Like other business owners, farmers have different skills, expertise, financial positions, and appetites for risk. Reducing costs and risk through contracts allows a farmer to establish a steady income source that is attractive to traditional farm lenders.
In contract production, the farmer is responsible for construction of the barns and the day-to-day labor while someone else, either another farmer or a company, provides the animals and feed. Producers are paid a set fee to care for the animals regardless of market prices.
Paying the farmer a set fee reduces the economic risk when the market is down but also the opportunity when the market is up. Farmers who enter into production contracts generally have more stable incomes but at a lower level until initial construction is paid for when net income increases. This might be compared to paying an insurance premium to avoid bad outcomes.
Because farms with limited means to improve or expand often seek off-farm income, contract production could be considered a contributor to individual farm economic sustainability. Research shows growth of modern livestock and poultry production in the United States has resulted in significant economic benefits to rural communities in terms of farm income, employment opportunities, and tax revenues.