Smithfield Foods bought Murphy Family Farms in September. A few weeks later, Smithfield acquired Tyson's hog operations.
Across the border, Canadian packer Maple Leaf Foods bought Landmark, a producer cooperative that includes pork production.
These acquisitions have made the harsh reality of vertical integration even harsher. But do increased levels of vertical integration mean the sky is falling?
First off, let's look at what vertical integration is – and is not.
In the purest sense, vertical integration is a business strategy tying together two or more functions of production, marketing or processing of an industry under one entity.
In the pork industry, the term "integrator" has come to mean a number of things. It's often used as a label for all large-scale hog operations, which is not necessarily accurate.
Size is independent of vertical integration. For example, Murphy Family Farms was not integrated until Smithfield bought it. Still, people within the industry viewed Murphy as a "large integrator."
At the same time, a group of independent producers who organize to build a packing plant would actually be vertically integrated.
Today, the pork industry's main integrators are Smithfield, Seaboard, Premium Standard Farms and Farmland, with Hatfield, Lundy and Clougherty's incorporating various levels of vertical integration.
Smithfield leads the pack, with 70 percent of its system to be vertically integrated if and when the Murphy and Tyson deals are finalized.
"I don't know if vertical integration is an overall trend," says John Lawrence, Iowa State University agricultural economist. He points to the last five years or so as the timeframe when vertical integration has taken off. Twenty years ago not even 3 percent of the industry was integrated. Just five years ago, the number hung around 5 percent. Pork magazine's 1998 Industry Structure Study, showed about 15 percent of the hogs marketed in 1997 were owned by a vertically integrated entity, such as a packer, feed or genetic company. That number has risen to 25 percent, according to Glenn Grimes, University of Missouri agricultural economist. Grimes says if the market goes through another price disaster like the end of last year, the industry could integrate almost completely.
Why so much integrated growth in the 1990s? It's a result of a maturing industry. It reflects a more business-like orientation, one that identifies and acts on opportunities. In pork's case, it means controlling the product from production to the meat case to meet consumer demands.
Despite an increasing market share, the rise of vertical integration is not to blame for poor hog prices.
"Vertical integration hasn't affected the markets at all yet," says Grimes. "Even with all the consolidation it shouldn't change slaughter capacity or hog production, in the short run." He also points to the 1998 Industry Structure Study, which showed producers in all production size groups expanded hog numbers, leading to the eventual glut.
Grimes acknowledges that if vertical integration goes far enough it could take away shackle space from independent producers. Obviously, integrator/packers will slaughter their own hogs first. The next priority is their contracted hogs, possibly leaving independent producers without contracts out in the cold. This leads to a declining importance of the spot market.
"There's a point where the spot market becomes irrelevant. We're not there yet, but most people are moving towards marketing contracts to get away from the uncertainty of the spot market," says David Meeker, director of the Ohio Pork Industry Center. "I predict in the next few years there eventually will be few situations that a producer doesn't know where his market hogs will be going when he breeds the sow."
Vertical integration is a business model, but it is not the only business model that will be successful. There are advantages and disadvantages to vertical integration, as other industries have shown.
"The broiler industry is a good example. Growers don't have seasonal production problems; their biggest production increases match their biggest demand increases. That's not the case in pork production," says Grimes. "With vertical integration you control production changes to meet consumers' needs."
Of course there are some risks as well. "There are some built in inefficiencies," says Meeker. As an example, he cites the period when General Motors owned steel mills, built all its own parts and made its own tires. It was too much for one company to handle so GM eventually spun off some production aspects.
Vertical integration is not the only route to the future.
"Just a few years ago it seemed like the trend was moving away from vertical integration. Tyson bought and then sold a packing plant, and opening a packing plant did not prevent financial problems for PSF," says Lawrence. "It's not so much an industry-wide trend as it is a strategy of a few companies."
What can't be denied is the trend toward vertical coordination, which has increased more dramatically than integration. Vertical coordination involves producers and packers working together, usually through some type of contract.
Vertical integration is sure to force this hand further, impacting packers as much as it does producers. As vertically integrated pork companies grow and evolve their systems, independent packers will be forced to keep pace. Those packers will need to invest capital in value-added processing, marketing and product assurance. But U.S. packers who don't currently own hogs are not expected to make a move in that direction any time soon.
"For vertical coordination to be successful long term, there has to be some sort of division of the profits between packers and producers," says Grimes. "Figuring out how to get that done is the challenge."
Another eventual offshoot of vertical integration that will impact producers and packers is production guidelines. Integrators' ability to control the pork production system from beginning to end is a selling point with retailers and consumers. All of the major integrators – even Farmland, a producer cooperative – have specific production guidelines for their growers. Don't be surprised when some independent packers follow suit.
Vertical integration may not have affected hog market prices directly, but its long-term impact will forever change the way the industry markets pork.
Integrators' Share of the Pie
It's easier to get a direct line into the company president than it is to get annual market hog numbers from vertical integrators. This table offers rough estimates for the current number of hogs marketed per year for the top four integrators.
Some of the companies are putting a lot of their own pork on the market, while others own only a small percentage of the hogs they kill.
Company – Hogs marketed annually (million head)
Smithfield Foods – 13.75 *
Seaboard – 2.0
Premium Standard Farms – 2.5
Farmland Industries – 0.7
*Includes hogs from the Murphy and Tyson mergers
Not Exclusive to the United States
Vertical integration in the pork industry has no boundaries – at least no international boundaries.
Maple Leaf Foods, Manitoba, Canada, recently purchased The Landmark Group, a producer cooperative that includes feed manufacturing and hog production.
This shows that vertical integration is a strategy being implemented elsewhere, not just in the United States.
The Maple Leaf system will use a mix of producer-oriented partnerships, involving independent ownership and risk management strategies. Landmark Feeds, the feed processing unit, and Elite Swine, the genetic supply source, will continue to operate independently from Maple Leaf, which differs slightly from vertical integration models in the U.S.
The point to note here is that by purchasing Landmark, and securing a hog supply, Maple Leaf will shut off slaughter prospects for others eyeing the company's new packing plant. U.S. producers had been looking to Maple Leaf's expanded slaughter capacity as a potential marketing option.