Competitive Structure of the Leading Pork Exporting Countries

Marvin L. HayengaProfessor of EconomicsIowa State University

General considerations• Typically, global markets are only

components of a raw commodity• Comparative Supply-Demand of

each component in each country determines what crosses borders in trade;

• e.g. pig tails in China, ham in the U.S., bacon in the U.K.

General considerations• Low hog production cost not a

sufficient index of competitiveness• Processing and merchandising costs

and services provided cannot be overlooked in competitive analysis

• Value received (!!) versus cost is critical determinant of market share

• Exchange rates -- a wild card in global market competition

Leading Exporters

• United States• Canada• Denmark• The Netherlands

Factors Driving Structural Change

• Economies of Size--Production, Processing, Distribution

• Changing Consumer Demands and Market Conditions, e.g. health, WalMart

• Adoption of New Technologies• The Country’s Infrastructure System• Environmental Regulations!!!

Factors Driving Structural Change

• Food Safety Risks; Trace back is becoming required

• Disease Outbreaks/ Risks

The U.S. Pork Industry

• Increasing Trend Towards Fewer, Larger Operations

• Expansion Into Corn-Deficit Regions– Less Strict Environmental Regulations– Bulk Grain Purchasing– Technologically Advanced Production

Systems

Three-Site Production Systems

• Sows, Early Weaned Pigs, and Finished Pigs at Separate Sites--Low disease risk

• Used Primarily By Larger Farms– Own Feed Mills– Own Trucking Fleets

• Increased Efficiency and Quality Control• Continuing Trend in the Future

Processing Industry

• Trend Towards Value-Added Processing• Increased Concentration

– Ten Largest Firms Control 80% of Slaughtering Capacity

• Closer Links to Producers– Marketing Contracts

• Packer Ownership of Pigs Small, but Increasing

Pork Contracting

• Increased Volume Consistency For Processors

• A Way to Provide Quality Pigs That Can Be Given a Processor Brand

• Over 70% of Pigs Delivered Are Under Long-Term Contracts or Direct Ownership of Processor

Long Term Growth

• Environmental regulations, neighborhood political constraints increasingly affecting location of production and processing

• Vertical chain linkages becoming essential to satisfy changing market environment

• Will remain a leading exporter

Canadian Pork Industry

• Number of Pig Farms Has Decreased by over 75% in Last 20 Years

• Reputation for High Quality Pork• Processors Typically Small, High Cost

Plants; Two Larger Plants Now Built or Planned, Wage Structure Lower

• More Direct Sales and Contracts Being Made with Packers

Pork Production

• Increasing Number of Large, Specialized Hog Farms

• Economies of Size are Being Realized

• Pork Production is Spreading West– Lower Feed Costs Than Before– End of Rail Subsidies Have Lowered

Costs

Pork Processing

• 15 % of hogs are slaughtered in U.S.• Top Eight Firms Accounted For 76%

of Slaughter in 1998• Slaughtering is Much Slower, and on

a Smaller Scale Than in the U.S.– No Plants Double-Shift– Lower Carcass Weight– 30% Lower Productivity than the U.S.

Marketing System

• Marketing Partially Controlled by Provincial Marketing Boards– Progressively Less Restrictive– More Producer-Packer Relationships

• Pig Pricing Based on a Carcass Premium/Discount Matrix– Incentives to Produce Lean Hogs

• Grading Done By Federal Inspectors– National Pig Classification System

Long Term Growth

• Western Canada growth beginning rapidly--large area with few neighbors, low grain cost, current technology in production and processing

• Greatest potential share increase in world pork market

The Dutch Pork Industry

• Major European Exporter Until the Classic Swine Fever Outbreak

• Pork Produced on Small Family Farms

• Number of Farms Expected to Decrease

• Strict Environmental Regulations• Many Small Slaughtering Plants

Prior growth

• Dutch ports importing cassava provided cheap CHO’s versus protected grains in EU; gave The Netherlands a competitive advantage in EU pork production

• Declining protectionism gives a more level competitive playing field

Pork Production

• Number of Farms Decreasing, Size Increasing

• Large Finishing Operations Accounted For 9% of Farms, 38% of Hogs

• Technologically Advanced Production Systems– All-In-All-Out Production– Nearly 100% Artificial Insemination

Environmental Regulation

• Act on Manure and Fertilizers (1987)– Manure Quota Assigned Per Unit of Land – Every Pig Farm Must Now Account for

Production and Distribution of Manure

• New Facilities Must Have 50% Lower Ammonia Emissions

• Expansion Expensive, Only by Exchanging Manure Rights With Others

Pork Processing

• Many Recent Mergers Have Taken Place• In 1998 Three Groups Controlled Two-

Thirds of Total Slaughter• Plants are Very Slow, High Cost

– 400 Head per Hour– 6-7 Hours per Day– 5 Days per Week– Virtually All Are Single Shift

Pork Processing

• Slaughter Plants Do Very Little Value-Added Processing

• Estimated Total Cost of $30-$35 per Head with Moderate Processing, $14 for No Additional Processing in 1998

• With Little Value-Added Processing, Packer Profitability is Low

Long Term Growth

• Highly restrictive environmental constraints

• May not get back to prior levels of production; may export pigs (or pig farmers) to neighboring countries rather than pork products

The Danish Pork Industry

• Customer Oriented Pork Industry• World’s Leading Exporter of Pork• High Cost Structure, Lean Pigs• Regulations in Place to Preserve

Environment• Rapid Consolidation in the Pork

Processing Sector

Pork Production

• Production Doubled From 1975-1995• More Specialization, Concentration,

and Larger Herd Sizes• All Hogs Traced Back to Source For

Quality Assurance• Regulations in Place Regarding

Manure Storage and Spreading– High Manure Management Costs

Pork Processing

• Farmer Cooperatives Dominate Breeding, Feed, Slaughter, Processing and Distribution Systems

• All Hogs Marketed Through One or Two Year Contracts

• 54 Companies in 1970, 3 Today• Danish Crown Controls 80% of the

Slaughtered Pigs

Pork Processing

• Processing Focuses on Customer Specifications, Adding Value

• High Processing Costs, More Differentiated Products Compared to Other Countries

• All Activities Coordinated by an Umbrella Organization: Danske Slagterier

Long Term Growth

• Environmental restrictions clearly limit growth potential

• Will continue to be successful in world market despite costly production and processing; value added in production and processing is the trade off

Summary:

• Environmental Concerns/Regulations Increasing Importance in all countries

• Tighter Linkages Between Producers, Processors and Customers are Emerging

• Increasing Size is Achieving Economies Where Limits Have Not Yet Been Reached

• Canadian Growth--Greatest Potential!!