farmgate: How Clear Is The Crystal Ball When You Look At The Pork Industry?
Who is currently raising hogs, how are they doing it, and are they making any money at it? Better yet, what is their perspective of the future, and for future profitability? Some probing questions have been asked by two prominent livestock economists, and the farm gate has the answers.
Subscribers to PORK Magazine, members of the PIG Improvement Company, and cooperators with the National Pork Board answered a comprehensive survey taken by John Lawrence at Iowa State and Glenn Grimes at the University of Missouri, whose research and analysis has been published in Production and Marketing Characteristics of U.S. Pork Producers. The survey was taken in February and March of this year and based on 2006 production. It is probably no surprise to hear Lawrence and Grimes say, “The US pork industry continues to evolve and consolidate to fewer and larger production operations.” It has been doing that and will likely continue, based on the intentions of the group.
Statistically, they found, 65% of US hog production was under control of 191 operations which marketed 50,000 or more hogs annually. Another 21% of the US production was attributed to 1,450 operations which marketed 10-15 thousand head annually. They indicated, “Operations marketing at least 10,000 head gained market share between 2003 and 2006, and farms marketing less than 10,000 head lost market share.” So operations selling fewer than 10,000 head annually were a “dying breed.” But overall, the entire industry is contracting. USDA identifies 56,350 owner operators of hog farms in 2006 and that is a 20% decline since 2003, and is down from 323,000 operations in 1988.
Among the operational differences, size was the major determinant of characteristics:
• A higher percentage of the 50-500-thousand-head producers outsourced the feed preparation and gilt development aspects of their business.
• Over half (54%) of the hogs ate feed prepared by the firm.
• Likewise, the 50-500-thousand head producers purchased a higher percentage of their replacement gilts compared to other size categories.
• The percent of firms raising hogs indoors and using split-sex feeding increased with firm size. The percent of all hogs under each technology was 94% and 64%, respectively.
• Wean-finish facilities were less common. Less than 20% of the under 50-thousand-head operations and 44% and 31% of the Large and Very Large producers used this technology and in total it was used on 29% of the hogs.
• The percent of firms raising grain declined as annual hog marketings increased. In total, 35% of the grain eaten by hogs was raised by the firms that produced the hogs.
There was also money to be made in 2006, and it saw an increase in the number of operations in the black and 95% of the 50,000+ head operations reported profits. In 2003, only half of the group was in the black and less than a quarter of the 50,000+ head group was profitable. Lawrence and Grimes say, “In 2006, all size groups anticipated increasing their production in 2007 and on to 2009. Thus, it appears that the supply of pork will continue to grow. Producers’ perceived obstacles to growth depended on the size of the operation, but in 2006 there were some common themes. Animal disease, productivity and compliance issues were the greatest perceived challenges.” Profitability was still an important issue, since the survey occurred at a time of $3.00+ corn. Less than half of the producers marketing less than 500 thousand hogs would continue to raise hogs if hog prices fell below $46/cwt liveweight. Seventy-five percent of the Very Large producers indicated that they would continue to produce at prices below $46/cwt.
Larger producers sold their production on a carcass basis instead of liveweight. Lawrence and Grimes discovered, “The use of contracts, negotiated or group, increased with the size of the firm. Nearly 90% of the over-500-thousand-head operations reported using negotiated contracts and 42% of the producers in this group reported selling to their own packing plant.” 57% of the hogs were priced using a formula tied to hog prices. The Large and Very Large producers sold a higher percentage using formula pricing. Approximately 20% of all hogs were sold on the spot market with smaller producers selling a higher percentage of their hogs this way than large producers. Contracts with pricing based on a formula tied to futures market prices or meat prices represented 7% and 6% of hogs respectively.
Would farmers continue using marketing contracts? All sizes of producers responded positively with a higher than average ranking. In spite of their lower ranking to the earlier question, larger producers responded more positively to this question than the smaller producers. When asked if marketing contracts should be more closely monitored by USDA an interesting trend developed:
1) First, agreement with the statement declined with the number of annual marketings.
2) Second, the level of agreement declined over time among the under 50,000 head producers, but increased, particularly since 2003, with the over 50,000 head producers. Producers’ preference for marketing all of their hogs on the spot market declined in 2006 and has declined over time. Preference declined as producer size category increased.
Contract production is expected to increase in the coming years. Over half of the over-500-thousand-head producers responding in 2006 expect to increase contract production. A portion of the under-50-thousand and 50-500-thousand-head producers expect to reduce contract production, but on average it is expected to increase from these two size groups. The vast majority of growers expect to continue contract production when their contract expires, 78% with current contractor and 6% with another company. Fourteen percent of the growers expect to become independent producers at the end of their contracts.
Summary:
In the past 20 years, five out of six pork operations have disappeared, but the 56,000 that remain are expecting continued profitability. 95% of those over 50,000 head marketed indicated profitability. However with the advent of $3+ corn, they have established that they would stay in business until 2009 as long as half of the producers marketing less than 500 thousand hogs would continue to raise hogs if hog prices fell below $46/cwt liveweight.
Posted by Stu Ellis on June 27, 2007 12:11 AM to farmgate