HP04-11
November 1, 2004
Special Report
The Changing US Pork Industry
A 25-year historical review and challenges for the future
In the past 25 years, the US pork industry has undergone a dramatic transformation in response to pressures to
compete, both in the domestic market against competing proteins and in the export market against the pork
industries of other countries. Although the process of restructuring is ongoing, and the merits of this industry
restructuring are still debated in some quarters, the net result is that the US pork industry has held its ground
domestically and has made major inroads in export markets. Arguably, the US now has one of the most
competitive pork industries in the world, but still faces challenges both from other meats and against competing
nations such as Canada and Brazil.
Figure 1
US Pork Production & Domestic Disappearance
20000
Pork Production
Million Pounds
19000
Domestic Pork
Disappearance
18000
17000
16000
US pork industry
becomes net exporter
15000
14000
02
03
20
20
00
01
20
20
98
99
19
19
96
97
19
19
94
95
19
19
92
93
19
19
90
91
19
19
88
89
19
19
86
87
19
19
84
85
19
19
82
83
19
19
19
19
80
81
13000
Figure 1 shows how US domestic pork disappearance bottomed out in1982 but has since trended higher, as pork
has largely held its place in domestic consumption, while the human population has continued to grow. Around
1986, domestic pork production bottomed out and then began to increase on a steady trend, interrupted only by
the normal fluctuations of the US hog cycle. Active export market development has permitted pork production to
trend upwards at a faster rate than consumption, resulting in the US rise to prominence as a major pork-exporting
nation.
Probably the most comprehensive measure of industry productivity is pork produced per sow (Figure 2). While
the US swine breeding herd is almost half the size of what it was in 1980, the amount of pork produced per sow
has continued to trend higher, facilitating the upwards trend in total industry size and output, despite the decline
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of the traditional industry measure of breeding herd size. Beyond increasing productivity of US herds, in recent
years the importation of increasing numbers of feeder pigs from Canada to be finished and slaughtered in the US
has also contributed significantly to the total output of US pork, allowing the industry’s long-term growth trend
to continue.
Figure 2
US Pork Produced Annually per Sow vs Dec 1 Breeding Inventory
Note: Not including Canadian-Sourced Pigs
10000
9500
3000
9000
Productivity
2500
8500
Breeding
Herd
8000
7500
2000
7000
6500
1500
6000
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1980
1982
5500
1981
1000
Breeding herd 1000 head
(line)
lbs pork per sow/year (bars)
3500
The Competition among Pork and Other Meats for the Consumer’s Dollar:
The following six graphs provide a variety of illustrations and analytical profiles of US meat demand and
consumption. Figures 3 through 5 show the demand for beef, chicken and pork in the United States. Demand is
the combination of consumption and price. Another way to view demand is that it is the total revenue derived
from the sale of a certain quantity at a certain price at a certain time. It is typically expected that the higher the
price, the lower the amount consumed and vice versa. When more (less) of a product is consumed at a higher
(lower) price, it is said that demand for the product is increasing (decreasing).
On figures 3 through 5, the vertical axis shows the deflated price index for the particular meat while the
horizontal axis shows the annual per capita consumption of that meat product. The points and corresponding
labels show the demand for the product for the respective year. The price index is a good proxy for the actual
price of the meat because it shows annual changes in actual prices. The price index is deflated by the total
consumer price index for all goods in order to isolate only the beef, chicken or pork related changes.1 Each of
the graphs utilize the same scale in order to facilitate comparison. The annual points in these charts are
connected by a line to show the progression of demand over time.
The graph on figure 3 shows that from the early/mid 1980’s through the early/mid 1990’s, US beef consumption
rapidly declined. From that point forward, consumption more or less stabilized around the 65-68 pounds per
person range. During the period from 1983 through the late 1990’s the deflated price of the product was either
declining or steady. Declining price coupled with declining consumption is the definition of declining demand.
It has only been since about 1999 through 2003, that the industry has been able to see either steady or improved
demand for beef.2
1
Deflating the price index with the total index for all goods removes the influence of the prices of all goods and isolates the
dynamics of the particular product market. The deflation by the total price index is simply an analytical option, but it is not
necessary to make the relevant points regarding demand.
2
Note from 2000 through 2003, when price increases consumption decreases and vice versa. This is normal or steady
demand.
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November 1, 2004
Page 3
Figure 3
US Beef Demand
110
Deflated Beef CPI
105
100
91
83
90
89
'03
93
92
95
90
94
'01
95 '02
85
97 96'00
9899
88
84
87
85
86
80
45.0
50.0
55.0
60.0
65.0
70.0
75.0
80.0
85.0
Annual Per Capita Consumption (Retail Weight)
Figure 4
US Chicken Demand
110
89
Defl Chicken CPI
105
86
84
88
90
87
100
91
85
83
92
95
96 97
94
93
98
95
99
'01
'00
90
'02
'03
85
80
45.0
50.0
55.0
60.0
65.0
70.0
75.0
80.0
85.0
80.0
85.0
Annual Per Capita Consumption (Retail Weight)
Figure 5
US Pork Demand
110
105
Defl Pork CPI
87
100
95
90
90
91
97 86
83
84 88
96
85
'01 98
89
9392
'00
94
'02
'03
95
99
85
80
45.0
50.0
55.0
60.0
65.0
70.0
75.0
Annual Per Capita Consumption (Retail Weight)
Copyright © 2004 by Informa Economics, Inc.
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HP04-11
November 1, 2004
Page 4
Chicken is almost the mirror opposite of beef. Consumption of chicken has been rapidly increasing over the
past decades. While that may not be a surprise, the fact is that it has not taken lower prices to entice US
consumers to purchase more chicken. This is the definition of increasing demand. This graph shows how
dynamic the demand for chicken has been over the years.
The final graph in this series shows pork demand. Basically the graph shows that over the decades, pork
consumption has trended within a very narrow range, at least relative to the other meats. In addition, the pork
price has varied within a relatively narrow range. The graph shows a very static demand picture in comparison
to the other two meats. The chart suggests that the US consumer is willing to annually take up to 53 lbs of pork
within a set price range, but to grow beyond that is uncharted territory. This suggests that industry growth can
only come through domestic population growth and exports.
Figure 6 shows the combined demand levels of all three major meats. Essentially it combines the static pork
demand with the decreasing to steady (recently) beef demand and the surging chicken demand. The combination
of the three distinct demand patterns results in a classic demand curve for total protein. High prices induce low
consumption and vice versa. Figure 6 is of great interest as it shows how each of the above noted meat trends
have tended to balance each other out over time, which emphasizes the competition among the three meats for
the consumer’s dollar. It is also interesting to note the apparent rise in total meat demand in 2004. Whether this
is a temporary or permanent phenomenon, it still does not diminish the fact that each major protein source is in
constant competition with the other major meats.
Figures 7 and 8 show the per capita consumption trends and shares of each of the major meat groups. These
graphs show that over the past 20 years, per capita pork consumption has been relatively stable to declining,
while per capita beef and chicken consumption have trended in opposite directions.
Figure 6
US TOTAL MEAT PRICE-QUANTITY RELATIONSHIP
Annual, Weighted Wholesale Price Defl by GDP Deflator
Wholesale Price Cents Per Pound
(Wtd Ave)
145
80
135
81
82
125
83 84
115
86
85
87 90
8988
105
95
91
9392
96
97 9594
85
75
98
01 00 03
99
65
180
185
190
195
200
205
210
215
04*
02
220
225
Per Capita Disappearance (Retail Wt.)
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November 1, 2004
Page 5
Figure 7
US MEAT CONSUMPTION
Annual, Pounds Per Capita, Ret. Weight
225
200
175
150
125
100
75
Beef
Pork
Broiler
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
50
25
0
Turkey
Figure 8
US MEAT CONSUMPTION
Beef
Pork
Broiler
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1966
1964
1962
1960
1968
Annual, Pounds Per Capita, Ret. Weight
100
90
80
70
60
50
40
30
20
10
0
Turkey
Copyright © 2004 by Informa Economics, Inc.
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November 1, 2004
Page 6
The Competition for Pork Export Markets:
Figure 9
Total US Pork Exports
2000
1800
8.6%
8.1% 8.2%
1600
1400
6.5%
1200
1000
800
600
400
200
0
5.6%
6.6% 6.8%
6.1%
4.3%
3.0%
2.4% 2.6%
1.5% 2.0% 1.5% 1.4%
1.1% 0.9%
0.6%
0.8%
1.3%
1.7% 1.6% 1.8%
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
Exports, mln lbs, carcass wt
and % of Pork Production
The traditional US pork industry, (based on tens of thousands of small, independent Midwest producers and
dozens of small, largely independent slaughter plants) historically, was not competitive in export markets. The
lack of success was attributable both to quality and efficiency (competitiveness) factors. Only in 1992, after the
process of industry restructuring was well underway, did US pork exports exceed 2% of output for the first time
in our era. During the 1994-1998 period, the volume of exports trebled, as new plants using new genetics made
rapid inroads into the Japanese market in particular. 1995 was a watershed year, with US pork exports exceeding
imports for the first time in our records dating back to 1980 and probably back to WWII. Since that time, the US
pork industry has maintained its status as a net pork exporter. Following a sideways trend in exports in 1999 and
2000, trade shot higher again the next four years, with exports reaching 8.6% of pork production by 2003 and
likely to finish close to 10% of output for 2004. From 1990 to 2004, the US pork industry has maintained a
trend of increasing annual pork exports for 14 consecutive years. More than any other single factor, we would
hold out this trend as evidence of the global competitiveness of the US pork industry.
Figure 10
Major Pork Exporters
1800.0
1600.0
US (ex Canada)
Canada (ex US)
1200.0
Denmark (ex EU)
Brazil
million lbs
1400.0
1000.0
800.0
600.0
400.0
200.0
200
2
200
1
200
0
199
9
199
8
199
7
199
6
199
5
199
4
199
3
199
2
199
1
199
0
198
9
198
8
198
7
198
6
198
5
198
4
198
3
198
2
198
1
198
0
200
3
0.0
Copyright © 2004 by Informa Economics, Inc.
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November 1, 2004
Page 7
Of course the US is not the only country that is interested in and capable of exporting pork. Key markets, in
particular Japan, have been and will remain strongly contested in the years to come. During the late 1990’s
period of rapid export growth, key competitors Canada and Denmark were also growing their pork exports at a
strong pace, with volumes very similar to US exports. Since 2000, Canada has emerged as the top pork exporting
nation, if Denmark’s shipments to other EU countries are excluded. Since 1999, Denmark’s exports outside the
EU have leveled off, reflecting better opportunities within the EU and reduced competitiveness outside the
common market. Interestingly, if trade between the two countries is excluded, Canada and the US currently
export an almost identical volume of pork to third countries (Figure 10).
In the same period, a new power in world pork trade has emerged in Brazil. However, to this point, Brazil’s foot
and mouth disease status has prevented it from competing in the critical Japanese market, with Russia the main
customer of Brazilian pork so far. In this highly competitive trade environment, one US advantage is an efficient
well-integrated pork production system, with relatively low cost hog production complemented by a high
volume, highly efficient processing sector. As one indication of the degree of competition in export markets,
Figure 11 shows the US share of Japanese pork imports over time. Large gains were made after favored supplier
Taiwan suffered a foot and mouth disease outbreak in 1997. Since then, US exporters have maintained roughly
one-third market share in this critical pork market.
Figure 11
US Pork Exports as a % of Japanese Imports
50%
45%
40%
35%
30%
25%
20%
12 month moving
average
15%
Jul-04
Jan-04
Jul-03
Jan-03
Jul-02
Jan-02
Jul-01
Jan-01
Jul-00
Jan-00
Jul-99
Jan-99
Jul-98
Jan-98
Jul-97
Jan-97
Jul-96
Jan-96
Jul-95
Jan-95
Jul-94
Jan-94
Jul-93
Jan-93
10%
Consolidation of the Pork Packing Industry:
Competitive pressures have completely transformed the US pork packing industry and promise additional
changes in the years to come. Since 1980 the industry has been restructured from a highly fragmented sector
with dozens of small to medium sized companies to a sector dominated by six multi-plant firms and another five
firms with large single slaughter plants. The largest firm, Smithfield, now accounts for about 28% of market
share with eight slaughter facilities, including the world’s largest single slaughter operation. The top four
operations control about 65% of total slaughter capacity, compared to 55% ten years ago.
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November 1, 2004
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Figures 12 and 133
Estimated Daily Capacities by Company
US PORK PACKERS
Company
Smithfield
Tyson (IBP)
Swift
Excel /j
Hormel h/
Premium Standard Farms c/
Seaboard d/
Indiana Packers
Hatfield Quality Meats
Clougherty Packing
Sara Lee
Iowa Packing l/
Farmland i/k/
Lundy
Thorn Apple Valley/g
Dakota Pork Industries /f
Premium Pork Products
Worthington Packing e/
Fisher Packing
John Morrell a/
Tyson b/
Total of Major Packers
Estimated Industry Total
a/ Sold to Smithfield in late 95
End of
1994
35,300
63,900
38,500
25,600
36,700
5,000
13,000
10,000
6,100
8,400
5,500
22,000
12,000
14,500
5,800
5,000
4,700
4,400
30,000
6,500
353,000
385,000
End of
1995
73,800
70,900
38,500
32,600
26,000
5,500
1,500
13,000
10,000
6,100
8,400
5,500
22,800
12,000
13,000
5,800
5,000
4,700
4,400
360,000
390,000
End of
1996
81,800
78,400
38,500
38,000
29,000
6,000
8,000
13,000
10,000
6,100
8,400
5,500
28,800
12,000
15,000
5,800
384,000
413,000
End of
1997
78,000
66,200
38,500
38,000
29,000
6,000
14,000
12,000
10,000
6,100
8,400
6,000
28,800
12,000
15,000
368,000
395,000
d/ Opened Guymon, OK fall of 95
b/ Sold Marshall, MO to Excel fall of 95
e/ Down as of 3/96
c/ Opened Milan, MO fall of 94, bought Lundy in 00 f/ Closed August 97
g/Closed August 1998
End of
1998
78,000
66,200
39,400
38,000
30,000
6,000
16,000
12,000
10,000
10,000
8,000
6,000
31,000
12,000
363,000
388,000
End of
1999
78,000
66,200
39,400
38,000
32,500
6,000
16,000
12,000
10,000
10,000
8,000
6,000
31,000
12,000
365,000
394,000
End of
2000
78,000
66,200
39,400
38,000
32,500
16,000
16,000
12,000
10,000
10,000
8,000
6,000
25,500
358,000
390,000
h/ Rochelle, IL to single shift June 01
End of
2001
78,000
66,200
39,400
35,600
30,500
16,000
16,000
12,000
10,000
10,000
8,000
6,000
25,500
353,000
388,000
End of
End of
End of
2002
2003
2004
79,500 108,100 111,650
71,000
69,500
72,100
42,000
44,000
46,000
32,000
32,000
36,000
26,000
26,000
26,800
18,000
17,100
17,300
16,000
16,000
16,000
12,000
12,000
12,500
10,000
10,000
10,200
10,000
10,000
10,000
8,000
8,000
6,200
5,000
2,000
2,000
28,600
358,000
394,000
355,000
392,000
367,000
407,000
l/ Changing ownership late 2003
i/ Dubuque, IA sold and closed June 00
j/ Marshall, MO closed July 01
k/ Sale to Smithfield Nov 2003.
Federally Inspected Pork Slaughter Plant Closures
1985 - 2003
© 2004 Informa Economics, Inc.
3
Note: In Figures 13 and 14, squares denote plants from firms no longer involved in the industry, while circles denote
plants from firms still active in the pork industry.
Copyright © 2004 by Informa Economics, Inc.
The Changing US Pork Industry
HP04-11
November 1, 2004
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But the amount of change has been much more dramatic among the formerly large group of second tier
companies. With only a few exceptions, the category of small to medium-sized single plant company has ceased
to exist. The few that survived are either associated with a producer group, specialized out of barrow and gilt
slaughter, or involved in custom killing for other processors. Since 1985, we can identify 56 individual federally
inspected hog slaughter plants that have ceased operations in the US, shown in Figure 13. The majority of these
were single plant firms that were pressured out of business by some combination of lack of committed supply,
inadequate economies of scale, and continued pressure on margins, as new large-scale double-shifted plants were
built by the major firms, including the emerging integrated sector. Figure 14 shows that the process of packing
capacity consolidation and rationalization was most intense in the Midwest, particularly in Iowa. In addition to
the permanent exit of many small to medium sized firms, several of the large traditional packers were forced to
jettison slaughter capacity as a result of the consistently poor margins prior to 1998. Yet even after all the
painful adjustments of the 1980’s and 1990’s, the Western Cornbelt is still impacted by excess slaughter capacity
(Figure 15), suggesting further closures, particularly if slaughter hog production is not maintained at current
levels or higher in these states.
Figure 14
IPI
Federally Inspected Pork Slaughter Plant Closures
1985 - 2003
Farmland
Utica
Patrick, Cudahy
John Morrell
Cudahy
Thorn Apple Valley
Wilson Foods
Farmland Foods
Rath
Amour
FDL
Hormel
Hormel
AmPac
Cedar Rapids Meats
Goehring
Wilson Foods
Superior Brands
Oscar Mayer
Oscar Mayer
IBP
Swift
Emge
Dinner Bell
Selected Meat
Swift
Swift-Eckrich
Kahn's
Superior
Excel
Swift
Fischer Packing
Emge
Field Packing
Reelfoot
© 2004 Informa Economics, Inc.
Copyright © 2004 by Informa Economics, Inc.
The Changing US Pork Industry
HP04-11
November 1, 2004
Page 10
Figure 15
US Slaughter Capacity Vs Pig Crop, 2003
60.0
51.7
million head
50.0
pig crop
43.9
slaughter capacity
40.0
39.1
27.6
30.0
18.5
17.5
20.0
10.0
0.0
W. Cornbelt
E. Cornbelt
Other
The key to understanding the intense structural change in the packing sector is capacity utilization. After a
prolonged and painful period of underutilization (overcapacity), the industry has emerged with national, if not
regional packing plant capacity roughly in balance with available barrow and gilt supplies (Figure 15 & 16).
(The US sow slaughter industry still faces considerable excess capacity). This balance has been accomplished
by a combination of restructuring of both the primary hog production sector and the processing sector. The hog
cycle has been tamed to the extent that +/- 10% swings in production, last seen in the 4th quarter of 1998, have
been replaced by more modest production changes of 5% or less, with the typical trend being a 2% year-overyear production increase. Packers have lined up supplies, either through contracts, direct ownership, or some
combination of the two, in order to keep their current investments running at efficient levels, at least most of the
year. Regional balance has been achieved through shifting millions of head of feeder pigs from other states and
provinces to the Western Cornbelt, to be finished and marketed in that region.
Figure 16
Capacity Utilization and Packer Margins
US Pork Industry
10.00
Note: Utilization
compares capacity at
beginning of year to
slaughter during year.
Utilization (%)
95%
8.00
6.00
90%
4.00
85%
2.00
80%
0.00
75%
70%
-2.00
% Utilization
-4.00
Estimated Packer Margin
1994
1995
1996
1997
% Utilization
90%
Estimated Packer Margin
1.42
1998
91%
86%
81%
94%
0.19
-3.98 -2.94
6.52
1999
2000
2001
2002
2003
96%
91%
93%
95%
94%
9.37
2.19
4.48
7.11
4.65
Packer Margin ($/head)
12.00
100%
-6.00
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The Changing US Pork Industry
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Page 11
Figure 17
The Large-Scale High-Throughput Model
Cost/cwt pork
Top US Pork Plants (4 mln plus annual capacity)
Low Cost
Large Scale
Double Shift
Industrial Model
World Class Competitiveness
1
2
3
4
5
6
Capacity (million head)
7
8
Market 7
Market 6
Market 5
Market 4
Market 3
Market 2
Market 1
Target mass market for top efficiency.
Meet niche markets through sorting, taking advantage of volume.
Quality Attribute
In the future, major new plant investment will no longer be built on spec; hog supplies will be secured long
before ground is broken for any new packing plant. Even minor capacity improvements will be given careful
consideration. The largest remaining challenge for the industry is to even out the flow of hogs over the course of
the year so that plants run closer to capacity all year long. So far the price incentives of much higher spring and
summer markets have not been sufficient to allow producers to overcome the biology of hog production, which
tends to result in largest kills in late fall and early winter.
The US large-scale high-throughput model (Figure 17) is a unique solution to developing a competitive pork
industry, that has so far not been duplicated in other major pork producing nations. The modern US packing
industry now consists of 12 mega-plants of 4 million head or greater annual slaughter capacity, including the
largest plant with roughly 8 million head annual capacity (Figure 18). The economy of scale advantage of these
12 double-shifted plants is virtually unrivaled; only one plant in Denmark is in the same league in processing
capacity. These mega-plants are owned by six different firms and all but two are located in the Midwest.
Copyright © 2004 by Informa Economics, Inc.
The Changing US Pork Industry
HP04-11
November 1, 2004
Page 12
Figure 18
35000
30000
Smithfileld
25000
20000
Tyson
Swift
Excel
Excel
Hormel
15000
Swift
Smithfileld
Seaboard
Smithfileld
Tyson
Tyson
10000
5000
A
us
t
in
or
th
in
gt
on
Si
ou
x
Fa
lls
G
uy
m
on
Si
ou
x
C
ity
St
or
m
La
ke
Lo
ga
ns
po
rt
la
de
B
W
C
ou
nt
y
W
at
er
lo
M
ar
o
sh
al
lto
w
B
n
ea
rd
st
ow
n
O
ttu
m
w
a
0
n
Estimated Daily Capacity
Top US Pork Plants, 2004
Construction is scheduled for completion in late 2005 for one additional plant of this eventual scale, which could
alter the US capacity balance significantly. The new plant is a producer-driven initiative to be located on the
Southern fringe of the Western Cornbelt at St. Joseph, Missouri. Because the plan is to source hogs from existing
hog production facilities, the net effect of this plant would be to create additional demand for slaughter hogs
within the region, as existing plants scramble to fill out production lines.
In addition to the 12 mega-plants there are 15 large plants, which in general are assumed to operate at a slightly
higher cost structure than the biggest plants and are primarily single shift plants. The group of large plants have
capacity to kill about 2-4 million head per year. The largest plants in Canada also operate at this scale. If packer
margins are pressured by reduced supplies of slaughter hogs or increased slaughter capacity such as is currently
the case, expect to eventually see closures in this second tier of large plants, particularly among firms that own
more than one facility. We have seen examples of this pattern in recent years, where moderate-sized slaughter
plants have been converted to processing plants, and slaughter capacity at other corporate plants was increased
slightly. Still higher cost plants below the 1.5 million head annual capacity threshold are no longer common, and
most survive either as sow kill facilities, producer-owned operations, or other specialty and niche market
providers.
Copyright © 2004 by Informa Economics, Inc.
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Page 13
The Role of the Integrated Producer:
How were some firms able to invest in new packing plants during the long period of difficult packing plant
margins prior to 1998? Two types of firms have invested in new packing capacity since 1980: 1)large traditional
packing companies committed to restructuring and 2)the emerging integrated sector, in some cases attracting
outside investment capital. For the integrated sector, one important influence was the large margins that could
be captured from efficient commercial hog production, as the production sector was restructuring during the
1980’s and 1990’s (Figure 19). Hog production efficiencies of large commercial units were initially far above
the US average, resulting in attractive margins and incentives to grow commercial production. But, as average
production efficiencies in the US hog production sector climbed closer to the efficiencies of top commercial
units, the recent trend has been for hog production and slaughter margins to merge. In the future, it is reasonable
to expect well run commercial slaughter and hog production operations to contribute similar returns per head, but
with a much higher volatility and investment around the hog production margin compared to the packing margin.
Additional important advantages of integrated production include improved coordination of slaughter and
reduced purchasing costs, increased uniformity of product, and the natural hedge resulting from slaughter
margins tending to be best during periods of low hog prices and vice versa. The benefits of streamlining plant
operations through an owned supply of hogs are considerable, compared to the old system of buying hogs from
buying stations or worse yet, terminal markets. The advantages of uniform high quality genetics for pork
marketing and enhanced competition with the other meats are substantial as well. However, to a large degree,
many of these benefits can also be achieved by long term contracts with large independent producers, which
often dictate everything from genetics to pricing and delivery of the hogs. However, there is still a risk that
during a period of overcapacity, another packer will be able to entice away your contracted hogs by offering
more favorable terms to the independent producer, something which would not happen to directly owned
supplies.
In terms of the “natural hedge” that comes from owning both hogs and packing capacity, Informa Economics
analysis of historical margins has shown that the ideal packing capacity/hog production portfolio for risk
management purposes would consist of direct ownership of about one quarter of a company’s packing capacity.
All of the major integrated pork companies in the US are well beyond this level of swine ownership, with the
result that their risk profile is very close to that of a large hog producer, rather than a traditional packing
company. It is thus in the best interests of the highly integrated companies for hog prices to be as high as
possible, directly opposite to the best interests of the traditional non-integrated packer. As a result of direct
ownership, we are likely to see more examples of independent producers and integrated packers working
together for a common purpose in coming years, in contrast to the historical adversarial relationship between
packers and producers.
Copyright © 2004 by Informa Economics, Inc.
The Changing US Pork Industry
HP04-11
November 1, 2004
Page 14
Figure 19
US Producer & Packer Margin Trends
50.00
Margin ($/hd)
40.00
30.00
20.00
10.00
0.00
-10.00
2
3
20
0
1
20
0
9
8
0
20
0
20
0
19
9
7
19
9
5
6
19
9
19
9
3
2
1
4
19
9
19
9
19
9
19
9
0
19
9
8
9
19
9
19
8
7
19
8
19
8
19
8
6
-20.00
Estimated US Commercial Farrow-Finish Margins ($/head)
Estimated Packer Margins
Linear (Estimated US Commercial Farrow-Finish Margins ($/head))
Whatever the rationale for integration and the motives of integrated packers, market share analysis of the overall
pork industry clearly shows that the high hog ownership model has been the most successful business model,
compared to low or medium direct ownership of hogs. Although success has not been universal among highly
integrated firms, since 1994, firms with a high degree of direct ownership have tripled slaughter capacity in the
US, with a corresponding decline in the capacity of the other two categories of ownership (Figure 20). Our
central theme is that competition in this industry is intense, and in order to make money, plants need to operate
as close to capacity for as much of the year as possible. Firms with a high degree of ownership have invested
heavily to permanently solve the problem of how to run plants close to capacity, but in the process have adopted
the risk profile of a large producer rather than a processor.
Figure 20
Daily Packer Capacity by Hog Ownership Strategy
daily capacity, head
250,000
200,000
150,000
100,000
50,000
High Direct Ownership
Medium Direct Ownership
Low Direct Ownership
0
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Figure 21 shows the total capitalization of industry leader, Smithfield Foods. Following the 1998 and 1999 hog
glut and price meltdown, Smithfield acted on the opportunity to buy several of its largest hog suppliers, in the
process becoming the world’s largest grower of hogs. No longer involved only in the pork industry nor operating
Copyright © 2004 by Informa Economics, Inc.
The Changing US Pork Industry
HP04-11
November 1, 2004
Page 15
solely in the US, the development of this firm has nonetheless been central in the dramatic changes that have
swept the US pork industry.
Figure 21
Smithfield Foods Total Capitalization
4000
3500
million $
3000
2500
2000
1500
1000
500
04
20
03
20
02
20
01
20
00
20
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
19
91
19
90
19
19
89
0
Vertical Integration has Redefined the Geography of Pork Production:
The rise in prominence in the 1990’s of integrated pork firms, with their operations base outside the traditional
Cornbelt production area, has changed the geography of hog production dramatically. The most dramatic change
occurred in North Carolina, which was transformed in a decade from a relatively minor hog state to the second
largest pork producing state in the country. This transformation occurred in spite of a natural disadvantage for
the state in terms of feed supplies and costs, compared to states in the Midwest. Key industry players on both the
production and processing side developed and refined a highly effective production and processing model
working up from a three site production system, with contracting replacing the traditional cash markets for
feeder and slaughter hogs found in the Midwest. The isolation from the Midwest was certainly a factor in
permitting this system to reach its potential, before inventories were capped by a legislative moratorium
effectively topping regional slaughter capacity as well. Figure 22 shows the dramatic growth path of North
Carolina swine inventories. In contrast, swine numbers in Georgia, a state with similar climate, culture, and
resources, declined steadily as the last major packing plant in that state was closed in 1995, and no new packing
plant investment occurred.
Another comparison is shown between the western states of Oklahoma and Nebraska (Figure 23), with swine
inventories trending in opposite directions since 1992, before leveling off at very similar-sized industries by
2003. As a Cornbelt state, Nebraska has the advantage for hog production from a feed cost perspective, but with
some of the most restrictive family farm legislation in the country, the state actively discouraged investment by
commercial players that spurred the growth in nearby Oklahoma. Western Oklahoma was the site for the last
major new pork packing plant to be built in the US. One important observation from the new pork industry is
that inventory trends in the US are far from homogenous, with some states still growing and others losing
inventory rapidly. Furthermore, the behavior of key firms, and state legislation have been more important than
natural resources in determining whether a regional industry will expand or contract.
Copyright © 2004 by Informa Economics, Inc.
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Figure 22
North Carolina & Georgia Swine Inventories
12000
1200
Total
_____
8000
North Carolina
Breeding
-- -- -- --
1000
800
6000
600
4000
400
Georgia
2000
200
0
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
0
Breeding (000 Head)
Total Inv (000 Head)
10000
Figure 23
Oklahoma & Nebraska Swine Inventories
600
5000
500
Nebraska
4000
400
Breeding
3000
300
Total
2000
200
1000
100
Oklahoma
03
02
20
01
20
00
20
99
20
98
19
97
19
96
19
95
19
94
19
93
19
92
19
91
19
90
19
89
19
88
19
87
19
86
19
19
19
19
85
0
84
0
Breeding (000 Head)
Total Inv (000 Head)
6000
The Role of the Independent Producer:
The truly independent producer, who holds no packer contract of any kind and sells his hogs by negotiated sale,
certainly represented the large majority of output 25 years ago but today operates as a bit player in the US pork
industry. Today, negotiated sales account for 10% of slaughter volumes and this share will continue to decline as
the primarily small producers that market in this fashion exit the industry (Figure 24).
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Figure 24
Negotiated Share of Daily Hog Purchases
25%
20%
15%
10%
5%
12/3/2004
10/3/2004
8/3/2004
6/3/2004
4/3/2004
2/3/2004
12/3/2003
10/3/2003
8/3/2003
6/3/2003
4/3/2003
2/3/2003
12/3/2002
10/3/2002
8/3/2002
6/3/2002
4/3/2002
2/3/2002
12/3/2001
10/3/2001
8/3/2001
0%
In this discussion, we will define the new independent producer as a full time dedicated commercial hog
producer with no significant ownership by a processing firm. Most of these farms are tied contractually to
specific packers, and many have delivered hogs to the same plant for their entire existence. As their customers,
pork packers, sell their products into a highly competitive domestic and export market, the need to coordinate
from genetics all the way up to pork marketing is critical. Therefore the term “independent” applies more to
ownership than to operation of these firms.
Unlike the small, truly independent producers, who have largely become marginalized from the new pork
industry, modern independent hog producers play an important role, supplying about two thirds of current
slaughter hog marketings. Commercial independent producers are likely to continue to figure prominently,
particularly in the Midwest, where non-integrated packers still struggle to line up slaughter supplies. This is an
important distinction from the chicken industry, where the simplicity of production and smaller capital
investment for production was instrumental in eliminating the independent grower within a relatively short
period of time. But the remaining independent producers face competitive pressures passed on down from the
end markets for pork as well as the competitive pressure from other hog operations located both in the US and
Canada. If individual operators do not achieve continuous improvement in their productivity or cost structure
and fall behind for even a year or two, they are likely to end up as casualties of the restructuring process, with
other firms operating their assets. That said, many of the top independent producers achieve efficiencies and
margins surpassing the hog production systems owned by packers, having mastered a management-intensive
production process that requires doing many small things right, particularly at the farrowing level.
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Figure 25
Modern Pork Production Scale Hurdles
Sow herd (head)
200000
150000
Increasing bargaining power and
cost efficiencies
100000
50000
0
Pork Production Scale Hurdles
Can deliver 1
truckload/week
Matched to 500
pig nursery room
Can deliver 1
truckload/day
Can purchase own
100,000 ton/year
feedmill
1 mln head
marketing level
Can supply one
modern packing
plant.
600
1200
3000
9000
50000
200000
In addition to successfully managing a complex process, including controlling costly disease outbreaks, there are
certain key size hurdles that we have identified as important to the long term success of a farrow-finish hog
operation, as shown in Figure 25. The lowest of these size hurdles, 600 sows, ensures sufficient production to
market one truckload of slaughter hogs per week given typical production efficiencies. Producers below this size
limit are unlikely to secure a long term marketing contract with a packer, and therefore are likely relegated to the
less attractive spot market. Considering that the average Midwest producer 25 years ago was a farrow-finish unit
of 200 sows or smaller, utilizing part-time farm labor, the impact of this first size hurdle on market structure has
been enormous. Remaining small producers in the Midwest are now mostly involved in finishing out of feeder
pigs, either on a contractual basis for one of the larger producers, or independently often using feeder pigs
brought in from outside the region, including Canada. Operating a finishing barn involves lower investment than
farrow-finish, as well as less labor, lower risk, and less management expertise, making these operations a better
fit for farms involved in grain production as well as livestock.
Doubling size to 1200 sows matches weekly output to a 500 pig nursery room in a typical 3-site production
system, potentially achieving another gain in efficiency. Ramping up to 3000 sows in a 2 or 3-site system,
generates about one truckload per day of slaughter hogs, a hurdle that is likely to significantly enhance the
producer’s relationship with his customer, the packer. Tripling production again to 9000 sows brings the
operation to a scale that can justify the purchase of a 100,000 ton/year feedmill, with the potential to
significantly improve the cost structure. At a minimum, an operation of this size would be able to negotiate a
very competitive toll structure with an existing commercial feedmill. Beyond this level, the economies of scale
are not clear, although there may be additional gains achieved by leveraging management overhead over a larger
output, justification of full time veterinary and other professional assistance, and last but not least, steadily
increasing leverage with the packer customer. At 50,000 sows, accounting for about 1 million head annual output
or roughly 1% of US output, a firm would certainly be in a favorable bargaining position on both the input and
output side, with that output critical to the efficiency of an individual slaughter plant. At 200,000 or more sows, a
firm would be able to single-handedly supply a modern double shift plant. There are no independent producers
remaining at this level of output; sow bases of this size and larger are currently all packer-owned. While these
production scale hurdles are relevant in explaining the structural change, we hasten to add that there are recent
examples of financial successes and failures at all the size levels, suggesting that individual management is still
the most important factor dictating success.
Copyright © 2004 by Informa Economics, Inc.
The Changing US Pork Industry
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November 1, 2004
Page 19
The Top US Swine Producers:
According to the USDA, there were 73,600 farms producing hogs as of December 1, 2003. The number of
producers has declined steadily over time, with very little fluctuation, at the same time as hogs per farm has
increased. From 2001 to 2003 the rate of loss of operations was slightly slower than trend, but since 1980 the
pattern has been very consistent and apparently independent of margins or any cyclical trends.
Figure 26
US Farms Producing Hogs
1200000
1000000
800000
600000
73,600
operations
Dec 03
Hog Operations
400000
03
01
99
97
95
93
91
89
87
85
83
81
79
77
75
73
71
67
65
0
69
Poly. (Hog
Operations)
200000
Year (Dec 30)
Although the USDA may still find tens of thousands of farms with a few hogs, today’s hog industry is far more
concentrated than this data would suggest. In fact, the fate of the US hog production sector now rests in the
hands of a few hundred pivotal operations4. Taken even further, 30 key firms now control more than 45% of the
US sow inventory and at least 50% of the production (Figure 27). Ten years ago, these same firms accounted for
a little over 5% of US inventories. These firms, all of which reach our fourth production hurdle in size, have
successfully achieved a dramatic expansion in sow inventory during a period when the overall US industry was
shedding breeding herd capacity more or less steadily, and estimated margins for hog production were in a
steady downtrend combined with a sharp cyclical component. This is further evidence that it is dangerous to
generalize about the general financial health of the industry, when some sub sectors are expanding aggressively
at the same time as other, mostly small, producers continue to exit the industry.
Breaking down the top 30 producers further, we see that as of 2003, packers owned 25% of the US swine
breeding herd, compared to less than 5% back in 1994. The top 10 producers, including the largest packer herds,
accounted for one third of the US swine herd, and the top 20 firms controlled 40% of the breeding herd.
Furthermore, because of higher-than-average productivity, this group is responsible for an even larger share of
total US production then their breeding herd share would imply.
4
According to the 2003 Pork Industry Structure Study, by Glenn Grimes, the largest 159 operations accounted for 59% of
market share, the largest 1,074 78% of market share.
Copyright © 2004 by Informa Economics, Inc.
The Changing US Pork Industry
HP04-11
November 1, 2004
Page 20
Figure 27
US Top Hog Producers & Share of Sow Herd
Top Producers, share of US herd
historical trend of 2003 top 30
50.0%
top 30 share of US
herd
top 20 share of US
herd
top 10 share of US
herd
Packer share of US
herd
45.0%
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Figure 28 shows the time trend of the top 10 breeding herds. All of the top firms show strong growth in the last
10 years, and all but one show growth during the most recent five-year period5. In most cases, sharp spikes in
sow herd size are indicative of acquisitions of the production assets of other firms, while a steady uptrend is
typically the result of internal growth and expansion. The top production firms have demonstrated dramatic
growth and success during a period of increasing competition and downward-trending margins for primary
production. In the future, we would expect this process of growth and consolidation among the top producers to
continue, with the transfer of production assets from firm to firm, combined with modest internal growth. While
the list of top players 10 years from now could be substantially different from today’s list, it is almost a given
that the new Top 10 and Top 30 will control a substantially larger share of the total US production sector.
Figure 28
US Top 10 Hog Producers
historical sow herd of 2003 top 10
800000
700000
200000
600000
500000
150000
400000
100000
300000
200000
50000
100000
2003
2002
2001
2000
1999
1998
1997
1996
1995
0
1994
0
# of sows (Smithfield)
#of sows (2-9 ranked
companies)
250000
ContiGroup/PSF
Seaboard Corp
Christensen Farms
Prestage Farms
Cargill
Iowa Select Farms
SMS of Pipestone, LLC
Goldsboro Hog Farms
The Hanor Company
Smithfield Foods
5
The breeding herd estimate for fourth ranked producer, Christensen farms, includes an acquisition as of early 2004. All
other data and rankings in this section are from Successful Farming’s “Pork Powerhouses” annual fall survey of commercial
operations.
Copyright © 2004 by Informa Economics, Inc.
The Changing US Pork Industry
HP04-11
November 1, 2004
Page 21
Challenges for the Future:
The US pork industry has been largely re-invented in the last 25 years, in response to constant competitive
pressures both internal and external. The packing sector has shed dozens of firms and 11 key companies have
emerged out of the intense restructuring. Similarly, the production side has been distilled down from tens of
thousands of small producers to about 30 key firms and several hundred additional significant players. The
traditional 200 sow or smaller farrow-finish producer in the Midwest is no longer a significant factor in the
industry, with most having either left the industry or adapted by feeding out pigs brought in from outside their
geographic region. About one quarter of the national sow herd is now owned directly by packers. Through this
entire period of often-painful adjustment, two main accomplishments of the industry stand out. The first is that
through constant productivity improvement as well as increased live imports, the industry has captured a steady
share of the growing US population’s meat consumption. The second major accomplishment has been to grow
exports every year since 1990. Together these two elements have resulted in the considerable growth the industry
has seen since 1987 (Figure 29).
Looking forward, we have identified several important challenges for the US pork industry as it continues the
process of restructuring in the coming years.
Challenge 1: Hold Pork’s Share in Domestic Market
The long term demand analysis highlighted in the first section of this report is very telling. It suggests that it will
be very difficult to grow per capita pork consumption beyond current levels without a dramatic reduction of
price, comparable to what was seen in 1998/1999; in other words at price levels that would not be financially
sustainable. A realistic goal is to continue to hold pork’s share of the domestic protein market at least steady,
while looking for opportunities to grow demand. For example, the industry will need to strike a balance among
flavor, leanness, and versatility attributes, noting that some items such as bellies have seen exceptional demand
in recent years, while other pork cuts such as loins have demonstrated a clear decline in demand.
Challenge 2: Regain Momentum in Net Trade
Although pork exports have grown for 14 consecutive years, there have been no significant gains in US net pork
trade in the last five years. 2004 looks to be a return to strong gains in net trade, but exceptional circumstances
factor into the current situation. Further trade liberalization of key markets like Japan would benefit the US pork
industry, but also benefit the industries in export competitors Canada, Denmark, and Brazil. We expect export
markets to be strongly contested in the years to come, with intense competition in both quality and price. Shocks
such as disease outbreaks and trade disputes will add volatility to the export component of demand.
Copyright © 2004 by Informa Economics, Inc.
The Changing US Pork Industry
HP04-11
November 1, 2004
Page 22
Figure 29
Contributors to US Pork Industry Growth Since 1987
4.5
Billions of lbs Increase
4
3.5
3
Domestic Consumption
2.5
2
1.5
1
Gain in Net Trade
0.5
03
20
01
02
20
20
99
00
20
19
98
19
96
97
19
19
95
19
93
94
19
19
92
19
91
19
90
19
88
89
19
19
19
87
0
Challenge 3: Keep the Packing Industry Running near Capacity
A high volume efficient slaughter and processing sector is one of the principle strengths of the US pork industry.
The largest failure of the traditional pork industry of 25 years ago was the inability to coordinate hog supply and
match it to available slaughter capacity and pork demand, resulting in alternating periods of excess supply/low
prices and tight supply/high prices on both a seasonal (annual) and cyclical (approximately four year) basis. The
new, more efficient processing industry has much less flexibility and reserve capacity built in, making it
imperative that a better job is done of matching production to slaughter capacity. If there is insufficient capacity,
prices will turn disastrously low as they did in 1998, an adjustment mechanism to be sure, albeit a highly painful
one for producers.
On the other hand, if the pendulum swings too far in the direction of excess capacity, which appears to be the
trend in 2004, packer margins will suffer and further painful adjustments will follow in that industry. Once net
packing capacity is lost in the future, it will not be regained unless there is an equivalent increase in hog
production directly committed to the new plant, meaning that the overall size of the US pork industry would
likely shrink.
The integrated production companies have invested heavily in hog production capability to effectively solve the
capacity problem, although like the rest of the industry they continue to tackle the problem of seasonality of
production. Most of the highly integrated production systems are located outside of the traditional Cornbelt
production area.
As we pointed out in this paper, even after a decades-long adjustment process, the Western Cornbelt region still
has a large excess in packing capacity compared to the region’s pig crop. Fortunately, the region also has a huge
surplus in feedgrain production and a large number of producers, independent and contractors, that are interested
in taking pigs from outside the region and feeding them through to slaughter weight, to be marketed to the
region’s packers. Thus the market’s solution to the capacity imbalance has been to import about 20 million head
of pigs into the region in 2003, from other states as well as Canada (Figure 30). If this flow were sharply
curtailed for some reason, plant efficiency would immediately decline and permanent plant closures would
probably result.
Copyright © 2004 by Informa Economics, Inc.
The Changing US Pork Industry
HP04-11
November 1, 2004
Page 23
Figure 30
Pig Inshipments, Iowa & Minnesotta
16000
14000
IA
MN
000 Head
12000
10000
8000
6000
4000
2000
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
0
Challenge 4: Improve Farrowing Efficiency
For the last 25 years the main engine for productivity improvement in the US hog production sector has been
structural change. Small, inefficient, single site, and part time farrow-finish units have been replaced by larger,
multi-site dedicated units, with much higher productivities (Figure 31). Structural change has now progressed so
far that the contribution of traditional small producers to total output is very small, probably less than 10%. To
make further gains it will be necessary to improve productivity in all units, including existing commercial
operations, which do not appear to have made major improvements as a group.
Figure 31
Pigs/Litter by Operation Size
9.3
Head
8.8
5000+Head
8.3
2000-4999 Head
1000-1999 Head
7.8
500-999 Head
100-499 Head
7.3
1-99 Head
Jun-Aug 03
Sep-Nov
Dec-Feb 02
Mar-May
Jun-Aug 00
Sep-Nov
Dec-Feb 99
Mar-May
Jun-Aug 97
Sep-Nov
Dec-Feb 96
Mar-May
Jun-Aug 94
Sep-Nov 93
6.8
We believe the current strengths of the US pork industry are in the finishing stage of production as well as the
packing and processing sector. The US has demonstrated a consistent competitive disadvantage to Canada in
breeding herd productivity, measured by pigs weaned per breeding animal per year (Figure 32). Both countries
have made large improvements in their breeding herd efficiencies in the past 25 years, but the gap has persisted,
and even widened in recent years. While there may be differences in management styles between the US and
Canada, the ready exchange of people and ideas, and similar production systems makes a persistent gap seem
Copyright © 2004 by Informa Economics, Inc.
The Changing US Pork Industry
HP04-11
November 1, 2004
Page 24
less likely. Similarly, the productivity gap cannot be explained by macro-economic effects such as the
Canada/US exchange rate, which has varied widely over the same period. One of the more plausible theories is
that a relatively low hog density, cool climate, and better-insulated barns have resulted in consistently lower
disease status and improved performance at the farrowing level in Canada. Historically, the climatic necessity of
higher investment in barns may have encouraged more intensive management systems with full-time owner
managers, compared to the traditional US model where part-time producers were common.
Figure 32
22.00
20.00
US
18.00
Canada
16.00
14.00
12.00
10.00
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
pigs/breeding inventory/year (gov't data)
Breeding Herd Productivity
REG
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