The pork industry is going through a massive transition and it's leaving a lot of integrators questioning their business models and the contracts they have made with their feeders. In the coming months it's likely the agreements between integrators and contract feeders will take a new direction.
Experts like Iowa State University Extension Economist John Lawrence say there will be fewer hogs to finish in the buildings that many grain producers have built with the promise of production contracts as collateral. So, what do you do if your integrator tells you they're cutting back on your contract and they'll pay you less money?
According to Lawrence, if you're one of those faced with that situation, attitude may determine the long-term commitment the integrator is willing to make to your operation.
That may sound heavy handed if you are a feeder faced with years left on your mortgages, but it could mean the difference between making loan payments or facing foreclosure. Craig Raysor, an attorney with the Memphis-based ag and food law firm Gillon and Associates, says it's a difficult situation to face, but you have to weigh the risks.
Legally, he says you likely have the legal right to sue for breach of contract if your integrator changes or breaks the contract. However, you have to consider the long-term risk to your business.
In virtually any business, the natural thing is to not deal with a contractor who is considered a trouble maker and complains. The business could cut the contract completely.
"Technically I wouldn't even call the decision not to renew a contract a retaliation (there are various anti-retaliation laws based on whistle-blower type complaints); rather, it's a business decision. If you have one person who is complaining a lot, would you take your business back to them? More than likely, not. The processors are getting squeezed, too. The difference is they have a lot more money and resources to fall back on than a contract feeder.”
"Pork processors are getting squeezed because they're not being able to sell the pork in the markets where they traditionally have a channel, so they're putting the pressure on the contract feeders,” Raysor says. "It's one of those things where it ends up shifting a bad situation along the line, and the production contracts are where it ends up resting. In those contract situations, you may have the right to sue or get a lien on the animals in some states. However, it may be difficult to pursue a lawsuit while continuing to operate as a contract feeder.
"You have legal remedies, but business reality makes pursuing those remedies difficult. It's one of those hairy situations,” he says. "You will have to decide whether it is economically viable to go ahead and sue. It takes time to go into court to argue, while money is not coming in. On top of that, there is never a guarantee of a favorable judgment, so you may be out completely.”
When the market turns around, and it eventually will, the integrators will need to fill those buildings. How you handle this market turmoil and how willing you are to work with the integrators could result in how full your buildings are in the future.