The U.S. Pork Industry Since the Crisis of 1998
by Linda L. Leake, Contributing Editor
It may seem like ancient history now, but it was just about three years ago when record-high production at the farm level, complicated by inadequate shackle space nationwide, drove live hog prices to unfathomable depths. The imbalance was particularly dramatic during the fourth quarter of 1998, when processing ran as high as 2.265 million head per week, while capacity in federally inspected slaughter plants was (and still is) only about 1.950 million in a five-day week. In December that year, some producers were offered as little as $8.00 per hundredweight (cwt.) for their market hogs. Industry-wide equity loss for 1998 ran no less than $2.5 billion.
Glenn Grimes, agriculture economist with the University of Missouri, calls it "the most difficult time U.S. hog farmers ever experienced … the 1998 crises was even bigger than any year during the Great Depression in the 1930s," Grimes emphasizes.
Not surprisingly, by early 1999 significant changes occurred in the pork industry. For starters, many producers liquidated their herds entirely. Meanwhile, some producers traded their "independent" status for more secure prices, joining the vertically integrated segment as contractors.
So how has the industry evolved since then?
According to Grimes, vertical integration accounted for just 9.4 percent of the hogs produced in this country in 1997. By 2000, that number rose to 23 percent. "There’s no way to know the exact number of producers raising hogs on contract," Grimes says, "and how far vertical integration will go is not written in stone. It depends on the success of Smithfield Foods, Premium Standard Farms and Seaboard Farms, the three most vertically integrated packers."
Since the early 1970s, an Industry Structure Report (ISR) has been compiled every three years. Currently the report is conducted by the University of Missouri and Iowa State University, with financial assistance from Pork Magazine, PIC, Land O’Lakes, DEKALB Choice Genetics and the Research Institute for Livestock Pricing.
The 1998 report showed that, in 1997, 89,744 market hogs were produced in this country, and 91,960 hogs were slaughtered, with the latter including animals imported from Canada.
Contractors produced 44 percent of 1997s market hogs, while 17 percent of the total produced were contract farrowed, and 30 percent were contract finished.
In 2000, 55 percent of the 95,955,000 hogs produced in the U.S. were produced by contractors, according to the 2001 ISR. However, only 22 percent of those hogs were farrowed under a contract and just 34 percent were finished under a contract.
What about the equity status? "There’s no way to know exactly how far producers have come in rebuilding equity lost during the crises," Grimes says. "But two Missouri producers recently told me they are back at their pre-1998 equity level. In June of this year, several producers with ledger contracts from 1998 had paid their packers off."
By mid-summer this year, market prices were running about $55/cwt. for good quality hogs. "For producers with outstanding management skills, that can mean as much as $50 profit per head," Grimes says. "Average producers cleared about $25/cwt. to $30/cwt. during the same time period. And I wouldn’t be surprised if our best producers’ break-even costs of production are in the low $30 range/cwt. For these producers, the profit level may equal $60 per head."
Using a scale of 1 to 6, the 2001 ISR posed the question "How satisfied are you with pork production?" with "1" being "Not at all satisfied" and "6" being "Very satisfied". Producers marketing 50,000 to 500,000 hogs annually responded with an average score of 4.67, while those marketing more than 500,000 averaged 4.95.
"Producers I talk to are upbeat," Grimes adds. "They are concerned about the possibility of another 1998, but the odds are improving. We can’t rule out the chances of overproduction occurring in 2002, but we have reduced hogs numbers in this current cycle (which started in 2000) less than we normally do.
Grimes expects 2001 processing to reach about 99,455,000, approximately .5 million head less than last year. Pork producers are now using restraint, he says, and don’t have as much productivity growth as last year.
That’s a good thing, because there’s not much flexibility in slaughter capacity, Grimes emphasizes. "Producers need to realize if they don’t increase production they will continue to make $20 to $50 per hog and be better off," he says.
Where will the pork industry be in five years?
There are so many variables that make it hard to predict, Grimes says. "Over the past 50 years the industry has grown at a rate of 1.5 percent per year," he points out. "At that rate, we’ll be producing 105 to 106 million hogs by 2006. Demand for pork keeps increasing and from that standpoint we may be all right, but we’ll need two or three more major slaughter plants with capacity for 15,000 head per day each to process all of those animals at a profit for producers. The ongoing challenge for the production segment of our industry is to not surpass slaughter capacity," Grimes emphasizes.
Input Marketing Strategies
What are current mindsets relative to post-crisis marketing of inputs?
Since 1998, a greater percentage of producers have aligned themselves in new agreements or arrangements, especially relative to pig sources and financial arrangements. The feed supply is often tied to these new alliances, and already determined, says Bruce Brinkmeyer, director of swine feed for Land O’ Lakes Farmland Feed, Kansas City, Mo.
"In the past, producers’ business decisions were often based on convenience and emotion," Brinkmeyer observes. "But 1998 really got their attention, and now their decisions are primarily driven by economics and the bottom line."
Producers’ focus on adding value through genetic advancement declined during the crisis. Surprisingly, that’s when Monsanto Company, St. Louis, purchased a swine genetics company, DEKALB Swine Breeders, DeKalb, Ill.
After careful analysis, Monsanto decided the then shaky hog world held new promise, according to Jana Reilly, marketing director for the Monsanto division now known as DEKALB Choice Genetics. Capitalizing on its genomic capabilities, the parent firm focused on accelerating the rate of improvement in female productivity, growth rate, meat quality and health status.
"Extensive market research enabled us to better understand the post-crisis environment," Reilly says. "Since 1998, we have positioned DEKALB Choice Genetics as the technology leader in swine genetics, most notably with the completion of the first genome physical map of a livestock species.
"Despite this and DEKALB’s ongoing technological advances, the decline in 1998 prices impacted our company’s business in much the same way as it did most producers," Reilly points out. "As a genetics company, we were also a producer of pork. In that sense, we shared in the devaluation with our customer-partners."
DEKALB Choice Genetics continues to build relationships throughout the industry to understand, know and meet the needs of pork producers and ultimately packers. "We participate in programs that not only help us understand the industry, but help the industry better understand itself, such as the 2001 Pork Industry Structure Study," Reilly mentions.
To continue to be successful in marketing to pork producers, we must provide our customers the very best genetics coupled with exceptional technical service," Reilly says. "We must continually strive to add value to our customers, or they will find a different genetics supplier."
A revised strategy evolved from 1998 events that heightened PFIZER Animal Health’s single-minded and unremitting focus on serving the pork industry, according to David Hallas, head of the New York, N.Y.-based pharmaceutical firm’s 30-member U.S. Pork Business Team.
"Our marketing challenges have changed as the post-crisis consolidation of the industry has progressed," Hallas points out. "We are continually striving to better understand our specific customer segments, so we can meet producers’ respective needs, whether they own 10,000 sows or less, or more than 100,000.
"Foremost, we want all of our customers to be able to justify their investment in health programs," Hallas continues. "So we differentiate our company in the marketplace by offering quality products backed by precise scientific and economic data to ensure health benefits for animals and monetary returns for their owners."
To that end, PFIZER has fostered partnerships with producers, both individuals and groups, as well as with veterinarians and universities. Moreover, the firm has developed special holistic services and diagnostic programs, such as serology profiling for respiratory diseases.
"You might call our efforts to serve the pork industry a schizophrenic blending of ability and attitude," Hallas quips.
"From our company’s point of view, the future of the pork industry is pretty promising," Hallas says. "Domestically, demand remains good, and there’s a healthy export market, even if other countries become more competitive in the international marketplace. AM
Freelance journalist Linda L. Leake writes about the pork industry from her home base in Wilmington, N.C.