There may be no more contentious issue in the U.S. livestock industry than that of packer ownership. This election year, you're sure to hear plenty of campaign rhetoric condemning it.
The thing is — somewhere in the neighborhood of over 60% of all hogs are sold on some type of contract or marketing agreement. Now, I've known pork producers all of my life and I find it hard to believe that over 60% of them would participate in an activity that wasn't beneficial to them.
And, if packers are taking unfair advantage of pork producers through those contracts, they're doing a darn poor job of it. According to a recent paper by John W. Skorburg, an agricultural economist and policy advisor for the Heartland Institute, “the meat industry net profit margins hovered around 2.3% in 2002. Even Smithfield (Foods), the largest and most integrated of the packers, had a net profit margin of only 0.3% in 2002, well below it's 2.0% five-year average.”
Unfamiliar with the Heartland Institute, I turned to their Web site, www.heartland.org, where it is described as “a genuinely independent source of research and commentary …. It is not affiliated with any political party, business or foundation. Heartland Institute has been endorsed by some of the country's leading scholars, public policy experts and elected officials.”
I'm not convinced that packers should own hogs, but I certainly recognize their need for a consistent supply of quality hogs to sustain their product lines.
Skorburg's report, “Packer Ownership of Hogs: Economic and Political Ramifications,” and a companion op-ed piece, “Why Packers Should Own Livestock … and Why Politicians Won't Let Them,” discuss the pros and cons in the debate.
“The opponents of packer ownership are either misinformed or have simply not looked at the issue beyond the political rhetoric,” he writes. “Specifically, they perpetuate a distorted picture of what packer ownership stakes in livestock means.”
For some of you, I know, them's fightin' words. But remember, the Heartland Institute's commitment to remaining open-minded, objective and politically neutral.
Skorburg offers six principal conclusions:
National legislation to ban packer ownership is unlikely to win support.
Low profit margins, foreign competition, pressures for greater quality control and better risk management have driven trends toward corporatization, consolidation and vertical integration in the pork industry.
Organizational trends have fostered new product introductions, improved productivity and higher sales. Thus, contractual relationships are beneficial to both parties.
Vertical integration by packers has not led to lower prices for independent producers nor has it resulted in high profits for packers.
The environmental impacts of large-scale pork production facilities differ from those of smaller facilities, but probably are no worse.
A ban on packer ownership of livestock would be tremendously expensive to the industry and to consumers, resulting in fewer specialty products and lost market share to foreign suppliers.
Skorborg explains that ownership, either outright or indirectly through contracts, “enables packers to create new products, avoid underutilization of facilities due to supply interruptions, and avoid uneven quality of raw materials.”
The kicker is this: “Heavier packer investment in partnerships has supported the development of 490 new beef products for retail sale during the past 10 years. This value-added impetus is credited with some of the increase in demand for beef during the last two years,” he states.
We all know that per capita pork consumption has been stagnant for some time. And, pork's inability to capitalize on the recent high-protein diet craze is a common concern. Would the rollout of 40-50 new pork products per year help?
Laying it on the line, Skorburg says: “Packers seek a more consistent quality of raw material at a lower cost of inspection and rejection once the material is acquired; producers seek to be paid more, of course, but in particular for carcasses of higher quality due to more expensive inputs. Since these agreements are voluntarily entered into, and since there are no barriers to competition that might protect one party or the other, it must be concluded that such agreements are mutually beneficial.
“Packers claim ownership is necessary to attract more capital to the industry and raise product quality in order to compete with the more centralized poultry industry and with livestock products imported from Canada, Brazil and elsewhere,” he adds.
The harsh reality is, we need to get along to get along. One segment of the industry cannot survive without the other. The margins are far too thin at both ends of the pork chain to think otherwise.