More highly aligned systems will characterize the pork industry of the future, says Chris Hurt, agricultural economist, Purdue University.
It's the kind of thing being successfully done by Farmland Industries from production, through processing and distribution.
And it has been perfected by Wal-Mart, the highly successful discount retailer. Hurt has used the phrase, "Wal-Marting of America," to describe the overall trend in American business and how that experience compares with what is occurring today in the pork industry.
According to the Purdue economist, the Wal-Mart concept is being copied by businesses including the pork industry. "It's part of the industrial concept being used in large pork production systems today," he says. "What it does is place more pressure on smaller producers. Profit margins get continuously squeezed tighter and tighter as costs are driven lower."
Hurt briefly discusses five tenets of the Wal-Mart approach and how they are being used to change the face of the pork industry.
1. Wal-Mart brought massive buying power to how goods are sold. Volume-buying leads manufacturers to price goods at lower prices.
In turn, larger hog production businesses gain cost advantages in buying inputs. These larger entities have gained even more buying clout by pooling orders and buying larger volumes.
2. Wal-Mart drove retail prices lower by innovation such as the use of large-scale distribution centers.
In turn, larger hog operations are building close to packing plants. Feed mills are locating close to large production units. "The concept is to design a production system that minimizes the total transportation costs."
However, environmental, regulatory and societal constraints may limit the ability of pork industry businesses to build on the best site.
3. Wal-Mart uses huge distribution facilities to gain economies of size, driving fixed costs per unit lower and thus lowering the cost of delivery to retail stores.
In turn, mega pork producers use large feed mills and large sow units to drive per unit costs down.
4. Wal-Mart uses a huge amount of data to coordinate its production system which feeds thousands of goods into retail distribution.
In turn, coordinating information in an increasingly complex pork industry is just as important. That includes the coordination of the flow of animals from the production site to the processing plant and the inputs required. "And clearly it is critical to flow information from the retail level back to the input-supplying sector and to the production sector," stresses Hurt.
5. Wal-Mart's edge in size, location and efficient application of technology gives the giant discount merchandiser an advantage in pricing over some other types of retailers.
In turn, hog operations applying these same principles are working to supply higherquality pork products at competitive prices.
Options For Small Producers Wal-Mart's arrival on the retail scene has meant the demise of many small businesses, explains Hurt. The same fate is now facing smaller pork producers, he points out. As with the small business, the small pork producer has difficulty competing directly with the giants of the pork industry.
The smaller pork producer has three options, observes Hurt. Simply give up, find a niche that the larger producer does not fill or compete in or join a system that mimics Wal-Mart or the larger producers.
"Wal-Mart is simply a different retail system than the smaller shops they often replace. Direct, head-on competition is simply not possible. However, Wal-Mart does not serve all market segments ..."
Likewise, the mega pork producers don't service all supplier needs. It's possible smaller producers can fill the needs of some smaller outlets and thrive in the marketplace, suggests Hurt.
For those small producers who haven't substantially upgraded the quality of their genetics or technology in the past three years, profits may be hard to come by, he states (see Figure 1 on page 18).
Observes Hurt, "Two major factors have worked against smaller-scale producers in the last 25 years: narrowing profit margins and higher living costs."
For example, with a $5/cwt. margin in the mid-'70s, a 100-sow operation would generate a return of about $17,000 per year, a decent income in those days. That's based on 15 pigs/sow/year and selling at 225 lb.
Today, with an average, smaller profit margin of say $2/cwt., a 100-sow unit would generate an annual return of about $9,000, a paltry sum to meet the income needs of most families, says Hurt. This is based upon an improvement to 18 pigs/sow/year and marketing at 250 lb.
That comparison is based on rough estimates from Iowa State University's Swine Enterprise Records. While today's smaller producer has improved somewhat in production output over the 20-year period, lack of improvement in two areas, overall efficiency and carcass merit, has cut returns for these producers by more than 50%.
For some of those producers, exiting the hog business and seeking out other career choices may lead to a less stressful, more fulfilling lifestyle than the pork industry currently affords them, suggests Hurt.