It’s easy to look at the U.S. pork industry and conclude that it has reached a stabilizing point. Following the robust, consolidated growth in the 1990s, this decade has generally seen a leveling off. Productivity growth has brought more pigs to market each year, but there have been only minor structural shifts. 

USDA’s Quarterly Hogs and Pigs Reports, which have become somewhat predictable and uneventful, reflect that trend. Now, the 2007 Pork Industry Structure Study lends further confirmation that the industry is on a steady course.

There is less difference in the business mindset and approach of producers running different size operations today. The Structure Study does break producers into various size groups, with the two major sectors being those who raise 1,000 to 49,999 hogs annually and those who produce 50,000 or more hogs. Presented here is a look at the 164 producers who market 50,000 to 499,999 hogs and the 27 who produce 500,000 or more hogs each year. The August issue will report the survey results for the other size groups. 

In 2006, these large firms raised 65 percent of all U.S. market hogs, which compares with 59 percent in 2003 and 51 percent in 2000. Of course, their major growth spurt came in the 1990s when the mentality was “if you’re going to grow, you have to do it now.”

Today, the 50,000+ group’s “rate of growth is slowing, and their share of the market is stabilizing,” says Glenn Grimes, University of Missouri agricultural economist, who has analyzed every Pork Industry Structure Study since they began in 1973.

Dissecting that market share further, you’ll see the 50,000-to-499,999 group claimed 21 percent of the 2006 U.S. hog slaughter (21.4 million hogs) versus 20 percent (19.63 million) in 2003. The 500,000+ group had the lion’s share at 43 percent (43.86 million), compared with 39 percent (38.28 million) in 2003. (See chart.) 

Who owns the hogs?

Beyond individual producers or producer groups, those involved with operations in the 50,000+ sector are wholly or partially owned by the following (50,000 to 499,999, and 500,000+ respectively):

  • Veterinarians: 1.90 percent, 1.23 percent
  • Feed company: 4.80 percent, 1.47 percent
  • Packer/processor: 1.90 percent, 24 percent
  • Foreign firm or person: 2.86 percent, 1.73 percent
  • Ownership by the feed sector has declined since 2003, as United Feeds reduced its hog numbers, and Land O’Lakes left production.  

As for the packer/processor sector, USDA’s January Mandatory Price Report reflects packer ownership at 29.4 percent. “The Structure Study is at 26 percent, but Triumph Foods didn’t get its second shift started until the last half of 2006,” Grimes notes. Triumph Foods is actually the only new vertical integrator on the scene since 2003.

Of course, there’s been some shuffling among vertical integrators, the most recent being Smithfield’s purchase of Premium Standard Farms. As a result, Smithfield’s processing capacity will move from 30 percent to about 36 percent of the market, and its production will increase by one-third.

“There is room for this sector to grow, but it will depend on the integrator model’s success and profitability,” Grimes says. “So far, it hasn’t done dramatically well.”

Planned growth is always part of the equation for the pork industry in general, but it’s especially true for the 50,000+ sector. While survey participants typically overstate their growth plans, this group tends to do as it says. In 2003, producers raising 50,000+ hogs planned to grow by 11 percent by 2006. They came close at 10 percent.

Looking ahead, the two groups have pretty aggressive plans: 

  • Producers in the 50,000-to-499,999 group plan to produce 5 percent more hogs this year than last. From 2006 to 2009, they intend to increase production by 16 percent.

    “That seems high, but this group is always optimistic,” Grimes notes.

  • Producers in the 500,000+ group also plan to have a 5 percent production gain this year over last.  In the three years from 2006 to 2009, they expect to grow by 8 percent.

    The point here is these guys always want to grow,” Grimes adds. “There’s no doubt that they will, but a flag has to be corn prices and just what their profitability turns out to be.”

Not so clear cut

While the producers raising more than 50,000 hogs annually have an advantage in economies of scale, there’s a new glitch — ethanol production and its demands on the U.S. corn supply.

Last year, U.S. pork producers were looking at Central Iowa corn prices around $2.20 per bushel; today you can add another $1.50 to each bushel you want to feed to hogs. That has added another $7.50 per hundredweight to the cost of gain.

However, with only about seven months of those new higher corn prices on the books, the impact hasn’t fully settled in for most pork production systems. Since the Structure Study was conducted in February 2007, and it’s based on 2006 numbers, producers were still reveling in three years of continuous profits. It’s safe to say, the reaction to high corm prices is yet to come.

“We’re still riding with as much equity in the hog business as we’ve ever had. It probably takes six months to a year before you start to see the effect of that change,” Grimes says.

But anticipation also enters the picture. “It’s pretty predictable that corn prices will remain high, but we don’t know about hog prices,” he adds. So the survey asked what would happen if corn prices held at $3 per bushel, but hog prices fluctuated. (See chart.)

For example, 30 percent or fewer producers in all categories from 1,000 to 499,999 hogs said they would remain in business if hog prices averaged $43 to $45. The exception was the 500,000+ category, of which 75 percent would still be feeding hogs. That’s because they have no other options.

The survey shows that the largest producers (500,000+) raise only 2 percent of their corn needs, making it their biggest input variable today. Producers in the 50,000-to-499,999 category, grow 55 percent of their corn quota. For producers  who market fewer than 50,000 hogs a year, they produce 89 percent to 94 percent of their corn. 

“I can argue this two ways,” Grimes says. “High-priced corn could make producers with less than 500,000 hogs terribly competitive because they have corn and hogs. If they don’t make money on hogs, they’ll make it on corn — or it could push some of them out of hogs.”

That’s not likely to happen in the 50,000-to-499,999 group. For those that do leave production, the ownership would change but the hogs would likely still be produced.

As for the 500,000+ group: “Those producers can’t be as competitive with the small producers as they could with low-priced corn,” Grimes notes, “unless they make a lot of money on packing, but that hasn’t been the situation recently.”

Plans to build

So if producers in the two largest size groups say they intend to increase production through 2009, how will it occur?

Somewhat surprising, constructing new facilities was the most popular choice — 63 percent for the 50,000-to-499,999 group, and 70 percent for the 500,000+ producers. (See chart.) That marks the biggest change in growth strategies compared with the 2003 survey. Of course, 2004, 2005 and 2006 were all significantly more profitable years than the tough margins of 2002 and 2003, so there’s more hog money in the bank. 

“We built a lot of new finishing facilities in Iowa and Minnesota in the last three years,” Grimes notes, “some of that could already be factored into their growth plans.”

Those plans also could reflect their need to build more facilities due to productivity gains, moving to older weaning ages and other production strategies. 

But beyond the corn-and-hog-price equation, building costs are extremely high. So the potential outcome for this area is uncertain, since a lot of economic factors have yet to unfold.

The higher building costs have already caused bankers to require longer production contracts. “They’re lengthening the payment period. Payback on facilities was seven years; now it’s 10 years and higher,” Grimes says. (See table.)

Production contracts are an ingrained part of the business. They have helped producers, with all sizes of operations, grow. “The percentage of hogs raised by contractors has continued to grow and will continue to grow,” Grimes notes.

But contract production’s actual contribution to growth has been steady, not excessive. As for the percent of the U.S. hogs raised under contract for these two large-producer groups, it shakes out as follows:

 

Farrowed on contract

 

 

2000

 

2003

 

2006

 

50,000-499,999

 

7%

 

5%

 

4%

 

500,000+

 

13%

 

17%

 

15%

 

 

Finished on contract

 

 

2000

 

2003

 

2006

 

50,000-499,999

 

10%

 

11%

 

14%

 

500,000+

 

21%

 

25%

 

25%

 

 

In the next five years, these producers want to:

 

50,000 to 499,999

 

500,000+

 

Expand contract production

 

20%

 

53%

 

Reduce contract production

 

35%

 

----

 

Keep the mix steady

 

44%

 

47%

 

That’s because contractors are satisfied with contract production. On a scale where 6 = “very satisfied” and 1 = “very dissatisfied,” contractors have consistently scored their satisfaction 4 or higher — 4.23 for the 50,000-to-499,999 group in 2006, and 4.84 for the 500,000+ producers.

With that same 6-point scale, both groups scored their satisfaction with pork production in general at 5 or higher. In 2003, it was 3.7. “They’re happier with the business when they’re making money,” Grimes says. 

As for market contracts, you can see the influence of strong hog prices. These producers use and like market contracts and don’t plan to change. Formula contracts have been the dominant option, especially with these large producers.

They believe that market contracts help coordinate hog slaughter, and that they’ve been treated fairly, although that margin has slipped some since 2000. “In 2003, a higher percentage of them (50,000 to 499,999) thought people with contracts got higher prices, and they did because 2002 and 2003 were tough years,” Grimes says.

Consistently over the years, these producers have said the government should not mess with market contracts. Of course, that’s an increasing challenge today as various congressional bills would dictate the use of contracts and price more hogs on the cash market.

“We’ll continue to have issues to address in this area,” Grimes says, “but it’s driven by a vocal minority. We have production and marketing contracts in most agricultural commodities and certainly elsewhere in business.”

He points out if, for example, there is a mandate that 25 percent of the hogs must be priced on the spot market, it would enhance the packer’s bargaining power. “It would help the packer push the contract more in his favor because he’d have more producers wanting contracts than he can write,” Grimes notes. “It would actually be counterproductive from what these groups want to accomplish. Contracts are a more stable and secure arrangement for producers.”

Looking ahead

Of course, no business is immune from challenges. Ask survey participants what are the greatest challenges facing the U.S. pork industry in the next five years and the answers often shift between surveys and producer size groups. However, this time the results are more consistent between groups than in the past.

“It tells us that there’s a more uniform feeling of what’s good and bad for the industry,” Grimes observes.

Input purchasing is the largest-producers’ No. 1 concern as they look five years out. Following close behind, however, are maintaining productivity, disease management and compliance issues (permitting and such).

For producers in the 50,000-to-499,999 group, animal activism and compliance issues concern them the most. Disease and employee management tie for second.

Producers raising fewer than 50,000 hogs a year place disease management in the lead, with maintaining productivity a close second before the gap widens for the other issues.

So what else lies ahead? “The industry will continue to concentrate. There are just too many economies of scale to pass up, but the rate will be slower as we move forward,” Grimes says.

Of course, future predictions bring us back to the one variable that we don’t know how to measure at this time — feed prices.

Risk management — pricing corn — will be more of a challenge, especially for the big producers. “It will be important to try to identify any corn shortfall well ahead of time,” Grimes says, “anything that would cause it to spike to $5, $6, $7, and the crop doesn’t have to fall very short for that kind of reaction.”

Unless you raise corn, pricing inputs now becomes more serious. “Five years ago, you didn’t have to do much about corn pricing, and you knew you weren’t going to pay very much for it most of the time,” he adds. “Not so today.”            

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