No question, the complexion of the U.S. pork industry changed dramatically and permanently in the 1990s and early 2000s. Today, the industry is more consolidated than it was 10 years ago, but it’s also more productive and more profitable.

“Advances in production technology and changes in consumer preferences are credited as the driving forces behind the rapid evolution,” notes Glenn Grimes, University of Missouri agricultural economist. “But innovative, entrepreneurial pork producers are the ones who have made the changes occur.” And those traits are not exclusive to pork producers running “large” operations (50,000+ hogs marketed annually).

In some ways producers raising more than 50,000 hogs a year and those raising fewer than 50,000 head are more similar today than a decade ago. There’s less of a gap in attitude and approach in how they raise hogs. The 2007 Pork Industry Structure Study results reported in the June issue of Pork magazine shows signs of that. Asked about challenges facing the industry in the next five years, all producer size groups placed disease management, maintaining productivity, input purchasing and compliance issues high on their lists. That similarity in attitude and approach has helped stabilize the pork industry’s growth and consolidation patterns that we’re now seeing.

The second half of this decade also is turning the tables on producers raising 50,000+ hogs annually and those with less than 50,000. Corn production and ethanol are the key drivers. While the very largest producers (500,000+ hogs) still benefit from production economies of scale, they raise only 2 percent of their corn needs; producers in the 50,000-to-499,999 group harvest 55 percent of their needs. But producers marketing fewer than 50,000 hogs fill 94 percent of their corn needs. That diversifies their portfolio at a very profitable time. “I can make money on corn, on hogs or both,” says a Missouri producer.

Individuals with land in their portfolio will benefit even further. “With ethanol pushing up corn prices, the producer who owns land is going to make money on corn for quite some time. For those renting land, it’s going to be interesting to see what happens. The value of land is going to go up — sharply,” Grimes notes.

The under-50,000 group
For the 2007 Pork Industry Structure Study, 6,240 producers in the 1,000-to-49,999 production size category received the survey — 15 percent were returned. The numbers reflect 2006 production. Grimes and John Lawrence, agricultural economist at IowaStateUniversity, collected and analyzed the data.

Simply put, in the last 20 years there’s been a flip-flop in terms of market-share domination. In 1988, U.S. annual hog slaughter was 87.8 million head. According to USDA, 323,000 farms had hogs, of which 32 percent were on farms marketing less than 1,000 head a year. Only 7 percent were from operations with more than 50,000 hogs.

“In 2006, U.S. hog marketings reached 102 million head, 14 million more than in 1988, with 80 percent fewer farms with hogs,” Lawrence notes. Last year, about 1 percent of the hogs were tied to farms marketing fewer than 1,000 hogs annually, while 65 percent came from farms selling more than 50,000 hogs.

Producers raising 1,000 to 9,999 hogs have continuously lost market share in this decade. Bucking that trend are the producers who raise 10,000 to 49,999 head; they have gained market share steadily through the 1990s and on into today. (See chart.)

It’s no surprise that the “smaller” farms generally started producing hogs sooner than the “large” farms. Most producers raising fewer than 50,000 hogs a year entered the business before 1985. Interestingly, 31 percent of those in the 50,000-to-499,999 category started prior to 1976. More producers in that size category and those raising 500,000+ hogs entered pork production after 1985.

Profitability and future plans
Thanks to a string of very good years — 2004, 2005, 2006 — producers across all size categories made a profit. It ranged from a low of 81 percent of producers to a high of 100 percent during those years, the most profitable of which was 2005.

Profit breeds contentment, and all producers rated their satisfaction with pork production high. The ratings ranged from 4.2 to 5.2 on a 6-point scale, where 6 = very satisfied.

With money in their pockets and satisfaction in their hearts, producers across all size groups said they plan to raise more hogs in the future. It’s worth noting again that the survey was taken before the new higher corn price levels had a chance to sink in. While producers will get periodic reprieves, high corn prices won’t go away.

“With the exception of producers in the largest and smallest categories, the most rapid growth is projected to occur in 2008 to 2009,” Grimes notes. (See chart.)

Not all producers do as they say. In 2003, all categories planned to raise more hogs by 2006. In the end, only producers marketing more than 10,000 hogs a year followed through, and they did so at higher levels than anticipated. 

Here’s a look at growth from 2003 to 2006.

Firm Size (head marketed annually)

 

Planned in 2003

 

Actual

 

1,000-2,999

 

+18%

 

-35%

 

3,000-4,999

 

+3%

 

-23%

 

5,000-9,999

 

+22%

 

-31%

 

10,000-49,999

 

+11%

 

+14%

 

50,000+

 

+11%

 

+15%

 

 

Future profitability will have a significant influence on the final growth that materializes. Production costs have risen in the last several months. Along with feed prices, higher costs for building materials, interest rates, labor and more will challenge producers’ breakevens. To get a perspective of the breakeven threshold, the Structure Study asked producers about their ability to stay in business at various hog prices, keeping corn prices stable at $3 per bushel. (See chart.)

“Note that less than half of the producers marketing fewer than 500,000 head would continue to raise hogs if prices fell below $46 per hundredweight,” Grimes says. And that’s at $3-corn.

“That may tell us something significant; we might reduce the hog herd more than we think with a couple of hog price declines and $3.50-corn or better,” he adds.

Meanwhile, 75 percent of the 500,000+ producers would continue to raise hogs if prices dropped below $46 per hundredweight. That’s because their size limits their options.

Counting on contracts
Whether it involves producing hogs or marketing them, contracts are an industry fixture. “It’s part of the business,” Grimes notes. “Over the years, growers have been consistently satisfied with the process.” It typically scores 4.4 or better on that same 6-point scale.

What’s more, they see themselves as independent producers. “Growers often contract as a way to get into pork production, with the intention of eventually raising hogs for themselves,” he adds. “But after a few years, that goal dissipates for most of them.” They like the regular paycheck. In the survey, 78 percent said they plan to continue to contract with the same producer or company, 14 percent want to become independent, 6 percent will look for a different contractor and 2 percent want to stop raising hogs.

Contract production has leveled off in the past three years. According to the survey, 20 percent of the hogs were farrowed under a contract in 2006, while 46 percent of the market hogs were finished on a contract.

Here’s a look at the hogs raised on contract for producers in the 1,000-to-49,999 category. (See the June issue of Pork for data on the two largest producer groups.)

  • Farrowed on contract: 2000 = 2 percent; 2003 = 7 percent; 2006 = 1 percent
  • • Finished on contract: 2000 = 3 percent; 2003 = 5 percent; 2006 = 7 percent

Looking ahead five years, about 50 percent of the contractors expect to maintain their mix of contract and owned production. Of the 500,000+ producers, half expect to increase, while the other producer groups plan to cut back. Here’s a look at contractors’ plans for the next five years.

  5-year plans                                      Firm size (head marketed annually)

 

 

1,000-49,999

 

50,000-499,999

 

500,000+

 

Expand contract production

 

21%

 

20%

 

53%

 

Reduce contract production

 

23%

 

35%

 

0%

 

Keep the mix steady

 

56%

 

44%

 

47%

 

On the marketing side, the use of contracts or negotiated sales increased with the operation’s size, but all producers sold hogs that way. Producers raising fewer than 50,000 hogs sold more hogs on a load-by-load basis. They also sold more hogs on the spot market, ranging from 58 percent for the smallest operations (1,000 to 2,999) to 32 percent for the 10,000-to-49,999 group. The largest producers sell most of their hogs on a formula tied to live-hog prices. Here’s how operations of all size groups market their hogs.

  • Spot market – 20%

Marketing contracts:

  • Based on futures market – 7%
  • Formula based on hog prices – 57%
  • Formula based on meat prices – 6%
  • Formula based on feed, with or without a ledger – 3%
  • Window, with or without a ledger – 3%
  • •Other – 4%

At 20 percent, the spot market’s share is higher than USDA’s Mandatory Price Reporting data shows. “One reason is that it includes only top-quality barrows and gilts. In this study, cull breeding animals and lightweight market hogs were included,” Lawrence notes.

Some producer attitudes about the marketing process varied by operation size; here’s a snapshot:

  • The under-50,000 group had more flexibility in terms of when to market their hogs. Only 30 percent were committed to a “tight schedule.” Fifty-three percent of the 50,000-to-499,999 group sold hogs on a tight schedule, while 68 percent of the 500,000+ group marketed hogs that way.
  • Operations of all sizes used futures markets at times to manage hog-marketing risks, but the larger operations used them more often. Reasons for not using futures were consistent across size groups. They included: bad experience in the past, dislike margin calls, option premiums are too high, and too complicated.
  • Producers believe that marketing contracts help coordinate hog slaughter. “There is more agreement with that statement in profitable years than unprofitable years,” Grimes says.
  • Producers said marketing contracts treat them fairly — producers running smaller operations agreed with that more strongly than the two largest producer groups.
  • Producers in all size groups said they would continue using marketing contracts.
  • Asked whether USDA should more closely monitor market contracts, “a couple interesting trends developed,” Lawrence notes. As market numbers increased, the desire for more monitoring declined. However, the largest producers scored this higher than in the 2003 survey. Fewer producers in the under-50,000 group saw the need for more USDA oversight today than in past surveys.  
  • Producers’ interest in selling hogs on the cash market continues to decline; the one exception was the 500,000+ group, which scored it higher than in 2000 or 2003.
  • Producers running smaller operations tend to think that market contracts cause lower cash-hog prices, but this stance weakened in the more profitable years.
  • Asked whether producers with marketing contracts get higher prices, producers running smaller operations were more likely to say “yes.” However, that opinion was less dominant than in past years.
  • Asked whether market contracts should be made illegal, all producer groups said “no,” as scores ranged from 1.2 to 3.2. This has become a significant trend over time.

So, as some U.S. senators try to force more cash-market hog sales as a way to “protect” pork producers running “small” operations, results from the 2007 Pork Industry Structure Study would suggest that’s an unfounded idea.

Looking ahead, the next three to five years are expected to be tough for pork producers as input costs will likely force some production realignment. As the corn scenario works itself out, Grimes expects all meat and poultry sectors will have to cut production back to some degree, followed by a rebuilding phase.

“In 10 years, we can think in terms of 112 million to 114 million hogs annually,” Grimes says. “Of course that requires growth in exports and maintaining demand domestically; I think both are attainable.”

Editor’s note: The June issue of Pork magazine presented additional results of the 2007 Pork Industry Structure Study. You also will find more information on Pork magazine’s Web site at www.porkmag.com.

 

 


Flip-flopping the market share 

In 20 years, the market share by size groups has flip-flopped between the smallest and the largest systems. There was a significant shift to larger pork production operations from 1994 to1997, as feed costs climbed in 1995 and 1996. In 1994, 68 firms had 50,000+ hogs, claiming a 17 percent market share. In 2006, there were 191 firms, with a 65 percent market share. However, as Glenn Grimes points out, their rate of growth is slowing and their market share is stabilizing.  

Firm Size (head marketed

annually)

1988

 

1991

 

1994

 

1997

 

2000

 

2003

 

2006

 

< 1,000

 

32%

 

23%

 

17%

 

5%

 

2%

 

1%

 

1%

 

1,000-1,999

 

19%

 

20%

 

17%

 

12%

 

7%

 

---*

 

---*

 

2,000-2,999

 

11%

 

13%

 

12%

 

10%

 

5%

 

8%*

 

5%*

 

3,000-4,999

 

10%

 

12%

 

12%

 

10%

 

7%

 

4%

 

3%

 

5,000-9,999

 

9%

 

10%

 

12%

 

10%

 

10%

 

9%

 

6%

 

10,000-49,999

 

12%

 

13%

 

13%

 

16%

 

18%

 

19%

 

21%

 

50,000+

 

7%

 

9%

 

17%

 

37%

 

51%

 

59%

 

65%

 

 

* 1,000-1,999 and 2,000-2,999 were combined into one category beginning with the 2004 Pork Industry Structure Study, reflecting 2003 production.

Source: 2007 Pork Industry Structure Study


Planning a growth spurt

Producers in all size groups said they planned to raise more hogs this year than last. However, they project an even bigger growth spurt as they approach 2009. Corn prices and pork demand will dictate the likelihood of that outcome, but for now, here’s what producers had to say.

Firm Size
(head marketed annually)

 

Planned increase

2006 to 2007

Planned increase

2006 to 2009

1,000-2,999

 

4%

 

11%

 

3,000-4,999

 

1%

 

7%

 

5,000-9,999

 

2%

 

8%

 

10,000-49,999

 

2%

 

18%

 

50,000-499,999

 

5%

 

16%

 

500,000+

 

5%

 

8%

 

Source: 2007 Pork Industry Structure Study


Breakevens and survivability

As with previous Pork Industry Structure Studies, producers in the 50,000-to-499,999 size group had a tighter breakeven range. As shown here, none would stay in business if hog prices dropped below $40 per hundredweight, but 92 percent would continue at $48 per hundredweight.

The survivability of producers marketing fewer than 50,000 hogs is more balanced over a variety of hog prices. Those producers also have an edge in terms of corn supply and options.

Here’s who would stay in business at various hog prices with corn set at $3 per bushel (central Iowa price). 

 

                                    Live-hog Prices (per hundredweight)

Firm Size (head
marketed annually)

 

$37-$39

 

$40-$42

 

$43-$45

 

$46-$48

 

$49-$51

 

>$51

 

NA

 

1,000-2,999

 

3%

 

14%

 

19%

 

28%

 

17%

 

14%

 

3%

 

3,000-4,999

 

5%

 

17%

 

26%

 

29%

 

12%

 

9%

 

3%

 

5,000-9,999

 

6%

 

16%

 

27%

 

27%

 

14%

 

7%

 

2%

 

10,000-49,999

 

8%

 

18%

 

23%

 

33%

 

11%

 

6%

 

1%

 

50,000-499,999 

 

0%

 

16%

 

14%

 

63%

 

7%

 

1%

 

0%

 

500,000+

 

25%

 

15%

 

35%

 

10%

 

15%

 

0%

 

0%

 

Source: 2007 Pork Industry Structure Study