Knowledge is power, but application of knowledge is critical to a business' success. That was true in 1998 when the Pork Industry Structure Study showed tremendous growth plans across all production size groups, and it will prove just as true in the years ahead.
Since 1987, Pork magazine has conducted industry structure studies to provide that knowledge. This year marks the fifth such survey. Agricultural economists, Glenn Grimes, University of Missouri, and John Lawrence, Iowa State University, did the data collection and calculations.
Here you will find a snapshot of what the industry looks like today, and where it's headed tomorrow. In future issues, Pork editors will provide a more in-depth look at specific industry segments.
Conducted in February and March of this year, the survey looks at 2000 production as well as plans for 2001 and 2003. It was sent to 8,400 pork producers across the nation who market 1,000 to 49,999 hogs annually. Producers were randomly selected from five size groups.
A second survey went out to producers marketing more than 50,000 hogs a year, which resulted in responses from 156 operations. "My confidence level with these numbers is quite high," says Grimes, "especially with the large producers. Those are very hard numbers."
It is important to note that producers raising less then 1,000 hogs a year, were not surveyed. Grimes and Lawrence extrapolated those numbers from USDA data.
It's also important to note that Grimes and Lawrence share the same feeling that the numbers may reflect slightly more optimistic producers than the industry as a whole. "There are still some bruises out there, and my sense is that's why some people didn't return their surveys." Past response rates ran 25 percent to 30 percent, this year's was 17 percent.
Market share is the best way to measure industry status, and the status quo of fewer but larger farms raising more hogs dominates. "It's a continuation of what's been going on for 50 years," points out Grimes. "Whether that's good or bad depends on how it affects you. Certainly it has lowered production costs, which has meant low-cost pork for consumers."
As of last year, the top 20 U.S. pork operations marketed 33.3 million hogs, for 35 percent of the total, up from 24 percent in 1997. Add in the 136 producers from the 50,000-to-499,999 group and market share increases to 51 percent. In 1997, the 145 firms in the 50,000-plus category produced 37 percent of the total. "While 51 percent certainly is a lot of hogs, some within the industry had that number higher," says Lawrence.
Include producers with 5,000 or more hogs, and you'll have nearly 80 percent of all U.S. marketings in 2000. They represented 63 percent in 1997.
A consistent dividing line is found in producers who raise less than 5,000 hogs a year, and those that raise more than 5,000 hogs. In terms of producer numbers, an estimated 71,977 producers fall into the first group, while 5,284 producers make up the second (there were 3,441 in 1997.)
Growth plans in the1997 survey revealed an optimistic and aggressive three-year strategy among all producer groups. However, 1998/1999 hog prices squelched those plans. "This is the first time that producers didn't increase more than they said they would," notes Grimes.
"Producers with smaller operations have more flexibility – they can do other things," says Lawrence. "If I have 40,000 finishing spaces, I have to raise hogs or sell it to someone who will."
Producers with 10,000 to 49,999 annual production most closely hit their growth targets, but it's also worth noting that this category includes the most contract growers.
Regardless of size, producers lost money during the 1998/1999 period, "But in many cases the larger producers had deeper pockets and a more committed investment," says Grimes.
Those larger producers also had growth activities underway when prices dropped and had to follow through, points out Lawrence.
Looking ahead to this year and 2003, producers again say they will increase production, but at a much more modest pace. (See table.)
Getting a handle on exactly what growth plans mean is the most challenging task of the survey. With the exception of the two largest size groups, the survey's random sampling does not allow for direct producer comparisons nor does the survey identify how growth will occur.
Future plans could simply reflect the producer's anticipated productivity gains or it could reflect the addition of sows. Some producers continue to evolve their businesses to participate in things like sow cooperatives, or in retrofitting facilities to accommodate farrow-to-wean systems, then finish pigs elsewhere. Either strategy results in more total hogs.
"We're starting from a growth point that is very close to the maximum number of hogs that packers can slaughter," emphasizes Grimes. "So, any significant growth will get us into trouble."
With last year's commercial slaughter at 98 million hogs, a 5 percent increase would put numbers at 103 million. "We would have difficulty with slaughter capacity at that level," says Grimes. He adds that with the exception of one cycle (1993/1995) producers have always increased production by more than 5 percent.
The most comparable growth numbers are found in the largest two size groups. Producers marketing more than 50,000 hogs a year indicated that at least part of their growth will occur through mergers and acquisitions, if it occurs at all.
Who's a candidate for purchase? Operations of 2,500 sows or larger. But more importantly, the unit has to fit within the producer's system. "That's one thing people learned from 1998," says Lawrence.
In 1997, the 50,000-to-499,999 producer group had the most aggressive growth plans, and they reclaim that spot in this survey. "These are the 'wanna be's', they want to be in that biggest producer group," notes Lawrence. "They're also the most vulnerable in terms of production costs." Only 4 percent of those producers said they could survive $36 live hog prices.
Profits will drive any growth according to survey participants. Asked "what would limit growth" – "lack of profit" – was the overwhelming answer by all groups.
Part of that attitude is a carryover from 1998/1999. Not everyone has recovered from that price crash. Asked specifically about 2000, 65 percent of the 1,000-to-1,999 producer group said they made a profit, with another 24 percent breaking even. In the largest producer group, 95 percent reported a profitable year, with the other 5 percent at breakeven. Those two groups represented the highs and lows. As for the remaining size categories, 77 percent to 90 percent reported a net profit last year.
Looking ahead, the vast majority of producers said they will require $39 per hundredweight live hog prices to remain in the pork production business into 2003.
Other major factors that most producers said would limit growth were environmental regulations and lack of market outlets.
Market access moved up the priority list the most since 1997. "That's a dose of reality," says Lawrence. "We're down to 17 percent of the hogs sold in the open market. It will become increasingly challenging for producers to find a place to market hogs without a pre-arranged agreement."
In 1997, environmental factors and local opposition were top limitations. While the two go hand-in-hand, environmental issues remain a major concern. "We can't rule out that environmental issues won't become so strict that they will be a barrier to entry or expansion," says Grimes.
Other factors worth noting in this first look at the 2001 Industry Structure Study involve the regional breakouts. It's no surprise that production has grown slightly faster outside of the Corn Belt than it has within its boundaries, but that trend will slow heading into 2003. Meanwhile, the Eastern Corn Belt intends to play catch-up.
Grimes says the Eastern Corn Belt is going through the structure adjustments that previously occurred in the Western Corn Belt – meaning finishing floors are moving into that region.
Finishing pigs in the Midwest has become and will remain a standard operating procedure in the industry, says Lawrence.
The take-away message from the 2001 structure study depends on your future business strategy. Consolidation will continue and the competition will intensify.
"Producers with the best management or deepest pockets will compete in the long run," says Grimes. "If you are a good manager there can be a future for you."
Lawrence advises "smaller" producers to capitalize on strengths that large producers face as challenges. He points to the labor and environmental areas.
"If you can build on your strengths, and ensure access to a market, then there are still opportunities in this business," he says.
Finally, he emphasizes that change will continue and you will have to adapt and adopt new technology. "Regardless of the size you want to be, you're going to have to change along the way; and you have to plan on being in a business dominated by large players."
|Change in Annual Marketings (1,000-49,999)|
|Eastern Corn Belt||+7.9%||+4.3%||+8%|
Source: 2001 Pork Industry Structure Study, Glenn Grimes, University of Missouri, John Lawrence, Iowa State University.
Editor's note: Along with Pork magazine, sponsors of the 2001 Pork Industry Structure Study include the National Pork Board, PICDeKalb Choice Genetics, Land O' Lakes and the Research Institute for Livestock Pricing.