Purdue University 1997 Swine Day Report

Opportunities in Coordinated Hog Production

J. Ray, M. Boehlje, and C. Hurt
Department of Agricultural Economics

Hogs have traditionally been raised on independent farms in which most of the needed services were provided by that farm. Resources included ownership of all hogs and facilities, land, labor, management, and risk taking. In addition, the type of production facilities and specific management practices such as the nutrition, genetics, health, handling, and marketing programs were independent decisions.

New technology has added to the complexity of hog production at the same time that larger production units are driving costs lower. This means that it is more difficult for traditional farms to keep up with the required information flows, to implement new technology, and to obtain sufficient size to gain full economies of scale. Coupled with these dilemmas is the advent of technology, including large sow units, enhanced genetics, segregated early weaning, all-in all-out production, and multiple-site rearing.

As a result of these changes, the industry has been thrust into a period of dramatic change in which small farms are rapidly leaving the industry, causing sharp reductions in the total number of hog farms in the country as shown in Figure 1. As small farms decline, they are replaced by much larger and more technologically complex units which are becoming increasingly important in the scope of total production. As an example, farms with an inventory of 1 to 99 animals represent 61% of the total operations in the country, but only 3% of the total inventory. On the other hand, farms that have 2,000 or more animals are only 3% of the total farms, but 51% of the total inventory (Figure 2).

One of the natural responses of traditional producers to these changes is to search for ways to gain the full range of advantages in information collection, technology access and implementation, and size accumulation. Coordinated hog production is one of the alternatives.

Goals of Coordinated Production Systems

In coordinated hog production, multiple entities form a coalition or alliance to develop a "better" system of production, which may reduce costs, improve pork quality, improve market access, help obtain scale economies, share risk, obtain more information, or obtain better access to technology.

The overall goal of coordination is to structure a system from producer to consumer which creates the greatest pork value relative to costs. Key factors in coordination include the system design, financing, risk and reward sharing, and how the system is coordinated among its participants.

Some of the goals of increased coordination are listed in Table 1. Moving from independent production to more structured, formalized agreements with other participants may allow the producer to gain various advantages in production, marketing, and management. Table 1 is structured such that each goal is followed by a section explaining the basic motivation behind why that goal is desirable, and a section listing key questions for the producer to consider when assessing each respective goal.

As an example, the first goal listed in the table is to access technology. Through coordinated arrangements that provide access to technology, producers may be able to improve efficiency, thereby lowering production costs and quite possibly increasing the overall consistency and quality of their production. Technologies that might be obtained through increased coordination include superior genetics, specialized phased feeding programs, or the ability to move towards multi-site production.

A closer examination of Table 1 will reveal that the goals themselves are highly interrelated and pursuing one often incorporates facets of others in the list. Pursuing access to capital, for example, allows size or technology gains to be made. These interactions should be considered when trying to set up goal priorities for a specific operation.

Classifying Current Coordinated Systems

Table 2 provides some examples of how the current industry is structuring pork systems to attempt to achieve the goals of improved coordination, and to match each individual's resources and skills with others in the system. The first type is independent production, including independent input suppliers and packers. In this traditional system, coordination occurs from signals provided by spot cash markets as well as futures markets. Hog ownership is transferred from one party to the next based upon price signals and independent decisions. In essence, many producers and packers compete in an open marketplace, each making their own decisions of how best to maximize their profits.

The other extreme of the coordination spectrum is total vertical integration, as shown in the last row of the table. In total vertical integration, one firm owns (or at least controls) the system from production through processing. Transfer of hog ownership from producer to processor is not needed since there is only one profit center. All decisions are made internally by the management pool of the organization.

The most dramatic changes in the pork industry are likely not occurring at either end of the coordination spectrum, but rather in all the interesting combinations of coordinated production in between. Here are all types of combinations from simple marketing alliances, to jointly owned production units, to feed-company-directed coordinated production systems. Producer alliances are generally groups of independent producers working together to buy inputs, to market collectively, or to acquire or share information. Generally the alliance does not produce hogs, but rather each individual member continues their independent production. These types of networks have had considerable publicity and interest over the past three years. Family farm cooperatives or corporations by contrast do produce hogs in jointly owned facilities. Commonly a group of producers (or investors) buy shares in production units that may include sow units, gilt multiplication, or cooperative nurseries.

The next four types of coordination listed in Table 2 are generally owned by producers (or investors), but are coordinated by a key facilitator such as vet clinics, feed companies, regional cooperatives, and genetics companies. Vet clinics such as one in Pipestone, Minnesota, have developed systems of production in which they define the building design, genetics, health, and management practices. Investments are then made by individual producers in large sow units, with pigs moving to their own farms for nursery and finishing phases. Pigs may also move to contract nurseries or contract finishing. Most feed companies have programs that will be described in more detail in the next section.

The final three types of coordinated systems - feed company owned, mega producers, and total vertical integrators - generally build their own sow units or have outside investors build contract sow units. Then they tend to use contract nurseries and contract finishing. There certainly are exceptions, such as Premium Standard Farms, that primarily own all of their own buildings and equipment.

Feed Company Programs

As the pork industry has been evolving, feed company programs and services to the producer have also changed. Recently, however, these programs have taken on more specific characteristics that help producers expand, modernize, and generally make their operations more competitive. These programs reflect concerted efforts by feed companies to be a strong part of the evolving industry by helping their customer base expand and evolve. Typically these programs tie product purchasing to consulting/planning services and highly competitive financing alternatives. General overviews of three different programs are outlined in Table 3, reflecting different approaches taken in this sector.

The variability of feed company programs demonstrates the overall complexity and number of alternatives available in coordinated pork production. Even this limited summary reflects ways producers can achieve a number of the goals listed in Table 1.

Feed companies also coordinate contracting programs. These contracting arrangements typically focus on one of three stages of production (farrowing, feeding, or finishing) with the feed company supplying the hogs, feed, and support services, and the producer providing the facilities, labor, and management. Payment to the producer is commonly determined by a set base, with efficiency bonuses tied to the specific stage of production. Other coordinated arrangements also incorporate planning and support programs, financing alternatives, and/or contracting options.

Summary

The rapidly changing pork industry is providing new opportunities in coordinated production. Producers should examine the goals of coordinated systems to see if they match the objectives of their operations. Much of the current activity in the industry is attempting to find better ways to link all stages of pork production to provide the highest quality pork relative to costs. Many programs and alternatives exist for producers to consider.

Figure 1. Number of U.S. Hog Operations.

Figure 2. Comparison of Number of Operations and Hog Inventory by Size of Operation.

Table 1. Goals of increased coordination for producers.

Table 2. Forms of coordination, how coordinated, and hog ownership.*

* These are meant to serve only as examples. There are many firms with various programs. Please check with individual firms for specific programs.

Table 3. Services of coordinated feed company programs.*

* Certain qualifications must be met to be eligible for most programs.

Index of 1997 Purdue Swine Day Articles

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