiency attributes (lower innate hazard of exit, variable costs, or fixed contract adoption costs) are not only more likely to contract but will also produce more and expend more on lowering business survival risks. Using the 2004 U.S. Agricultural Resource Management Survey for hogs, a recursive bivariate probit model is estimated in which exit is affected directly and also indirectly through the contract decision. It is confirmed that contracting producers are less likely to exit. Greater specialization and regional effects are important in increasing the probability of contracting. More education, having non-farm income, and older production facilities are significant factors in increasing the expected rate of exit. The findings suggest further exits by non-contract producers.

Keywords: agricultural industrialization, hog production, occupation choice, production contracts, recursive bivariate probit, relationship-specific investments, sector dynamics.

JEL classification: D23, Q12, J26, J43.

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