One example of the impact of production contracts on efficiency is the increasing feed conversion rate among hog producers. The average quantity of feed required per hundredweight of gain declined 44 percent for feeder-to-finish hog operations between 1992 and 2004. Most feeder-to-finish operations operate under production contracts. Since contractors typically bear the cost of supplying feeder pigs and feed to the farming operation, they have a strong incentive to invest in genetic improvements in the animals and improved formulations to reduce feed costs. And since contracts allow farmers to specialize in the grow-out phase of the production process, they have adopted practices that further increase feed efficiency, such as grouping pigs by age and weight so feed rations can be formulated for each pig’s specific needs. In contrast, the average feed conversion rate on farrow-to-finish hog operations—which are less likely to have production contracts and are less specialized—declined by only 15 percent in 1992-2004.

While production contracts have boosted the productivity of livestock producers, they also limit a farm operator’s management options and can leave farmers who are heavily invested in specialized housing and equipment dependent on a single buyer. The concentration of market power in the hands of one or two contractors—particularly for products with a short shelf-life or a limited geographic market—can handicap farmers in negotiations and magnify their risk from contractor default. And while feed conversion efficiency has reduced the amount of waste produced by each animal, the geographic concentration of production encouraged by contracts may have led to localized and intensified environmental risks in specific areas.

Labor-Saving Innovations Help Crop Farmers Expand Their Operations

While agricultural contracts are less prevalent among crop farms, they are very important for specific commodities, such as sugar beets, tobacco, and peanuts, and their use has increased over time for most other commodities. When contracts are used in crop farming, they are almost always marketing contracts used by larger operations. But aside from their long-term impacts through reduced price risk, crop marketing contracts do not appear to provide the same push toward concentration that has occurred in the poultry and hog industries. To the extent that management time prevents crop farm operators from expanding their operations, other technological advances (such as improved equipment) that reduce management requirements can ease this constraint, enabling farmers to expand and consolidate.

Improved farm equipment has enabled farmers to increase the size of their crop farms. For example, in 1970, an operator could plant 40 acres of row crops and harvest 4,000 bushels per day. By 2005, a producer could plant 420 acres and harvest 30,000 bushels in a single day. Consolidation trends have continued through the adoption of further labor-saving innovations, such as GE seed varieties, which have improved the efficiency of crop farm management.