What lies ahead? Everyone wants to know what the pork industry will look like beyond 2000. Indeed, you need to know so you can make informed business decisions.
Since 1987, this magazine has brought you that insight. This year marks another Structure of the Industry Study. Presented here are preliminary results from producers who raise more than 50,000 hogs annually.
Glenn Grimes, University of Missouri agricultural economist, surveyed the 130 producers in this 50,000-plus group, of which 94 responded at the time of this writing. John Lawrence, Iowa State University agriculture economist, is compiling responses from the 8,200 surveys we sent out questioning "small" to "midsize" producers. Those results will come later.
What does it say? The big are getting bigger, and more producers got bigger.
In 1994 there were 66 producers identified in this group. Today, it's closer to 130. Of the 94 responses, 77 market 50,000 to 499,999 hogs a year (averaging 116,000 head), 17 produce more than 500,000. Those 17 make up all of the U.S. producers who are marketing more than 500,000 hogs a year.
Combined, the 94 producers accounted for 34 percent of the 1997 U.S. market hog slaughter. (Hogs entering the United States from Canada are excluded from the slaughter numbers.)
While 34 percent equals 30.4 million hogs, it's well short of the 50 percent to 60 percent market share that some industry watchers have suggested. It also means that more than 60 percent of U.S. hog slaughter remains in the hands of the majority of producers raising fewer than 50,000 hogs annually.
Add in feeder pigs and seedstock, and the 94 producers raised enough to equal at least 38 percent of all hogs in the 1997 domestic market.
The 1990s have been a busy time for these folks. (See table.) From 1996 to 1997 alone, these producers increased production by 20 percent. And they tell us that pattern will continue.
For this year, the group says it will raise 16 percent more hogs than in 1997. Two years from now, they expect to have grown by 54 percent.
Producers raising 50,000 to 499,999 hogs a year are the most aggressive, planning to grow 29 percent this year. But even though the 17 ultralarge producers show a slower expansion rate (9 percent), a smaller percentage of a larger number is still a lot of pigs.
Should the 54 percent increase materialize, that is an additional 16 million hogs. It could mean a U.S. hog slaughter approaching 109 million head by 2000.
That's not to mention what the producers marketing less than 50,000 hogs might have up their sleeves.
Simply put, we're looking at too many hogs, contends Grimes. His demand figures show the U.S. pork industry could handle a 12 percent production increase by 2000 and still have prices producers can live with – at least for a while.
His numbers allow for a 1 percent annual growth in exports and stable domestic demand – which allows for another 1 percent annual gain due to population growth.
Will these large producers follow through with their plans? "They have in the past, " says Grimes.
"Remember, they have 18 months of that growth built in right now," he adds, "so some significant part of their plans will come about regardless of prices or other developments."
What's the rush? "There's a feeling that there's a three- to five-year window to grow," says Grimes. Environmental and social opposition to "large" hog units have actually expedited their growth.
While capital doesn't appear to be coming from outside interests, segments within the industry such as feed companies, allied industry/farmer cooperatives and veterinarians are a driving force. In many cases, producers used profits from the past couple of years.
Then there's the philosophy that you have to be big to stay in business. But size doesn't ensure long-term success or security. The survey shows some of these large operations are highly vulnerable.
Asked about prices needed to stay in business to 2002: 44 percent of the ultralarge group, but only 24 percent of the large producers (50,000 to 499,999) group said they could survive a drop below $40 per hundredweight live weight. For a big share of each group – 41 percent and 44 percent respectively – the critical point is $40 to $42.
Producers in the large group have grown more rapidly and more recently. One-third of them will require more than $43 per hundredweight to make ends meet in the next two years.
But Grimes thinks their breakeven figures are low. "If we would have gone beyond 2002, they would have had to add in all their fixed costs," he notes.
Going back to his demand outlook, Grimes' price projections for the next three years isn't encouraging. If these produers grow as planned, he expects prices to spend a lot of time in the $30s.
The question is how the thought of three unprofitable – or losing – years might influence this group. "Some of these guys will likely say no to their plans," says Grimes. "This survey may convince some people to slow down or perhaps get out." At the very least, you can expect half of those planned market hogs to materialize.
"The probabilities of any of this group going out of business are very low," says Grimes. Ownership may change hands, however. "Somebody will pick them up for cents on the dollar." That will make the new owner's cost of production lower and more competitive.
Don't assume that the small or midsize producers will automatically wash out. "Many of those guys can stay in longer than anybody else, if they wish," says Grimes. "They have no debt, and their facilities are in pretty good shape." And many produce their own grain.
There is one more caveat. How much influence does market price carry?
Again, this early survey shows there are a lot of secured marketing arrangements in hand. The large producers sold 72 percent of last year's market hog production under some type of fixed program. The ultralarge group committed 93 percent of their production.
The most common method for both groups involves a formula set by a previous agreement. In this type of arrangement, the packer agrees to pay the producer a set bonus over market price for his hogs. The survey didn't ask for the bonus amount or agreement length.
The point is that these prearranged agreements should give those producers a higher price than the market quotes. That in turn makes speculating about the market's potential impact on these producers a tad more difficult.
Survey results still to come from the small to midsize producers will provide even more insight into the amount of marketing contracts and other similar programs under way.
However, if you don't already have an agreement in hand, you probably won't get one. With current contracts: "Packers may become very big lenders," says Grimes. Packers have enough capacity to handle the large run of hogs; they're just not likely to be as generous with marketing contracts or other commitments.
Expect to hear about production contract renegotiations in the next year or two as well. A lot of people will likely find themselves tied to some unprofitable production agreements.
Regardless of size, "if your cost of production is not below $42 with a $2.50 Iowa corn basis, you probably should get out of production," says Grimes.
"For the extremely good producers, there's always opportunity," he adds. "If you have to have a quick payoff, the opportunity isn't likely to be there for the next two to three years. If you're talking about the next decade, probably."
Editor's note: Along with PORK'98 magazine, sponsors of the 1997 Pork Industry Structure Study include: the National Pork Producers Council, PIC, DeKalb and Cenex Land O'Lakes.
Plans for the Future . . .
These estimates are as close to a crystal ball as you'll get in determining what the large and ultralarge producers are planning for the next two years.
University of Missouri economist Glenn Grimes, says these producers have been true to their word in the past. However, they also faced more lucrative price prospects and fewer challenges during those times.
|NUMBER OF PRODUCERS (annual marketings)||Expected Growth (percent of domestic slaughter)|
|77 = 50,000-499,999||29%||89%|
|17 = 500,000+||9%||37%|
|94 = Total group||16%||54%|
Source: PORK'98 Industry Structure Study, Glenn Grimes, University of Missouri
Make or Break Prices . . .
It's all about the bottom line. The survey asked large and ultralarge producers what kind of prices they need to stay in business until 2002. The common denominator was $2.50-per-bushel corn using a central Iowa basis.
The widest gap between the two groups comes in at $43 to $45 where more than one-third of large producers enter the profit danger zone, while only 6 percent of the ultralarge producers are vulnerable there.
|Price Needed (hundredweight, live)||Market Hogs Sold Annually(% of producers in this group)|
Source: PORK'98 Industry Structure Study, Glenn Grimes, University of Missouri