Smithfield overtakes IBP as largest pork packer in the U.S.

Changes in the pork packing industry abound. The industry is becoming increasingly concentrated and integrated.

But experts looking at the changes do not believe there is cause for great alarm. A report prepared by John Lawrence, John Schroeter and Marvin Hayenga of Iowa State University (ISU) says the industry is still far away from a monopoly.

More Concentration Pork packers continue to concentrate processing among the very largest firms. The four largest packers now process 57% of the nation's hogs versus 32% in 1985. This concentration remains lower than in the cattle business. However, the four largest cattle packers process 80% of the market.

The four largest pork packers have changed over the years. Smithfield is now the largest pork packer in the U.S., recently exceeding IBP, now the second largest pork packer (Table 1).

Smithfield has been on a heavy expansion schedule since 1994 when they were ranked fourth. They built the largest pork packing plant in the world in North Carolina, which processes 26,000 head/day. They also acquired the John Morrell plant in Sioux Falls, SD. Their pork processing share is now 19% of the market.

IBP's growth has been slower. They added a new Indiana plant but closed a Council Bluffs, IA, plant last year. They process 17% of U.S. hogs.

Swift (ConAgra) holds the third spot with a 9% market share and Excel (Cargill) at fourth also with 9% market share.

Other pork packers have changed size, according to the ISU report. Farmland Foods increased in size while Hormel decreased. Seaboard entered the pork processing business in late 1995 with a plant in Oklahoma. They've recently moved to a double shift.

In 1994, the flood of hogs on the market caused packers to hit their processing capacity limits. This in turn led to sharply lower hog prices. Since then, packers increased plant capacity 15%. The ISU experts expect capacity to remain ahead of hog supplies for many years.

Packer Costs The packer's share of the farm-to-wholesale margin has averaged about the same since 1980, according to the ISU report. Meanwhile, the wholesale-to-retail sector's margin has, on an average, steadily increased.

The report states packers are experiencing better efficiencies and stagnant nominal wages. They can operate their plants efficiently with low-skilled labor and high turnover rates, the report explains.

Between 1987-92, wages in meat processing were stable or fell. This is shown in a comparison of meat industry wages to manufacturing wages. In 1987, meat processing wages were 82% of manufacturing wages, but fell to 71% by 1992.

The report says the cost of hogs amounts to 70% of all fixed and variable costs for a packer. Other costs of operation from 1996-97 were $20/head for two-shift plants and $22/head for single-shift plants. Labor accounts for about half of the variable and overhead costs.

Filling plant capacity greatly affects packer profitability. They operate cheaper at optimum capacity.

The need to keep capacity filled helps drive the trend to integration. It also helps push packers to form long-term hog supply contracts with pork producers, the ISU report adds.

Increased Integration One trend among packers is more integration. Smithfield is the largest integrated packer - currently believed to rank third in U.S. hog production. It also is tightly coordinated with other large producers, the ISU report says.

Seaboard has constructed a large hog operation around its packing plant in Oklahoma.

Other integrated packers include Excel, Farmland Foods, and Premium Standard Farms, which recently had a majority stake purchased by Continental Grain Co.

Tyson, one of the largest pork producers in the country, attempted integration in the pork business. They bought a slaughter plant in 1993 and sold it two years later.

The report also noted the large number of hogs imported into Iowa for processing at in-state packers. In 1996, 8 million hogs were brought in by packers to fill capacity.