Competitive Structure of the Leading Pork Exporting Countries

1
Competitive Structure of the Leading Pork
Exporting Countries

• Marvin L. Hayenga
• Professor of Economics
• Iowa State University

2
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.

3
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

4
Leading Exporters

• United States
• Canada
• Denmark
• The Netherlands

5
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 Countrys Infrastructure System
• Environmental Regulations!!!

6
Factors Driving Structural Change

• Food Safety Risks Trace back is becoming
  required
• Disease Outbreaks/ Risks

7
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

8
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

9
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

10
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

11
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

12
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

13
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

14
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.

15
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

16
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

17
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

18
Prior growth

• Dutch ports importing cassava provided cheap
  CHOs versus protected grains in EU gave The
  Netherlands a competitive advantage in EU pork
  production
• Declining protectionism gives a more level
  competitive playing field

19
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

20
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

21
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

22
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

23
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

24
The Danish Pork Industry

• Customer Oriented Pork Industry
• Worlds Leading Exporter of Pork
• High Cost Structure, Lean Pigs
• Regulations in Place to Preserve Environment
• Rapid Consolidation in the Pork Processing Sector

25
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

26
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

27
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

28
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

29
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!!