In the June issue of Pork, Glenn Grimes, University of Missouri agricultural economist, evaluated results from the “large” producers involved in the 2004 Pork Industry Structure Study. Here, he looks at producers marketing fewer than 49,999 hogs a year in 2003.
Today, one cannot evaluate pork industry trends and developments without considering the red-hot demand scenario.
For the first quarter of this year, pork demand ran 5.3 percent higher than in 2003; beef was up 6.2 percent and broiler demand increased 5.8 percent. “The best we can tell, demand has not peaked,” says Grimes.
Hog supplies in first quarter 2004 were 5 percent higher than a year ago, but live-hog prices were 25 percent higher. “That’s clearly demand,” says Grimes. “You don’t have to know any more than that — it’s just demand growth.”
The question is, can it be sustained? “We’re afraid to project that this demand will continue because we’ve never seen anything like it — it’s so dramatic,” he notes. “We cannot rule out that the Atkins and South Beach diets are offsetting completely what’s happened to meat demand in the last 20 years.” Regardless of whether folks stay true to the diets long-term, the health message about meat has shifted from negative to positive.
Exports also are paying dividends. Following 13 years of consecutive annual export records, U.S. pork sales are running more than 30 percent higher than in 2003.
“Here’s the thing,” says Grimes, “it’s not Japan driving it.” First quarter sales to Japan were only 6 percent higher, while Mexico purchased 88 percent more U.S. pork and Canada 31 percent more. Look at the “other” group, that includes several countries, and you’ll find a 52 percent increase.
Any way you slice it, growing pork demand spells opportunity for pork producers.
“If we can maintain this recent demand, then we cannot rule out that the next 3 or 4 years could be like the hog industry of old in terms of profitability,” says Grimes.
As always, how producers respond will influence the length and level of profitability.
During the past 17 years and six surveys, there has been a consistent trend of declining market share from the smallest producers (those marketing fewer than 1,000 to 9,999 hogs a year.) Only producers marketing 10,000 or more hogs annually have gained market share, with producers in the 50,000+ category making the greatest gains.
“We expect that to continue for some time,” says Grimes. “Part of it will come from ‘small’ producers growing into the larger categories, which has always been true.”
It is worth noting that all market shares today are part of a larger industry than in 1987.
Back then, producers raising fewer than 50,000 hogs a year produced 93 percent of the U.S. hog slaughter. Today their share is 41 percent. The “largest” producers (50,000+) have moved from 7 percent to 59 percent. (See chart No. 1.)
In every survey for the past 17 years, all producer categories said they planned to expand production into the future. In recent years, the outcome tells a different story. (See chart No. 2.) Only the largest producers have actually followed through on their growth intentions.
Looking ahead, producers project the following growth patterns for their operations:
-1,000 to 2,999: 2003 to 2004 = +13 percent; 2003 to 2006 = +7 percent.
-3,000 to 4,999: 2003 to 2004 = +0.5 percent; 2003 to 2006 = -11 percent.
-5,000 to 9,999: 2003 to 2004 = +9 percent; 2003 to 2006 = +12 percent.
-10,000 to 49,999: 2003 to 2004 = +6 percent; 2003 to 2006 = +2 percent.
Based on history, producers in the 10,000-to-49,999 group are the most likely to come close to their plans.
How they plan to expand production into 2006 is one thing all producers have in common; they plan to market more hogs through existing facilities.
“I don’t know how long we can keep pressure on maintaining high productivity,” says Grimes. The 3 percent annual productivity growth seen during the past few years has been stunning. “If hog prices remain high, that may decline some,” he adds. “We always make the most productivity advances under stress.”
Across all size groups, the percentage of producers that would like to build new facilities to increase production was similar. “If we hold or grow this high pork demand, I could see some expansion coming from new construction,” notes Grimes. But building new facilities will likely re-ignite negative attention from U.S. pork-industry opponents. “Unless we do something different than we’ve ever done before,” he adds.
Not to be ignored, is the high percentage of producers who said they do not plan to market more hogs by 2006. (See chart No. 3.)
Profitability drives any business, impacting current attitudes and future plans.
As for attitudes toward pork production, all producers gave it an “average” score. “They were neither happy nor unhappy with the business,” says Grimes. “They need profits to put the joy back in hog production.”
The 2004 study revealed that more of the “small” producers enjoyed profits in 2001, and especially in 2002 and 2003, than did the “large” producers.
However, profitability involves more than meets the eye. There are some factors worth noting that likely are impacting this data. “We believe the smaller producers are mixing farm profits with hog profits, so they’re really reporting farm profits here,” says Grimes. The 50,000+ producers, on the other hand, reported only their hog profitability.
The other significant factor is that producers marketing fewer than 49,999 hogs are the ones holding risk-shifting market contracts, which tend to help their profit structure. (See chart No. 4.)
Looking ahead, the survey asked producers what price level for live hogs would keep them in business into 2006 given a $2.40-per-bushel Central Iowa corn price. The vast majority indicated $40 to $42 per hundredweight would keep them in the game. More than 84 percent of the “large” producers would be covered under that scenario. Here are the results for the other groups:
1,000 to 2,999 – 55 percent
3,000 to 4,999 – 66 percent
5,000 to 9,999 – 67 percent
10,000 to 49,999 – 68 percent
However, $2.40-a-bushel corn may be optimistic this year, and into the future, depending on how corn supplies shake out. Corn usage is up in all sectors, and it’s a worldwide issue.
“If the U.S. energy bill passes anywhere close to what’s been proposed, it will mean a lot of ethanol,” notes Grimes. “We will have higher priced feed in the next five years than we’ve had in the past five.”
Substantially higher priced corn could slow hog-industry growth. The study shows that on average, 80 percent of pork producers still raise corn, and that it’s their other major enterprise. As usual, as operation size gets larger, corn production declines. “Pork producers who raise corn have always opted to sell high-priced corn versus selling it through hogs,” notes Grimes. That threshold has historically been $3 a bushel.
One of the bigger surprises in the survey came in the market-contract area; specifically the number of hogs sold on meat prices. Looking at producers raising 5,000 to 500,000+ hogs a year — 4.6 million of their market hogs were priced on a formula contract tied to the meat price in 2003. “We expect that to grow. As the spot market disappears, that’s what will replace it,” says Grimes. Chances are good that the industry will lobby Congress to revise mandatory price reporting next year to include meat prices.
About 50 percent of the producers in the “small” group have marketing contracts that shift risk. Just less than one-third have contracts that negotiate prices in the spot market.
Generally, producers with a contract in hand are satisfied with them, and plan to renew them — although there are few alternatives today.
Here’s a look at opinions concerning market contracts for producers raising 1,000 to 49,999 hogs a year. (Scores were assigned 1 = strongly disagree; 6 = strongly agree.)
Plan to continue marketing contracts = 4.2.
Have been treated fairly by marketing contracts = 4.3.
Marketing contracts help coordinate slaughter = 3.5. “We believe that’s a reflection of their disillusionment of the pork industry,” notes Grimes. “The thinking goes: If contracts help coordinate slaughter, we wouldn’t have problems with live-hog supplies.”
USDA should closely monitor marketing contracts = 4.4; the largest producers scored this 1.4.
Prefer to market all hogs on the cash market = 3.9. With a range from 4.5 to 3.3, a consistent trend here is that the fewer hogs a producer sells, the more he likes the cash market.
Market contracts have caused lower cash market prices = 4.7. “Because marketing contracts have grown while prices have been low, producers see them as part of the problem. They’re blaming something that has no cause and effect,” says Grimes. “Probabilities are near 100 percent that marketing contracts have caused higher average hog prices for all producers than we otherwise would have had.”
Producers with contracts get higher prices = 4; the largest producers agreed with this as well.
Packers show undue preference in offering contracts = 4.2; only the 500,000+ producers disagree with this, they scored it 2.9.
Marketing contracts should be made illegal = 3.4. While this group’s score reflects a neutral stance, both of the “large” producer groups scored it 1.4.
Other marketing aspects of interest show that several producers sell hogs via group contracts, that ranged from 12 percent to 16 percent of producers. Also, some of the “small” producers indicated that they own a packing plant. “That’s a reflection of the co-op plants,” says Grimes. “The producers consider themselves owners.”
Producers in the “small” group say they sell hogs to several packers — all producers, regardless of size, sold to at least four packers — some sold to has many as seven. This is largely because they sell cull sows to one packer, lightweight pigs to another and so forth. Overall, upward of 80 percent of a producer’s hogs, go to a single packer; and they are generally shipped within 150 miles.
As operation size gets larger, the tighter the producer’s marketing schedule. Likewise, the smaller the operation, the more likely the producer will sell hogs on weight.
Carcass merit selling is the game of the day, essentially 90 percent or more of all market hogs are sold that way, which compares to 70 percent in 1997.
Businesses face many challenges regardless of the product; pork production is no different. Producers of all sizes agree that over-supply of hogs would be their No. 1 challenge in the next five years. For this “small” producer group, packer concentration and vertical integration was close behind.
In general, however, these producers felt challenged by many things, even more so than the largest producers. (See chart No. 5.)
“That’s possible because doing something about those issues is a bigger challenge for them than for the big producer because of affordability,” says Grimes.
No one was terribly concerned about country-of-origin labeling, but the “small” producers at 20 percent were the most concerned.
Boil all of the numbers down and you’ll find another truism from the many surveys that have gone before. Success is still more about attitude and approach than operation size. There are numerous examples of producers who’ve grown their operations successfully; or who started as contract finishers and now own the buildings; or who hold their operations to a certain size and remain competitive.
The shift in operation size came in the mid-1990s. “That’s when the large producers pulled away,” notes Grimes. Some people used profits from the 1980s, grasped the evolving technologies and adopted the techniques of big production.
Everyone has competed in the same atmosphere; it’s the decisions made that make the difference.
“I am confident that for the top 50 percent of producers, the hog industry will treat them well in the next decade,” says Grimes.
The more things change, the more they stay the same. Your future still depends on how you approach the industry, your business strategies and your attitude.
The Care and Feeding of Canadian Hogs
U.S. producers running all size operations are feeding some Canadian weaned and feeder pigs. For some it’s a way to fill extra finishing space, for others it’s a way to feed corn through hogs. For most, Canada has replaced a void created by the demise of the U.S. feeder pig industry in the southern fringe areas of the Corn Belt.
“In part, what Canadian producers are doing is making it possible for corn producers in Iowa, Minnesota, Illinois and North Dakota to continue to feed hogs without farrowing. So it’s not all bad,” notes Glenn Grimes, University of Missouri agricultural economist.
Last year, 4.971 million Canadian weaned pigs entered the United States. “We’re running higher this year,” says Grimes. “If we continue at this rate, we will import substantially more than 5 million pigs.”
Most U.S. producers feeding Canadian-born pigs price them on the cash market. Here’s a more detailed look:
1,000 to 49,999 = on average, 75 percent of these producers price pigs on the cash market; 50,000 to 499,999 = 96 percent; 500,000+ = 42 percent.
The remaining producers price pigs under marketing contracts; except for 2 percent in the 50,000-to-499,999 category which transfer pigs from the producer’s own facility in Canada.
Getting the Job Done
Providing financial support for this year’s research: the National Pork Board, PIC, Monsanto Choice Genetics, Land O’ Lakes and Pork magazine. University of Missouri and Iowa State University agricultural economists conducted the survey and analyzed results.
Editor’s Note: You can access more information about the 2004 Pork Industry Structure Study on Pork magazine’s Web site at www.porkmag.com. Additional results will be appear as available.