When pork producers look to build a small packing plant as their salvation, they would be wiser to look elsewhere, suggests a University of Missouri agricultural economist.
"There are promoters attempting to sell hog producers in many areas on investing in a small, cooperative hog slaughter plant," says Ron Plain. "Some of these schemes are little more than snake oil pitches."
History is proof, he points out. In 1981, there were 49 plants of the size producers are thinking about building - plants that kill 1,000-4,000 hogs a day. Just nine of those small plants are left today, he says.
Plain observes, "Only those small plants that have developed a differentiated product and have established a brand with consumers are surviving.
"It takes years to establish a branded product that can capture more of the consumer's dollar and that usually means operating at a loss for several years," he stresses.
The National Pork Producers Council is not emphasizing building packing plants, Plain notes. They are talking about partnering with packers and processors to add value to the hogs their members market, he says (see sidebar).
"That's what pork producers need to be looking at." How to capture value and get a higher and more stable price for hogs without risking millions of dollars on a small packing plant," he says.
Plain lists 10 points producers should ponder before investing in a packing plant venture:
1 Periodically, the U.S. has a shortage of hog slaughter capacity. During the fall of 1998, oversupply caused packers to work double shifts and in some cases seven days a week. Weekly hog slaughter exceeded 2 million head for 14 consecutive, non-holiday weeks. During these times, pork packers tend to make outstanding profits (and producers lose money) on each hog they slaughter.
2 Periodically, the U.S. has excess hog slaughter capacity. Hog slaughter is usually lowest the summer of every fourth year. During the summer of 1996, weekly hog slaughter dropped below 1.7 million head for 16 consecutive weeks. During these times, hog packers tend to lose money (and producers make outstanding profits) on each hog they kill.
3 Hog packers have earned good returns the last two years. Hog slaughter set a record of 101 million head in 1998 and was expected to exceed that figure for 1999. For those two years, packer profits far exceeded producer returns.
4 Historically, meat packing has not been a very profitable business. Meat packing is a low-profit enterprise when compared to other industries. According to the latest Value Line Investment Survey (Value Line analyzes investments and provides market advice; its Web site is www.valueline.com), the index of total returns for buying stock in all major businesses for the five-year period ending in July 1999 was 128.5%. The stock of four major players in the packing industry performed well under that five-year average, as follows:
* IBP inc., 71.7%
* ConAgra, 81.3%
* Geo. A. Hormel, 96.5%
* Smithfield Foods, 102.5%
In contrast, stock in grocery store chains, Kroger's total return was 323% and Safeway's was 770%.
Returns can change. But they can also be indicative of the future.
In 1980, the largest hog packer was Wilson Foods, followed by John Morrell, Armour and Sipco. None of these companies has survived independently.
5 Packers have been more successful at raising hogs than hog producers have been at packing. Smithfield, Cargill and Seaboard are packers that have successfully acquired large numbers of hogs. Tyson Foods and Premium Standard Farms (PSF) are large producers that have gotten into packing. Tyson's sold its Marshall, MO, slaughter plant to Excel after 32 months of operation. PSF filed for bankruptcy protection two years after opening its Milan, MO, slaughter and processing facility.
6 The number of hog slaughter plants has been declining. The number of federally inspected hog slaughter plants has dropped 45% in the last 17 years. The decline has hit small and medium-sized plants the hardest. The number of plants slaughtering 1,000-4,000 head/day has declined by 85% since 1981. The number of plants slaughtering more than 6,000 head/day has climbed by 190%.
7 Packing plant size is on the rise. For two decades, the average number of hogs slaughtered in federally inspected plants has been steadily rising. In 1981, 21.1% of federally inspected hog slaughter took place in plants killing more than 6,000 head/day. In 1998, that figure had risen to 85.2%. The number of smaller plants is declining, while the number of large plants is growing.
In short, economies of size encourage growth of bigger plants and ownership of multiple plants. One main reason is the export market for pork. A large packer killing 30,000 or more hogs/day can more easily justify opening a foreign trade office than a small firm slaughtering a few thousand hogs per day.
8 The packer share of the consumer pork dollar is decreasing, too. Kill and cut packers captured 31.2% of the consumer pork dollar in 1970. That plunged to 24.9% by 1980. Their share plummeted to 14.6% by 1990. It rebounded to 18.3% in 1998.
9 If you think packers will be very profitable in coming years, buy stock in Smithfield Foods. "There is a less risky way to take advantage of packer profits than investing in a start up firm to kill hogs - simply buy the stock of one of the major pork packers," says Plain. "It takes a great deal of money to construct and operate a hog slaughter facility."
One objective of a packer is to buy hogs cheap. How likely is it that a startup packer will be able to outbid established packers and return a profit on investment?
10 If you are concerned about getting your hogs killed in the future, sign a long-term marketing contract with a major packer. Almost half of 2000's hog production has already been assigned to a long-term contract with a packer, according to Plain.
"We're pooling producer's resources to increase profits by doing business in a way to take advantage of domestic and global demand opportunities." That's how David Meeker describes a newly established, national producer-owned cooperative. Meeker, Ohio State University, is a member of the interim board.
The cooperative will bring together independent producers in hopes of capturing more of the consumers' dollars. Producers share of the retail dollar has continued to decline and our goal is to capture more of that value, says Meeker.
The National Pork Producers Council Board of Directors voted last year to foster development of a national producer-owned cooperative.
A task force was established with the charge to create an independent, producer-based cooperative that would operate as a separate entity from NPPC.
The national co-op is now a legal entity and has a seven-member interim board. The board members are: John Adams, Snow Hill, NC; Brad Bradley, Del Rio, TX; Jim Lewis, Welcome, MN; John Medley, Springfield, KY; David Meeker, Columbus, OH; Linden Olson, Worthington, MN; and Jack Rundquist, Butler, IL.
The mission of the co-op is to create a national, producer-owned cooperative that will coordinate production, processing, distribution and marketing to optimize opportunities and profits for its members.
The criteria of the co-op are as follows:
* Flexibility to react to industry opportunities.
* Control sufficient number of hogs to attract alliance partners.
* Maximize returns on producer investment.
* Ability to react to rapidly changing markets.
* Assurance that market opportunities are actively sought.
* Access to key markets.
* Maximize cooperation between the national and regional cooperatives.
* Respond to consumer needs and desires.
* Establish a proactive position in the pork industry.
* Serve as an investment vehicle.
Meeker cautions producers to be realistic about their expectations, though they are counting on strength in numbers. Linden Olson agrees, stating: "We can't be all things to all people."
The national co-op will operate as an umbrella organization, bringing together individual producers, other cooperatives and producer groups. It will foster information flow among its members.
Qualifications for membership are still being fine-tuned, however, memberships will be available within the next 30-60 days. And, within the next six to nine months, the co-op hopes to establish business opportunities with existing cooperatives. Various alliances could be established before the end of the year. That may offer producers a chance to participate in the market in ways other than raising hogs.
Within a span of one to two years, the plan is to create new business ventures, which might include joint ventures with existing meat companies, foreign partners or niche markets. Construction of producer-owned plants could begin within three years if attempts to form joint ventures or other transactions fail to achieve co-op goals.