A cold sweat, pounding heart, shortness of breath – all common symptoms among pork producers on Sept. 3, when Smithfield Foods announced its intention to purchase Murphy Family Farms.
Telephone calls went out. "What does this mean? Where do I fit in this industry?"
No doubt about it, this is big news and one more change for an industry that's been spinning with changes. But it is not the end of the world or independent pork production.
First off, while the ownership will change, the hog production numbers or packing capacity will not – at least for now. Sure, this puts Smithfield miles ahead of everyone else as the United States' No. 1 pork producer and the world's largest packer. So what?
McDonald's is the United States' No. 1 burger vendor but that hasn't stopped Wendy's, Sonic or any number of neighborhood joints from grabbing their share of business.
Here's a thought: Smithfield's purchase of Murphy may actually be good news.
Before you call the guys in white coats, here are some points to ponder.
The sale will give Smithfield 325,000 more sows that produce 5.5 million market hogs annually, which pencils out to 17 hogs marketed a year. Smithfield's previous sow herd had 350,000 head, producing about the same number of market hogs. Even if you figure that the sows produce some replacement animals not included in the market hog numbers, the companies' production is not exactly setting the world on fire. The message: Smithfield's pockets may be deeper, but your production should be better.
There is the matter of Smithfields' farrow-to-meat-case business. That does help insulate the producer/packer from market cycles on the production and the product side. You don't have that link, and with the exception of Farmland, Premium Standard Farms and Seaboard, neither do the other pork packers. The message: This sale affects pork packers as much as it does pork producers.
Smithfield has the hogs, the packing and a wide array of branded products for the meat case. This raises the bar for other packers, which could be good news for you.
The U.S. pork industry is a food entity and in order to control supply, quality and safety it is going to vertically coordinate or vertically integrate. The two are not the same. Smithfield is vertically integrated. You and your packer can vertically coordinate.
"Packers who do not wish to vertically integrate will need to consider the producer as their partner," says Glenn Grimes, University of Missouri agricultural economist. "That producer will need to be paid a living income in order for the relationship to be successful long term." The message: Producers and packers need each other, and this sale has made both worlds a bit smaller.
The Pork Industry Structure Study that we released last year pointed to breakeven problems for many producers who market 50,000 or more hogs a year. We will see more rumblings in that sector in the months ahead.
Tight (and non-existent) profit margins will keep investors at bay. And Smithfield officials themselves pointed to the limited expansion climate as a main reason for the Murphy purchase.
As this issue went to press, Farmland and Cenex announced the final outline for their marriage of cooperatives. For now, this does not include any of Land O'Lakes (Cenex) hog units. Someday it might. Farmland already has hogs, packing and a branded product.
The real threat in these moves is in ignoring the growing trend toward controlling pigs and product. That opportunity is not exclusive to the Smithfields and Farmlands of the world.
Where there is change, there is opportunity. But it depends on the messages you embrace. The real take-home message in this isn't all that new: To compete long term, you have to link further through the pork chain. Today that applies to packers as much as it does to you.