To say pork production is different today from what it was 20 years ago could suggest subtle change over time — the kind you might expect as an industry slowly evolves and matures. Yet that’s not what you’ll find in “The Transformation of U.S. Livestock Agriculture,” a new study from USDA’s Economic Research Service. It paints a stark picture of just how much the industry, and all of livestock agriculture, has changed in its scale, efficiency and risks.

Looking at government data from 1987 to 2007, James MacDonald, ERS economist and the study’s co-author, points to a seismic shift in “small” versus “large” pork enterprises. Simply based on annual production the median hog farm size increased 2,000 percent, which dwarfed increases made in dairy (240 percent), fed-cattle (100 percent) and broilers (60 percent). This reflects the massive increase in the number of hogs removed (sold) per farm per year during that period. Although this number does include pigs in all phases — not just market hogs — the median size of pork operations went from 1,200 hogs sold per year to 30,000 hogs.

Based on the U.S. Census of Agriculture from 1987 to 2007, only the fed-cattle category, with a 75 percent decline, reduced producer numbers more than pork production has at 69 percent. Meanwhile, broiler producers fell by a mere 14 percent, which certainly reflects their previous industry consolidation. MacDonald says the broiler data is especially noteworthy as total broiler production nearly doubled during those two decades; pork production increased 54 percent.

Why Bigger?

Why the tremendous increase in swine operation size? MacDonald attributes the meteoric rise largely to economies of scale and coordinated production. This trend was bolstered by the slack created when high-cost producers exited during major shakeout years like 1998.

As recently as 2004, however, it’s evident that small producers, who must have a decent level of management to have survived this long, are still at a competitive disadvantage in terms of productivity, which translates into higher costs. (See chart.) Looking at the cost per pound of pork produced, MacDonald says there’s a threshold of about 1 million pounds, or roughly 4,000 market hogs per year, that’s needed to reach a competitive level in a farrow-to-finish model. It rises to 2.5 million pounds for a feeder-to-finish operation.

“While there is a range of actual costs around the averages, the hog survey indicates that large hog operations hold substantial cost advantages over smaller farms,” MacDonald notes, “and the effects may be even stronger if you look at location, production practices and operator characteristics.”

Beyond Size

Although the size of U.S. pork operations is clearly much bigger today than 10 and 20 years ago, it’s only part of the pork industry’s transformation.

“The size difference is dramatic; however, it’s the shift to a new model of farm specialization that’s most interesting,” MacDonald says. “Farms focusing on a single production stage, along with coordinated production with integrators by means of contracts, are bigger take-home points for me.” (See table and barn graphic.)

For U.S. meat consumers, the last 20 years have been a coup, according to the ERS study. While overall wholesale food prices rose about 3 percent annually, wholesale meat prices rose only 1.6 percent. This was mainly due to production efficiency gains that livestock producers made over that period.

The research clearly shows pork producers were successful in gaining efficiency. Today’s pound of pork requires much less feed, labor and capital than it did 20 years ago, MacDonald says. “The industry went from needing 4 pounds of feed for every pound of weight gain down to 2.5, which is quite striking.”

Feed conversion gains can be linked to improved genetics, nutrition, feed additives and marketing heavier hogs. While the 20-year period saw a 54 percent increase in pork production, it came with only 35 percent more hogs, underscoring the shift to bigger market hogs prized by most packers. This is reflected in average carcass weights, which were 176.5 pounds in 1987 but 200.9 pounds in 2007.

Multiple Drivers          

MacDonald says economics — specifically production costs — drove much of the pork industry consolidation over the last 20 years. “All U.S. livestock enterprises continue to shift to larger sizes largely because of economies of scale, because of production’s competitive nature and the need to focus on costs,” he adds.

Beyond sheer size, however, the report’s authors define transformation more broadly in terms of production technology use, greater specialization and more vertical coordination. “Pork producers started to get more specialized in their production,” MacDonald says. “This is different from what we saw in dairy producers, who focused more on just getting bigger.”

MacDonald says the trend toward increased specialization in pork production is clearly reflected in the data, as producers moved away from traditional farrow-to-finish models. In 1992, most market hogs were still raised on farrow-to-finish operations — all production phases were on one site and pigs were sold to packers on the open market. (See table.)

With specialization comes more focus on meeting pigs’ unique needs in each production phase. This emphasized the need for specialists in areas such as genetics, nutrition, housing, environmental control, pharmaceuticals and biosecurity. Large farms and systems also tend to adopt new technologies universally, which speeds the adoption rate across the industry.

Although most pork operations are still family owned and operated today, it’s estimated that 67 percent or more are coordinated under some type of contract or cooperative agreement with input suppliers or processors. This tends to ease financial risk management and reflects the industry’s shift from spot markets for feeder pigs and market hogs to coordinated or contract production.

Taking a Breather?

Can the pork industry sustain its incredible pace of consolidation, specialization and efficiency gains? MacDonald doesn’t like to make predictions, but notes it’s worthwhile to review all the trends that may impact future decision-making.

“Livestock producers do face more limits today than in the past,” he adds. Some potential growth limitations include access to fewer market outlets, more contractor-contractee issues, manure-handling regulations, limits on antibiotic use and others.

MacDonald emphasizes it’s good to remember that farm size isn’t immune from the law of diminishing returns. While a 12,000-head finisher operation can realize much lower costs than a 1,200-head unit, it may not have an advantage over one finishing just 6,000 head annually. “This means it’s good to get out of the small category but not necessarily to move to the biggest.”

When pressed, MacDonald zeros in on environmental issues, such as manure handling, as having the most potential to limit growth. This is despite the benefits that manure offers in terms of crop nutrients and energy capture. However, he says, “We do not see regulatory initiatives, such as confined-animal-feeding operation rules, altering current livestock operations’ size structure. New rules and regulations may affect the farms’ geography, especially for those finishing 20,000-head per year or more.”

MacDonald says pressures are likely to focus on reducing antibiotics use for disease prevention and growth promotion, which are as likely to come from retailers as from government. The report details the close links between farm size and subtherapeutic antibiotic use. “This may lead the industry to look closely at reducing antibiotic use, particularly in finishing, and expand sanitation procedures, increase pathogen testing and change feeding regimens.”

On a positive note, MacDonald says, “Consolidation has led to more consistent pork quality, which is important to buyers.” He concedes there is a growing niche for organic and breed-specific pork, but says the volume isn’t there to pose a real threat to current, large-scale systems at this time.

From MacDonald’s perspective, consolidation in the pork industry, and of all animal agriculture, will march on but not likely at the pace of the last two decades. “There’s no doubt that consolidation will continue,” he concludes, “but it will be tempered by additional risks and possible regulation.”

According to Agricultural Resource Management Survey data, in 1992, the typical market hog came from a farrow-to-finish operation marketing 1,200 head annually. Just 12 years later, that  hog came from a feeder/wean-to-finish operation that sent 12,000 head to market annually. This underscores not only the growth in median farm size but also increased specialization.

Specialization Creates Major Shifts

In the 12 years from 1992 to 2004, the pork industry saw dramatic shifts in how the industry is
structured. Most notable is the massive increase in the number of finish-only operations and the continuing decline of traditional farrow-to-finish operations. Experts cite factors such as the need to capture economies of scale, better sow productivity and manure management requirements as
reasons for the shift to more specialized production.

Note: Other operations, such as wean-to-finish, account for small shares of market hogs.

NA= Not available.

Source: Key and McBride, The Changing Economics of U.S. Hog Production,
USDA Economic Research Service, ERR-52, 2007.

Farm Size Influences Production Costs

Unless small producers have a differentiated pork product for which they receive a
premium price, they are unlikely to compete on production input costs based on the
efficiencies of scale gained by large operations. However, efficiencies of scale do plateau.

All Units Reflect Change

The number of farms raising hogs fell 69 percent from 1987 to 2007. However, the amount of pork produced increased 54 percent over the same period. Note the stabilization beginning in 2002.

Meanwhile, dairies and beef feedlots trended lower in number but grew much larger in size. The number of cow-calf and broiler operations remained nearly steady over the same 20 years.