Potential contractors include investors, feed companies and farmers. The two major risks involved in hog production are the need to invest in specialized facilities and fluctuating returns. Both contract and independent hog producers face the risks associated with investing in specialized facilities. Quite often hog buildings will bring less on the market than they are worth to the seller. They are not easily liquidated.
Investment risk is the largest risk contract hog producers face.
The fact that most contracts have a shorter duration than the useful life of the hog facilities increases the grower's exposure to investment risk. A grower needs to factor this added risk into the decision to produce hogs under contract, and needs to determine what will happen if the contract is terminated. Contract producers do not face the risks associated with fluctuations in input and output prices. Unless performance or costs change from one period to the next, contract returns are flat. Many hog finishing contracts guarantee a producer a fixed payment, and add or subtract bonuses and penalties from this payment.