MARKETING PIH-85
PURDUE UNIVERSITY. COOPERATIVE EXTENSION SERVICE.
WEST LAFAYETTE, INDIANA
The Structure of the U.S. Pork Industry
Authors
V. James Rhodes, University of Missouri
Glenn Grimes, University of Missouri
Reviewers
David Meisinger, Mundelein, Illinois
Emmett Stevermer, Iowa State University
In the early 1970s a farm marketing more than 5,000 hogs a
year was a ``big operation.'' By 1990, marketing of 50,000 hogs
per year was considered a big operation. We forecast that early
in the 21st century a firm will probably have to produce 500,000
hogs to be regarded as big.
The U.S. Agricultural Census provides some landmarks of
change. The proportions of ``hogs and pigs'' sold by farms
(places) marketing annually 1,000 head or more were: 34% in 1978,
48% in 1982 and 57.5% in 1987. If the U.S. Census counted busi-
ness units (involving 2 or more hog farms) rather than farms
(places), the growth would be even faster. The Census also indi-
cates the number of farms marketing hogs and pigs fell from
424,000 in 1978 to 315,000 in 1982 and to 239,000 in 1987.
The following estimates of 1988 marketings summarize the
current structure of U.S. hog production:
o 61-64% of the marketings were from business units (opera-
tions) marketing 1,000 to 50,000 head. This group includes a
majority of single units, most of the multiple units, and
about 1,000 small contractors. Most operators would probably
call themselves family farmers, although some are feed
dealers, investors, and others.
o 30-32% of the marketings were from operations marketing
fewer than 1,000 head. Some are growers (contractees) but
most are independents.
o 6-7% of the marketings were from operations each marketing
50,000 or more head per year. About half of these hogs were
contracted. These producers-contractor or independent-are
the big firms such as Cargill, Carroll, Dreyfus, Goldkist,
Hastings Pork, Murphy, National Farms, Prestage, and Tyson.
Reasons for Structural Change
Part of the shift toward production in larger units is asso-
ciated with the postwar growth in the typical commercial farm and
the dropping-out of agriculture of many small hog producers. The
shift was associated with a growing specialization in farming. It
has been generally believed that one can compete better by doing
one or two things expertly. As a farmer's corn acreage rose from
160 to 640, or more, the ten-sow enterprise changed from an
important income supplement to a nuisance. Undoubtedly, other
important factors were the developments in animal technology
(production scheduling; health aids; feed additives; and feed,
air and manure handling equipment) that permitted efficient,
labor-saving, year-round production. There are cost economies of
size available to the large units arising from technical effi-
ciencies, cheaper inputs and better prices for hogs.
Until 1979, new technology and rising costs of labor rela-
tive to capital facilitated industrialization of hog production.
Profitable hog prices during 1965-79 and an income tax structure
that encouraged investment of earnings in additional facilities
also encouraged the adoption of large-scale production methods
and facilities. The farm crisis of the 1980s squeezed out
numerous hog producers. Some independents turned to contracting
as the only available source of capital for continued hog produc-
tion.
Location, Size and Ownership
Typically, hogs are produced where the feed is grown. About
76 to 78% of hog production is located in the North Central (NC)
region (the block of North Dakota, Kansas, Michigan, Ohio and the
8 states in between). That percentage has been relatively con-
stant for 30 years or more. However, more than 78% of the smaller
producers and less than 78% of the larger ones are in that
region. Pork production has traditionally been associated with
large supplies of local feed grains. While that link still holds
for most of the country, some large operators in the South are
hauling feed several hundred miles. Hence, hog production is
minor in the West and in New England but is important in parts of
the South. North Carolina, Arkansas and Pennsylvania are the only
states outside the North Central region that increased marketings
of hogs and pigs by 300,000 or more from the 1982 to the 1987
Census.
Table 1. The ten leading states in large-scale hogs and pigs
marketings, 1987
____________________________________________________________________________
Hogs and pigs marketed (1000 head) Large scale National rank
__________________________________
Large From farms marketing as in growth of
scale marketing From all % of all marketing
State rank >5000 head farms marketings 1982-87
____________________________________________________________________________
N. Carolina 1 2,992 5,181 58 1
Iowa 2 2,324 23,484 10 (49)
Nebraska 3 1,781 7,443 24 5
Illinois 4 1,375 9,880 14 6
Indiana 5 1,216 8,025 15 2
Arkansas 6 798 1,211 66 4
Minnesota 7 744 8,073 9 11
Kansas 8 619 2,760 22 (48)
Michigan 9 500 2,216 23 3
S. Dakota 10 440 3,181 14 19
____________________________________________________________________________
Data from U.S. Agricultural Census of 1987. "Large-scale" is
defined here as 1987 marketing of 5000 head or more because the
Census doesn't break out larger sizes. The last column is based
on computing the absolute growth (loss) in numbers of hogs and
pigs between 1982 and 1987. Thus, North Carolina was first with a
growth of 1,274,000 head Iowa ranked 48 with a loss of 317,000
head. Note that growth by state based on changes in USDA inven-
tories for 1982 to 1987 is not very consistent with these Census
ranks.
The 10 leading states in numbers of hogs and pigs marketed
by Census farms of 5,000 head or more in 1987 included two states
outside of the North Central Region: North Carolina and Arkansas.
Arkansas was the leading state in the percentage (66) of market-
ing from those large units. The fact that 7 of those 10 leading
states also ranked in the top 10 in terms of numeric growth of
marketings from 1982-87 reflects a positive relationship of
large-scale producers and rate of growth (Table 1). Type of own-
ership is closely related to size of the unit. Those units below
1000 head in size are mainly individual proprietorships although
there are some partnerships and a few family corporations. About
half of the larger units are owned by corporations of which
nearly one-half are non family corporations or cooperatives. Own-
ership by corporations rises steadily as the size of the opera-
tion increases.
Table 2. Operations marketing 1000 or more head and their market-
ings by class, 1988.
_________________________________________________________________
Operations
_____________________________
Market hogs
Class Number % (1000 head)
_________________________________________________________________
Single unit 20,400 71.0 33,948
Multi-units 5,668 19.7 16,530
Small contractors 939 3.3 5,335
Large contractors 21 0.1 4,110
Growers 1,434 5.0 2,877
Sow corporation 275 0.9 157
____________________________________________
Total 28,737 100.0 60,080*
_________________________________________________________________
* Because grower hogs are also contractor hogs, this total omits
the grower hogs.
Source: V. James Rhodes, U.S. Contract Production of Hogs, Univ.
of Missouri, Agricultural Economics Report No. 1990-1; a report
on a national survey sponsored by UMC Ag Exper. Station, Port 89
and National Pork Producers Council.
Class Differentiation
Almost all hogs were once produced by independent producers
on single-unit farms. These traditional units are still the large
majority of units producing a majority of the market hogs. How-
ever, among the operations marketing more than 1,000 head annu-
ally, which likely will be the operations dominant in the 1990s,
these traditional units will likely lose their dominance. As
shown in Table 2, in 1988 the multi-units and the contractors had
already become quite important. A multi-unit producer is defined
as an independent (noncontracting) who produces hogs on two or
more farms. Many operate in facilities purchased or leased from
neighbors. While a farmer contractor hires other producers'
facilities and labor, a multi-unit operator hires or purchases
only the facilities of other producers.
Contract Production**
Contract production of hogs is not new. Contract production
of broilers swept that industry in the 1950s, and the idea was
tried simultaneously in swine. Attempts at contract production by
feed companies or packers in the 60s and 70s never became
accepted in the North Central region. However, contract produc-
tion took hold in the Southeast and has grown to large size. The
farm crisis of the 1980s led numerous Midwestern feed companies
and dealers as well as well-financed producers and investors to
contract production in the North Central region.
Many of the early contractors (those providing feed and pigs
or breeding stock to the growers) were producers rather than feed
companies or packers. Departures from the broiler model reflected
basic differences in the production of pigs vs. chicks.
Total contractor marketings of market hogs in 1988 were 6.8
million head from contract operations and 2.7 million from their
own production. This total of 9.5 million head was 10.9% of U.S.
slaughter of domestic produced hogs. It is possible that another
million head were produced by survey nonrespondents, which would
suggest an upper limit of about 12% of U.S. slaughter. While 9.5
million head are a great many hogs, contracting as yet is not a
major portion of hog production in the U.S. However, proportions
much higher than 12% exist in several states including North
Carolina and Arkansas.
Some 87% of the contractors contracted pig finishing, 21%
pig production, 15% farrow-to-finish and 3% the production of
breeding stock. Obviously, several contracted for two or more
types of production. While average contracts were bigger for pig
production than for finishing, total contractor volume was larger
in finishing; thus, contractors purchased a sizeable volume of
feeder pigs.
About 66% of the growers were required to build or modify
facilities in order to obtain a contract. Such initial invest-
ments were more common for pig production and farrow-to-finish
contracts than for finishing. Initial investments to obtain con-
tracts were common for the larger contractors and for East Coast
contractors (those contractors have considerable overlap).
Growers reported a large range in the lengths of their con-
tracts, but they averaged 15 months for finishing, 30 for pig
production and 49 for farrow-to-finish. These averages are obvi-
ously much shorter than the time necessary for depreciating new
facilities.
Fewer contractors (31%) than growers (41%) began contracting
within two years of the survey. However, 3% of the contractors
began in the 1960s and another 6% in the 1970s.
Contractor and grower attitudes toward contracting appeared
positive. When asked to rate their satisfaction with contracting
on a 6 point scale (6 = extremely satisfied and 1 = not at all
satisfied), growers gave an average score of 4.5 and contractors
averaged 4.0. An invitation to growers to complain about major
problems with their contractors did not elicit many strong com-
plaints. When asked if they worry about losing their contracts,
78% of the growers said no, and only 2% said they worry a lot.
Independents are much more negative toward production con-
tracting than are the participants-the growers and contractors.
When independents were asked if they would consider being
growers, one-half checked the strongly negative answer (not under
any circumstance).
Of the independents strongly opposed to contracting about
one-half were opposed in principle to contract production as
being bad for farmers while the other half had more individual
business reasons. Thus, about one-fourth of independents were
opposed in principle to contract production of hogs.
How viable and permanent is contract hog production? More of
the information is positive than negative. Supporting the contin-
ued viability of contract hog production are the following data:
1. 9% of the contractors have been contracting 18 yr. or
more,
2. plans of all large and most small contractors are to
stay in operation at the same or a larger size,
3. contractors expanded production sharply from 1987 to
1988,
4. the contractor-grower relationship appears healthy with
lots of expressed satisfaction and few complaints, and
5. contractors claim they are as efficient or more effi-
cient than large independents.
On the negative side is the response of 66% of the growers
saying that their contract incomes would not cover the costs of
replacing facilities. Are contract fees going to grow larger in
the future as the current stock of grower facilities is depleted?
Another question relates to high turnover in the ranks of both
growers and small contractors. Since those who exit the hog busi-
ness tend to disappear from lists, we have no reliable way of
measuring exits. However, it is possible that many growers view
contracting as short-term. In sum, the positive points appear to
out-weigh the negative. Contract hog production appears to be a
viable operation that will gradually increase its market share in
the next few years. It's too early to tell whether contract pro-
duction will eventually dominate the swine industry.
Structure of the Production of Breeding Stock
Continuing improvements in breeding stock are essential to
the industry. A 1989 survey by National Hog Farmer and Michigan
State researchers indicates that 75% of the gilts are self-
produced while about 10% are purchased from purebred breeders, 4%
from commercial breeders and 10% from corporate suppliers
(Dekalb, Farmers Hybrid, Pig Improvement Co., and Babcock Swine).
A majority (58%) of boars are said to be purchased from purebred
sources, corporate suppliers 23%, commercial breeders 4%, and
home raised 15%.
One would expect growth in the size of units selling breed-
ing stock as the size of the buyers grows. Some production spe-
cialists are recommending producers purchase F-1 gilts to produce
a terminal cross for commercial production. If this is adopted it
may add to the growth of larger breeding stock firms.
Future Structure
Modern facilities and techniques permit the efficient pro-
duction of large numbers of swine in one place. The trend toward
larger size production units will continue. The multiplication
of giant units of the size of National Farms may be limited to a
relatively few places in less humid and more sparsely populated
areas of the country because of the problem of effluent disposal.
The big question is the market share that will be obtained
eventually by large firms with numerous locations of the multi-
unit and/or contract operations type. Such large firms will be
vertically integrated into feed milling, whether the hog business
or the feed mills comes first. It is possible that hog slaughter
will also become integrated vertically by the largest firms
although movement in that direction has been slow. It is antici-
pated that during the '90s a majority share of hog production
will remain in the hands of mainly family producers in units each
marketing fewer than 50,000 head.
REV 6/90 (5M)
____________
** Much of this section is drawn directly from V. James
Rhodes. U.S. Contract Production of Hogs, University of Missouri
Agricultural Economics Report No. 1990-1.
______________________________________________
Cooperative Extension Work in Agriculture and Home Economics,
State of Indiana, Purdue University and U.S. Department of Agri-
culture Cooperating. H.A. Wadsworth, Director, West Lafayette,
IN. Issued in furtherance of the Acts of May 8 and June 30, 1914.
It is the policy of the Cooperative Extension Service of Purdue
University that all persons shall have equal opportunity and
access to our programs and facilities.
.