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Gaining Equity in an Existing Operation: 5 Benefits to Contract Growing (Article)
By: Dusty Compart , Associate Financial Services Specialist
TAGS: Swine, Grain, Dairy, Young, Beginning Farmers
 
February 07, 2017 -

With agriculture’s cyclical nature, we’ve seen our young and beginning farmers struggle to gain equity in an existing operation. Additionally, with prices like these, farm families are avoiding their succession plans. This makes it hard for second or third generation farmers to build equity and take more ownership in the farm.

While this is common, it doesn’t have to be that way. There are obstacles out of your control, but you can take the step into ownership with Contract Growing. Contract growing pigs has been a solution for many farmers who want to build equity and position themselves to take advantage of future opportunities. A contract grower owns a swine finishing barn and is paid yardage (barn rent) to raise pigs until the pigs are market ready. Contract growers are paid through a contract from an integrator, an individual or company that owns the pigs.

If you’re starting to consider contract growing, here are five benefits that you should be aware of.

  1. Long Term Equity Growth
    A new swine finishing barn, on average, costs $290 to $330 per space. The cost is highly dependent on the size and style of the facility. For many, building this size of facility will require a large loan, which isn’t always easy for a young or beginning farmer to acquire. Because of the contracted income source, however, some lenders will utilize customized underwriting standards, making it more feasible to build a hog barn as compared to purchasing land or other long-term farm assets. Utilizing long term financing allows farmers to leverage a smaller down-payment into significant long term equity as the debt is retired from monthly contract payments from the integrator.

  2. Access to Manure
    For many crop farmers, finish barns provide a steady and historically inexpensive way to access manure for fertilizer. It’s important to compare the cost of commercial fertilizer to manure nutrients to determine the actual value of that manure has as fertilizer. Integrators and consulting companies have nutrient analysis tools to identify manure values. They are a great resource in helping conclude a proper manure value.

  3. Depreciation
    Accelerated depreciation for the barn often offsets other farm income which can be used as part of a tax plan for an individual. Always consult your tax professional before making any tax based decisions.

  4. Transition Plan
    For someone looking to move equity or assets to the next generation, building a contract barn can be advantageous. There are a few different approaches to consider. Some of the more simple options include; gifting land for the site, pledging collateral for the loan or by guaranteeing the loan. Another method is to ask a lender to set up a lease arrangement.

  5. Consistent Income and Diversification
    Building a contract barn provides diversification and steady cash-flow to an operation during a down cycle in the agriculture economy. With the grower not owning the animals or providing the feed for the animals, they are not directly exposed to risk related to fluctuation in commodity prices. Contracts are structured to provide a monthly payment and may provide bonus opportunities based on the grower’s management performance.
If contract growing is of interest to you, the next step is to connect with an integrator. When looking for specific leads on which integrators have pods in your region, or who is looking for additional space, use your local network for information and guidance. Your lender, county feedlot officer, local feed mill managers or your State Pork Producers Association should be able to point you in the right direction.

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Dusty Compart
Associate Financial Services Specialist
Dusty Compart is an Associate Financial Services Specialist on AgStar’s Core Markets Team and has been with AgStar since 2015. Dusty’s role is to work with clients who are pursuing farm business diversification or expansion through constructing facilities to contract grow hogs. Dusty’s passion for the Swine Industry started at a young age while being active on his family’s farm in south central Minnesota. To discuss how AgStar can play a role in the success of your business, contact Dusty Compart.
Contact Dusty Compart
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