Production Contracts and Farm Business Growth and Survival

In recent decades there has been a substantial increase in the scale of production and the use of production contracts in the hog sector. This paper explores empirically whether these two phenomena are related by examining whether the use of production contracts has allowed finish hog operations to expand in scale. The study takes advantage of recently collected information from the Census of Agriculture that permits a comparisons of individual independent and contract hog producers over time. The study first examines whether operations that used a contract grew at a faster rate or had lower exit rates over the subsequent five-year period than did operations that produced independently, controlling for observable factors. The study then examines how the adoption of a production contract affected subsequent farm size growth. To address the potential endogeneity of contract adoption, the availability of contracting is used as an instrumental variable. The instrumental variable approach makes it credible to assert that the association between contract adoption and growth is a causal relationship.