MARKETING                                         PIH-85


               The Structure of the U.S. Pork Industry

V. James Rhodes, University of Missouri
Glenn Grimes, University of Missouri

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-

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

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

     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.
                                                      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

     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

     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

     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.

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