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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!!