Planning the right strategic choices in periods of dramatic change can be an exasperating task. Yet, the role of the general manager is to operate the production system efficiently, laying the groundwork today to exploit future change.
An understanding of the historical development of other agricultural commodities, an in-depth knowledge of one's own industry and familiarity with the national and regional political scene are the beginning prerequisites to effective strategic decision-making.
Below is a sequential list of factors driving change in the current strategic environment for pork production.
Technological Change The historical development of scale in pork production is the driving force behind the rapid pace of structural change.
The development of all-in, all-out (AIAO) and its evolution to multi-site production systems creates explosive growth potential by allowing large numbers of animals to be grown in confinement while managing health risks.
This technological change is bringing about a host of efficiencies in building cost, feeding systems and nutrition, manure management, labor efficiency, transportation economies and health management.
Changing Cost Structure Lower costs and the possibility of scale attracts new capital from both traditional and non-traditional sources. New adopters of the changing technology enjoy greater than average profits which stimulates more investment. The ensuing investment in capital has not only lowered the average cost of production but has restructured cost.
A larger percentage of total cost is now fixed. The implication of the higher fixed costs is that market signals to slow growth or limit production are not effective until prices reach very low (below variable cost) levels.
Shifts In Competitiveness Because of the changing cost structure of the industry, regional competitiveness has shifted. Those areas enjoying the greatest historical cost advantages (Corn Belt states) are losing production growth to new regions which offer off-setting advantages in construction costs, climate, labor and contracting costs.
Many larger confinement operations moved to areas with low population density to avoid the potential for nuisance from the sights, sounds and smells of modern agriculture. Within this strategy, many firms farrow pigs in outlying geographical areas then ship the pigs to grain-belt states for finishing where feed costs are lower and current packing capacity exists. Rapid growth, exceeding retirement and anticipated displacement of inefficient operations, results in overproduction.
Focus On Risk Management Factors adding to the traditional risks of agriculture are also growing. To name a few, the loss of aging packing capacity, a new militancy by environmental groups challenging sites for new production and packing investments, the instability of the world economy affectingexport markets and exchange rates. Add to that, the often-conflicting political demands on agriculture to not only supply an abundant, low-priced harvest, but to preserve societal models of freedom, independence and rural virtue, and you create a strategic environment fraught with price and production risk.
The focus on solving risk management issues is the current strategic interest of the industry. It is clear that investment will not continue in the pork industry until clear and effective risk management strategies have been developed and implemented.
There are several major areas of risk management that the general manager must anticipate in formulating a successful strategic plan. The first of these is supply control.
It is abundantly clear that the pent up demand for expansion cannot be realized. Continuing to push the cost frontier through scale and attempting to acquire added market share through continuous expansion are dangerous market strategies. With only 65% of the industry restructured to modern methods, the price of hogs has been effectively driven to zero.
How will the production industry achieve effective supply control? This is a crucial strategic question since how it is eventually realized will benefit those who correctly anticipate the means. There is no easy answer to this question since it depends heavily on decisions other producers, packers and policy-makers make in the next several months. Most industry observers believe the choices fall within a range from coordination to integration.
Packer Contracting Contracting with a packer, joining a coordinated scheme aligned with a packer or remaining "independent" are all possible strategies. Full integration by the packer or producers is another possibility but policy opposition is growing. A careful examination of the pros and cons of each must be made. Regardless of which strategy seems most rational from a business standpoint, government policy changes may sharply change the most effective or even the availability of market-oriented solutions.
Expect the political overlay to be heavy, unpredictable and conflicting. Policy makers have shown a tendency to send very strongly conflicting signals to the industry. A recent set of recommendations issued by USDA in support of small farms is no exception. After the appropriate show of support for nostalgia, there is scarcely a recommendation that if effectively undertaken, wouldn't lead to more production, growth in farm size and continued structural change. Even so-called sustainable methods, if adopted, will eventually drive inefficient and low-knowledge operations out of business and lead to larger, more intensively managed farms unless government intervenes in ways inconsistent with a free society.
Government payments to producers to cushion the effect of low market prices may be desirable as a temporary form of disaster relief, however, a systematic subsidy has never been shown to be effective and increases the pain later when market forces eventually grind to their inevitable conclusion.
Mandatory Price Reporting Mandatory price reporting is a popular subject among producers and legislators since it seems to guarantee fairness in the market. But, unless carefully undertaken, mandatory price reporting may actually de-stabilize the investment environment by thwarting coordination and increasing the risk of price leadership, a subtle form of price collusion.
Coordination is a means to bring a set of desirable characteristics to the market. It is a form of "bundling." Separating the hog itself from the "bundle" and pricing it may be difficult or impossible to do. For instance, a coordinated system may bring guarantees to the packer regarding the nutrition, quality (including freedom from residues), timing and quantity of hogs. If all hogs of the same weight and backfat are expected to receive the same price, opportunities to add value by the producer through coordination may be hampered.
The costs associated with entry and exit are growing dramatically as the cost structure changes to more fixed costs. Historical means of supply control which counted on large numbers of producers easily disinvesting and then reinvesting in production is no longer viable. Achieving supply control is the next major strategic move for the industry as it responds to unacceptable price swings and record losses. Deciding on a strategy for your operation will be challenging. Now is the time to create a formal process to engage strategic issues and make sound strategic decisions.