Feeding Time for Boss Hogs

by A.V. KREBS

The Clinton administration, through Vice-President Al Gore, pushing some more of his "practical idealism" in Iowa, has announced that it will provide hog farmers with $130 million to compensate for a collapsed pork market.

In the meantime, as hog farmers are currently suffering from Depression-era prices while consumer prices remain virtually unchanged from a year ago, IBP and Smithfield, the two largest pork processors in corporate agribusiness, are reporting record profits.

Against the backdrop of hog farmers losing about $2.6 billion in 1998, based on an average loss of $27 per animal, and a prediction by Ron Plain, a livestock specialist at the University of Missouri, that those same farmers could lose $1.5 billion more by midsummer, IBP Inc. has been posting record profits, up more than 125% in the third quarter of 1998. While its shares jumped more than 37% in 1998 it also expects fourth quarter earnings to be four times higher than last year's.

Hormel, the large meat processor based in Austin, Minn., also reported record profits of nearly $140 million in 1998 and Smithfield Foods Inc. of Smithfield, Va., the nation's largest producer and marketer of fresh pork and processed meats, said its net income rose 19%. Yet, over 11% of the nation's hog producers closed down last year, leaving 138,694 hog farms, many raising under 1,000 head. John Lawrence, a livestock economist at Iowa State University thinks 15% more will go this year..

Chris Hurt, an agricultural economist at Purdue University in West Lafayette, Ind., calculates meat processors and retailers are reaping roughly $4 billion more from pork this year than they did in 1997--at the expense of farmers and consumers.

"It does not make sense that IBP is banking record high profits while hog producers are being paid Great Depression-era prices. These prices are driving thousands of producers into bankruptcy," NFU President Leland Swenson recently declared. "This is clear evidence that something is seriously awry."

Producers are currently receiving about $10 per hundredweight (the market rose to $27 as of presstime) for hogs, while the average price in 1997 was $59 per hundredweight. The last time farmers received $10 per hundredweight was 1941. However, ten-dollar hogs in 1998 are comparable to 50-cent hogs in 1941 dollars. Most producers consider $40 per hundredweight a break-even price. Currently, hog farmers are receiving only 12% of the retail food dollar, compared to 30% a year ago.

"Despite the sharp decline in hog prices over the past year, retail prices paid for pork have remained constant. That simply does not add up," Swenson added."This raises serious questions about profit making at the expense of producers and consumers."

While the major media has begun to focus on the hog price crisis, talking about over production and disappointing export sales it has typically ignored one of major causes of the crisis--industry concentration. Like the cattle industry, where three firms--IBP, Cargill's Excel and ConAgra--control 81% of the beef packing industry, six firms--Smithfield, IBP, Swift, Excel, Farmland Industries and Hormel--control 75% of the pork slaughter.

This lack of competition, Swenson emphasizes, means that producers have few buyers for their product, hampering their ability to negotiate a fair price. In addition, packers continue to increase ownership and contract production of supplies needed for slaughter.

These six corporations along with such relative newcomers as Murphy Farms and Continental Grain operate factory-style farms where the overhead is so high they are required to operate at near full capacity to be efficient.

Yet, despite the current oversupply of hogs these corporations are much slower to cut their herds in response to a glut than are small farmers, and they have deeper pockets to withstand a downturn. Continental Grain, one of the nation's biggest closely held companies, owns 51% of Premium Standard Farms Inc., which has no plans to cut its breeding herd of 130,000 sows.

And now "with these down markets, even large producers with economies of scale are feeling the hurt," Hormel Foods' executive vice president of operations, Gary Ray told the Wall Street Journal. "The industry is heavily leveraged."

The situation is so dire, adds Iowa State's Lawrence, that "some companies are looking for equity infusions now." Who might bite? He says companies like ADM, which isn't in meats, but is big in grains and owns a 13.3% of IBP stock, might decide now is the time to step up to the meat counter.

Some industry representatives concede that they overproduced. Investments in new facilities, temperature-controlled rooms and sophisticated breeding techniques created a glut in the number of pigs produced and sent to market. While the number of hog operators has steadily declined to 138,000 today from three million in the 1950s, the industry will produce a record 19 billions pounds of pork this year.

Another fact, largely ignored, is that large number of hogs being imported from Canada and Mexico. As Dan McGuire, a board member of the Nebraska Farmers Union and American Corn Growers points out:

"U.S. hog imports from Canada in the period from January to September, 1998 totaled 3,109,032 head while total U.S. hog exports to the world only amounted to 110,264 head. During this period Canada's pork exports to the U.S. totaled 337.3 million pounds (carcass weight), 3.4 times more than the 100 million pounds exported to Canada by the U.S. Any U.S. or Canadian government official that believes these massive imports don't drive down our livestock prices needs to take a real world (not theoretical) economics course."

Considering such facts family farm advocates and consumers--particularly those who enjoy pork chops, an occasional pork roast and the traditional holiday ham--should become most judicious and extremely discretionary in any tears that might feel like shedding when they read Wall Street Journal headlines such as "Hog Market Collapses on Glut Of Animals; Big Blow to Farmers."

Like watching two steam locomotives barreling across the open plains headed toward each other on the same track this was a train wreck that was both foreseeable and inevitable.

And once again it is the small family farm operators who are being forced to suffer the economic consequences as big factory-style farms continue to flourish and a handful of meatpackers and retail outlets report record profits.

Meanwhile, the National Pork Producers Council (NPPC), wails about the possibility of a "massive restructuring of pork production in the United States." In a letter to President Clinton NPPC's President Donna Reifschneider, warned that "if this dangerous situation is not reversed quickly, it will result in the failure of tens of thousands of pork producers and a massive restructuring of pork production in the United States.

"We believe the economic crisis facing America's pork producers must be viewed as a national emergency, warranting immediate intervention by the U.S. government," she argued in her best "sky is falling" language sent to the White House.

Grimly cynical, however, probably could best describe the reaction of most family-farm hog operations to the pleadings of the NPPC. Supported by hog operators own checkoff dollars, it is the NPPC which has been corporate agribusiness's primary cheer leader in urging hog farmers to expand their operations into factory type operations which in fact has already led to a "massive restructuring of pork production in the U.S." and the current glut in the hog market.

Currently, a staff member of the Rural Advancement Foundation International (RAFI), Mary Clouse has done pioneer work over the years in helping to organize the National Contract Poultry Growers Association (NCPGA). It is that experience which she recalls in voicing her reaction to the current situation in the hog industry:

"Everyone saw this one coming. I have lost my patience with the contract hog farmers. There was plenty of evidence from the contract poultry growers about the risks involved in contracting, yet they refused to listen. No sympathy for the bankers either. Let them eat their loans on all of the new facilities they helped to build in order to grandfather them in when any newer, tougher environmental rules would have stopped the industry in its tracks.

"The independent hog farmers did the only thing they could," she adds, "either get out of the business or get bigger, form marketing co-ops, etc. Those that got bigger and imitated the corporate hog confinement producers, threw the curve into the hog market. They refused to go under quickly enough and the glut on the market continued to build. Now it has driven prices so low that even the corporate 'deep pockets' are crying for help. There should be none! Let the `free-enterprise' system work!"

Steve Dalton, a shareholder and coordinator of the Indiana Family Farms Cooperative, adds "U.S. producers have created a monster. There's a tremendous amount of wealth being made from pork producers, and we have allowed this to happen," he said. "We have been too production-oriented. Why does anyone need 20,000 sows?"

Meanwhile, corporate agribusiness mouthpieces like the American Farm Bureau Federation are urging greater "partnership" between farmers and retailers.

Unlike other commodity growers angry over low prices hog farmers won't be protesting or picketing, according to Dennis Vercler, an Illinois Farm Bureau spokesman. The Associated Press reports that Vercler "was careful to choose his words, saying he does not want to alienate retailers."

"This is not a protest. Farmers and retailers are partners ... It's not about price-gouging or bashing the middle man," Vercler said. "But there is a difference of opinion about the proper level of retail pricing."

But as Tom Morgan, of Morgan Consulting Group, Ltd., Paola, Illinois, whose firm in the past has been critical of the pork industry's legislative and marketing leadership (like the NPPC), points out the industry views retailers and purveyors as part of the whole market channel. They don't wish to offend their partners, Morgan said.

Morgan is adamant that the industry leadership almost two years ago agreed to expand numbers 25% to drive prices into the teens to capture market share. "They've pursued a policy of market share without any regards to profitability," he adds. "Market share without profitability isn't going to work in the long run ... What good is a partnership if it only goes one way?"

While the nation's hog market collapses the pork industry, true to its nature remains at the trough.

A "sweet heart" agreement was recently announced between the National Pork Producers Council and the Environmental Protection Agency that will allow hog farmers to voluntarily undergo environmental inspections and avoid "costly fines" for violations.

Providing pork producers have their farms inspected under the NPPC's EPA-approved odor and water quality assessment program they will be eligible for reduced penalties for any Clean Water Act violations discovered and corrected. Previously, farmers could be fined as much as $27,000 a day for violations. Under the new system, participating farmers will get a flat fine of no more than $40,000. The NPPC is paying for the program with the checkoff dollars that it collects from among the nation's 122,000 hog farmers.

The NPPC has established a team of farm inspectors, also approved by the EPA, which will include public employees, engineers, university faculty members and private consultants. The NPPC hopes to see more than 12,000 farms participate in the program over the next three years.

While NPPC President Reifschneider might prefer to call the agreement a "win-win for the environment and producers" it could prove more than likely, if history is any indicator, a lose-win for the environment and corporate hog farms.

Meanwhile, in North Carolina, the nation's second largest pork producing state behind Iowa, the NPPC is asking that the production/slaughter cap at the Smithfield Foods facility in Tar Heel be lifted so that more hogs can be slaughtered in a given day. Recently, Smithfield was denied expansion permission, and a cap was placed on the facility to hold it at 144,000 head per week. As part of their letter to President Clinton the NPPC asked for Smithfield to go from 24,000 per day to 32,000 per day which would result in a discharge of 4.5 million gallons per day from the present three million gallons per day into the Cape Fear River.

The call came shortly after North Carolina's governor signed a bill extending the state moratorium on new and expanded hog facilities from March through September 1, 1999. Passed by the general assembly after months of debate, the bill amends the controversial term "innovative" in the description of waste handling systems exempted from the building ban.

A.V. Krebs is author of The Corporate Reapers: The Book of Agribusiness (Essential Books: 1992)

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