The Missouri Swine Audit: |
The Missouri Swine Audit: |
|
2 HISTORICAL ECONOMIC, STRUCTURAL AND COMPETITIVE TREND ANALYSIS Pork is the most widely consumed meat in the world and the U.S. is the third largest producer after China and the European Union. Historically, Missouri has produced about five to seven percent of hogs and pigs in the U.S. In recent decades this percentage has been declining as production in Missouri declined and production expanded dramatically in certain regions of the country, but Missouri’s share of hog production seems to have stabilized to around five percent. As production systems evolved, many producers have exited the industry while others have expanded. In the process, the areas of the state with the highest levels of production have changed, but the overall importance of the industry has been maintained. Pork production practices and technologies are very transferable and from a production efficiency standpoint, Missouri’s industry mirrors that of the U.S. Like producers in all parts of the country, Missouri producers have become more efficient by intensifying production, increasing pigs per sow, increasing the number of pigs weaned, increasing feed efficiency and raising larger animals. 2.1 Economic Importance of Missouri’s Swine Industry In 2005 there were over $616 million worth of hogs and pigs produced in Missouri, representing 11 percent of all commodities produced, according to the National Agricultural Statistics Service (NASS). While this estimate of value is an appropriate measure of the value created through swine production, it does not reflect the total economic impact of the swine industry in the state. As farmers buy inputs and services and spend receipts on other items, considerable economic activity occurs. Transactions related to the farmers purchasing inputs such as feed and labor for the farm are generally referred to as “backward” economic linkages associated with the activity. The cash spent on inputs and labor is subsequently spent by the input suppliers and their employees generating economic activity several times over. When farmers sell output, in this case hogs and pigs, the economy is affected via “forward” economic linkages, as value is added to the primary product. A forward linkage illustration could be one where the worker at a processing plant earns a wage butchering hogs, then spends the wages in his local community, which contributes to profits and wages of other enterprises in the economy. To better capture these forward and backward linkages, this study utilizes an input/output (I/O) analysis approach to estimate the economic impact of the swine industry in Missouri. I/O analysis is a widely used and generally accepted approach to evaluating the economic impact of a particular sector of the economy. To conduct this analysis, IMPLAN software product and database Version 2.0 was used. IMPLAN is a widely used I/O model, originally developed by the U.S. Department of Agriculture. This software estimates the direct effects, indirect effects and induced effects of an economic activity. In this study, direct effects refer to the impacts (e.g. increase in employment or input purchases) specifically related to production of hogs in the state. The indirect effect refers to secondary economic impact that results from swine producers purchasing from other industries, which in turn purchase from other industries (e.g. additional input purchases to produce additional output). Induced effects are the impacts on all local industries that results from the expenditure of increased household income generated by the direct and indirect effects of the economic activity in question. The total cash receipts associated with the sale of hogs and pigs produced in the state in 2005 is used as the starting point for an IMPLAN I/O analysis. This value, totaling more than $616 million, represents the total value of raised or purchased animals and breeding stock. It is the direct effect of swine production on the state’s economy. The results of the analysis are presented in Table 1. The results are presented in terms of Combined Output, Value Added and Associated Jobs. The Combined Output represents the estimated cumulative dollar value of direct, indirect and induced transactions associated the swine industry. These amounts include the basic sales (direct effect) of animals, but also include all purchases of inputs, transportation, services and consumer purchases. It includes the cycles of purchases by workers in industries supporting swine farmers who use their earnings to purchase goods and services from other industries. The Combined Output for each industry can be viewed as the amount of business or sales that would be lost in each sector, if swine production were removed from the state’s economy. The Total Value Added estimates represent the estimated dollar value of wages and salaries including benefits, self-employed income, interest, rents, royalties, dividends, profits, plus excise and sales taxes. This measure would roughly represent the contribution of the swine industry to the gross domestic product of the state. The employment results or Associated Jobs are the estimates of jobs that are associated with the dollar amounts of commerce in each industry. The combined effects (direct, indirect and induced) of the swine industry in the state are estimated at $1.1 billion. The bulk of the economic activity is associated with the direct effect of the production itself ($616 million) which is included in the aggregated category of Agriculture. The remainder of the economic impacts attributed to the Agriculture sector is indirect and induced effects that include input purchases by swine farmers but also spending of wages and profits on agriculturally related goods. As expected, most of the economic activity is concentrated in the Agriculture sector. The remaining categories reflect the economic linkages to other sectors or industries in the economy. The upstream and downstream expenditures in wholesale/retail trade, finance/insurance/real estate and service sectors are most significantly affected by the presence of the swine industry. Similarly, the Associated Jobs column reflects the IMPLAN estimates of the levels of employment associated the existence of the swine industry in the state. As expected, most of the jobs (29,517) are concentrated in the Agriculture sector. Approximately 65% of these jobs are estimated to be directly related to swine production with the remainder associated with other facets of agriculture. Again, in terms of jobs, the wholesale/retail trade, finance/insurance/real estate and service sectors benefit most from the presence of the swine industry. The Value Added measure of the impact estimates can be thought of as an estimate of the “new money” brought into the state’s economy through the existence of the swine industry. This measure summarizes the profits, rents, interest, dividends, indirect business taxes and most importantly, the wages paid through the economic activity in question. Value Added measures the economic activity generated over and above the cost of the inputs used in an activity. By this measure, it is estimated that the swine industry contributes approximately $314 million to the state GDP.
Table 1. Economic Impact of the Swine Industry in Missouri*
One of the biggest leakages in the economic system related to swine production is the fact that the majority of hogs finished in the state are sold to be slaughtered outside of Missouri. Thus while the receipts from the sales accrue to Missouri’s economic ledger, all the wages and value added to the hogs, including the subsequent economic “ripple effects” accrue to other states. The new Triumph Pork plant in St. Joseph has the singleshift production capacity to process 1,000 hogs per hour or 4 million head per year. With the new processing plant on line in St. Joseph, MO as of January 2006 and another similar plant approved for construction in East Moline, IA, the swine industry in Missouri will make an even larger contribution to the state’s economy. 2.1.1 Historical Perspective on the Missouri Swine Industry Historically, Missouri has always been a major hog producing state. Because of settlement patterns, up the major rivers of the continent, Missouri was settled earlier and relatively speaking had more farmers than surrounding states west of the Mississippi River. In many respects, Missouri was simply a more desirable place to settle and farm because of the presence of river transportation, available land with timber for fuel and construction material and a more rapidly emerging railroad infrastructure. These small farms were diversified in every respect, and hogs fit well into the 19th and early 20th Century farm. It was expensive and difficult to transport corn and like today, pork production was a way to capture more value from grain. At the beginning of the 20th Century most farms had hogs and Missouri was no exception. Hog production grew rapidly in Missouri in the last quarter of the 19th century in response to the emergence of a large concentration of packinghouses on the east and west borders of the state. The invention of the refrigerated railroad car in 1869 allowed the meat packing industry to move west. The railroad was key to transportation and multiple lines intersected at East St. Louis, Kansas City and St. Joseph. The opening of the Hannibal Bridge in Kansas City connected the “West Bottoms” to the major markets in the east. In 1870 Philip Armour opened his first plant west of Chicago in Kansas City, Kansas. The presence of cheap labor in the form of ex-slaves and Eastern European immigrants, combined with the refrigerated car and the junction of numerous railroads in Kansas City and St. Joseph gave Northwest Missouri a major strategic advantage in hog and pork production. The railroads established large stockyards in Kansas City and St. Joseph to attract meat packing business and by 1900, there were more than a dozen meat packing plants in the two cities. In 1900, more than 3,000,000 hogs a year were being processed in Kansas City plants alone. Hastened by the disastrous flood in 1951, the packing industry was all but gone in Kansas City by the 1970’s and only one significant plant remained in St. Joseph. In 1993, the last plant in Northwest Missouri closed. The infrastructure in the area was old and outdated. A decade’s long period of low profitability and labor strife had simply done the industry in. Not long after the packing industry had emerged in Northwest Missouri and Kansas City, Kansas, large expanses of the prairie had been put to the plow in Iowa and Nebraska. By the 1950’s rapidly improving highway transportation and refrigerated trucks and the much enlarged markets for meat in the rest of the country had dramatically reduced the importance of the railroads to the meat industry. The meat packing industry completely decentralized and new packing plants were being built closer to the heart of the emerging Corn Belt. Missouri currently produces over 4% of the hogs and pigs in the U.S. (Table 2). In the year 2000 Missouri had 2.9 million head of swine, up from 2.8 million in 1990. In the U.S. and Missouri, hog inventories peaked around 1970 and the decline has only reversed in the last few years. From 1970 to 1990 Missouri lost 46 percent of its hog inventory while the U.S. declined by about 20 percent. Since 1990, Missouri has shown a slight decline in hog numbers (-1.8%) while the country has increased over 23 percent.
Table 2. Comparison of U.S. and Missouri Swine Inventories,* 1920-2005 1
The value of Missouri’s hog production has decreased overall since the 1990’s, representing approximately $616 million in 2005 (Figure 1), down from $741 million in 1997. This is a 17% decline in the value of Missouri’s hog and pig production from the high prices in 1997.
Figure 1. Value of Missouri’s Hog Production2 2.1.2 Changes in the Missouri Swine Inventory Trends in the geographic distribution of swine in Missouri are illustrated in Figure 2. The included regions are those defined by the National Agricultural Statistics Service. All regions show a decrease in swine inventory during the decade of the 1980’s, however four of the regions report increases in swine inventory numbers in the 1990’s. The Northwest (NW) and North Central (NC) regions of Missouri have over 40% of Missouri’s swine inventory in the year 2002, according to the Agriculture Census of 2002. There was a sharp increase in the number of pigs from 1990 to 2002 in both the NW and NC regions, an increase in 68% and 165%, respectively. This increase in pigs can be attributed to the entrance of the pork producer Premium Standard Farms. Hog inventories in the West (W) region increased from 1990 to 2002 with the entry of Murphy Family Farms. While inventories in the Northeast (NE), Central (C), East (E), South Central (SC) and Southeast (SE) decreased dramatically from 1990 to 2002, the above increases in inventories essentially kept hog inventories steady in the state from 1990 to 2002.
Figure 2. Changes in Missouri Swine Inventory by National Agricultural Statistics
Service Regions in the Last 20 Years3 2.1.3 Missouri Relative to Region and Nation Missouri is one of the top ten states in swine production in the U.S. It is seventh in the nation, after Iowa, North Carolina, Minnesota, Illinois, Indiana and Nebraska. Missouri experienced growth in swine herd from 1990 to 2000 as did four nearby states (Iowa, Oklahoma, Kansas and Texas). Oklahoma had a dramatic increase due primarily to Seaboard Farms moving into the state. Adjacent states experiencing a decline in inventory numbers were Illinois, Kentucky, Tennessee and Nebraska. Table 3. Hog and Pig Inventory of Missouri and Surrounding States Compared to U.S.4
The annual hog marketings in the surrounding states show much of the same story, with Iowa dominating the markets with 27.8% of the U.S. Market (Table 4), followed by North Carolina, Minnesota, Nebraska and Missouri.
Table 4. Annual Hog Marketings, Selected States and U.S.5
4 National Agriculture Statistical Service 2.2 Swine Production Trends The U.S. swine industry has evolved in a dramatic fashion over the last decade. Every year, fewer breeding animals are managed by fewer farmers producing an increasing amount of pork. The efficiencies that have led to this phenomenon have come from every facet of production. The driver behind this efficiency trend is the fact that the overwhelming majority of the pork produced is a commodity and producers must continually gain efficiencies to lower costs to maintain margins. 2.2.1 National and Regional Trends Total U.S. pork production has increased dramatically since the 1970’s. In 2005, the U.S. hit an all time high, producing over 20 billion pounds of pork (Figure 3). This increase in pork production reflects a massive adoption of capital intensive, specialized production systems, improved breeding and genetics and the desire of packers to kill ever larger animals.
Figure 3. Total US Pork Production, Millions of Pounds6 Pork consumption has remained relatively steady for 20 years (Figure 4). In 2005, the average American consumed almost 47 pounds of pork, boneless weight per year. Many industry observers predict increases in per capita consumption as a number of eating trends appear to indicate that consumers are less hesitant than ever to eat increasing amounts meat.
Figure 4. U.S. Per Capita Pork Consumption, Boneless Weight7 The following maps (Figure 5) depict the changes in inventory of breeding animals from 1992 to 1997 and 1997 to 2002. The map illustrates the major decrease in swine farms and the shift in the location of much of the nation’s hog production over the period of 1992 to 1997. From 1992 to 1997 large numbers of Corn Belt producers exited the industry (each red dot represents 500 head of breeding stock). Over the same period, larger specialized hog operations entered the industry or expanded close to new and existing slaughter plants. The most notable expansion occurred around new slaughter facilities in North Carolina, Oklahoma and Northern Missouri. The period from 1992- 1997 was essentially a period of relocation of the breeding herd as the net loss over the period was less than 100,000 animals for the country as a whole. From 1997–2002 there was continued relocation but also a decline in the breeding herd. Increases continued in the key regions of growth present in the previous five years with additional growth in new areas of Western Iowa, Southern Illinois and Pennsylvania. Most striking from 1997-2002 was a number of breeding animals taken from the national herd were not replaced elsewhere, resulting in a decrease in breeding animals of almost 700,000 head.
Figure 5. Change in Inventory of Breeding Swine8 Figure 6 depicts the changes in the overall hog and pig inventory over the same two periods as Figure 5. Not surprisingly, the location of the pigs followed the relocation of the breeding herd. Hog inventories increased dramatically in Southern Minnesota, Northern Iowa, North Carolina, Oklahoma and Northern Missouri. The establishment of substantial farrowing operations by Murphy Family Farms in Western Missouri was a notable exception. Figure 5 showed a substantial increase in breeding inventory in that region, but the pigs from these sows are almost entirely exported from Missouri to Iowa. While in Figure 5, 1992-1997 was a period of slight decrease in the breeding herd, the dynamics of the restructuring of the industry are apparent in Figure 6. While the breeding herd declined over the period, the new, intensive farrowing operations that were established had much higher productivity than the exiting operations. As a result, the actual hog and pig inventory increased dramatically over this period. Another contributing factor to the declining breeding herd and expanding hog and pig inventory was the emergence of the Canadian pig trade which brought large numbers of pigs into the U.S. The lower map of Figure 6 reflects the eventual slow down in new expansion in the wake of the price collapse of 1998. From 1997-2002, the total inventory of hogs and pigs had a net decline of about three quarters of a million head.
Figure 6. Changes in the United States Hog and Pig Inventory9 The economic importance of the swine industry in rural America is reflected in Figure 7. The value of hogs and pigs represented a significant proportion of the value of agriculture products sold in many of the counties of Missouri. The importance of the swine industry in rural Missouri appears very comparable to most of the Corn Belt in terms of value of agricultural sales.
Figure 7. Value of Hogs and Pigs as a Percent of Agriculture Products Sold, 200210 2.2.2 Size of Farms Over the last several decades there has been a steady decline in the number of farms with hog enterprises in both Missouri and the U.S., however, as detailed in Figure 6, the inventory numbers of livestock produced has not followed this same trend. Figure 8 shows the decline in hog operations in the state but a hog inventory that has leveled off in recent years. Hog numbers have held steady in the state mainly through the growing size of existing operations and the establishment of a number of large integrated operations that have entered the industry in the last 15 years.
Figure 8. Changes in Missouri Pork Industry, Inventory* vs. Operation Numbers11 The decline in the number of hog farms is primary related to the exit of the producers in the 100–500 head category in terms of farm size. Over time as farmers near retirement they are often faced with the choice of either making very large, long term capital investments if they want to attain efficiencies or exit the industry. This trend in Missouri mirrors the national trend in that many costs associated with production rise with inflation while hog prices have continued to fall relative to other prices in the economy. This classic cost price squeeze has led many producers to greatly increase the size of operations to gain economies of scale in their operations. Figure 9 shows a steady increase in the percent of farms with 500 or more head of hogs.
Figure 9. Percent of Operations vs. Size of Operations in Missouri12 The result of the “scaling up” and intensification of hog production is presented in Figure 10. Operations with less than 500 head of hogs represented 50 percent of the total state hog and pig inventory in 1990. Today, the small producers raise less than ten percent of the hogs in the state. Farms with over 500 head now produce the overwhelming majority Missouri’s hogs.
Figure 10. Percent of Inventory vs. Size of Operations in Missouri13 2.2.3 Swine Numbers The top hog producing counties in the state of Missouri are reported in Figure 11. Nine counties have greater than 80,000 pigs. Production in these counties is primarily driven by the operations of Premium Standard Farms, Smithfield and Excel. The traditional areas of hog production in the state are those counties bordering and to the north of the Missouri River, typically having inventories of 10 to 50 thousand head.
Figure 11. Swine Numbers in Missouri Counties14
2.2.4 Total Pork Production Over the last 25 years the numbers of slaughtered hogs has steadily trended upwards (Figure 12). In 2004 there were 98,831,000 gilts and barrows slaughtered in federally inspected plants in the U.S.
Figure 12. Barrows and Gilts Slaughtered in U.S., Federally Inspected15 In Missouri, gilts and barrows slaughtered in federally inspected plants also are trending upwards (Figure 13). In 2004, there were approximately 2 million gilts and barrows slaughtered, down from 3.3 million head in 1996. With the opening of the Premium Standard Farms slaughter facility in Milan, Missouri, federally inspected slaughter in Missouri increased from 1990 to 2000. This slaughter capacity helped offset the closure of the plant in St. Joseph and the elimination of the kill floor at the Excel plant in Marshall. Barrows and gilt slaughter in Missouri will increase significantly in coming years as a new state of the art plant in St. Joseph was opened by Triumph Pork, in January 2006. The facility has a single-shift production capacity to process 1,000 head of pork per hour or 4 million head per year.
Figure 13. Barrows and Gilts Slaughtered in Missouri, Federally Inspected16 The average dressed and live weights of barrows and gilts has gradually trended upwards (Figure 14). The average live weight in 2004 was 267 pounds compared to 25 years ago at 242 pounds. This gradual increase is also reflected in dressed weights. In 2004 the average dressed weight was 199 pounds compared to 170 pounds, 25 years ago. Currently the average dressed out percentage is 74.5%, up from 70.2% in 1980. The dressed out percentage reflects improved genetics and a highly efficient processing infrastructure. The improving genetics, a relatively long period of favorable feed costs and the processing sector’s cost incentives makes the production of larger animals a major driver in the industry’s success. Some swine industry observers predict that carcass weights could approach 225 pounds, dressed weight, in coming years if feed and meat price relationships hold. Others expect moderation in carcass weights as issues arise related to the size of various cuts such as loins and hams becoming excessively large.
Figure 14. U.S. Average Live and Dressed Weights of Barrows and Gilts, Federally
Inspected17 2.2.5 Pork Production per Sow In the last 10 years there has been a steady improvement in litters per sow per year in both the U.S. and Missouri (Figure 15). In Missouri there was a drastic improvement between the years 1993 and 1998. Currently Missouri has higher numbers for sows farrowing per average breeding herd inventory in a year than the U.S. This increased production per sow represents more pigs per year produced from each breeding unit. Thus these higher production averages signifies an increased opportunity for economic growth. This is primarily indicative of the high levels of management, investment and specialization that characterize much of the “new” swine industry in the state. The “other side of the coin” is that this trend also reflects an exit of large numbers of less efficient operations in the state. The trend is important as it seems to indicate that Missouri’s swine industry is comparable and competitive in relation to the U.S. swine industry.
Figure 15. Litters per Sow per Year in the U.S. and Missouri18 Similar efficiency gains are observed in pigs per litter in Missouri in recent years. Greater pigs per litter numbers are indicative of improved efficiencies in breeding herds (Figure 16). The national and Missouri averages were equivalent in 2005 at 9 pigs per litter. Both nationally and in Missouri the averages are up from slightly over 7 pigs per litter in the 1970’s. This increase in production efficiencies can also be reflected in greater profits for breeding production systems. Again, this indicates that there is no apparent difference in production in Missouri sow herds relative to the rest of the U.S.
Figure 16. Pigs Per Litter in the U.S. and Missouri19 Missouri compares very well to surrounding states averages for pigs per litter (Figure 17). This places Missouri in a highly competitive position in yearly pig production numbers. Arkansas statistics show more than a 0.4 pig per litter efficiency edge over the other states in Figure 17. This difference is primarily due to the fact that the Arkansas sow herd is almost entirely comprised of very large, specialized sow farms.
Figure 17. Pigs per Litter in Surrounding States, 200520 2.2.6 Missouri Pig Exports One of the greatest potential opportunities for the Missouri swine industry is that a substantially large number of pigs produced in the state are exported rather than finished in Missouri. Thus a supply of pigs exists that could be finished in the state, creating increased revenue for Missouri farms and economic activity for rural communities. Figure 18 illustrates the trend in feeder pig exports from the state in recent years. In 1990 only about 500,000 pigs left the state to be finished in other states. In recent years however, pig exports from Missouri have exceeded 3,000,000. Missouri has always been a net pig exporter. Historically, southern Missouri in particular was a very favorable place to operate sow enterprises with outside production, land and labor was relatively cheap and feeder pig production did not require a great deal of feed. This all changed as technology and new practices evolved which effectively moved production indoors and made climate and weather irrelevant. Confinement facilities reduced labor requirements per sow which also diminished any competitive advantage of southern Missouri. In recent decades, however, the farms in Missouri that continued to produce pigs have made substantial capital investments to expand and achieve efficiencies and have adopted ever improving practices and genetics to create the state’s modern and competitive weaner/feeder pig production sector. Over the same period, however, many farms in Missouri that had previously purchased many of these pigs, exited the industry, as detailed above.
Figure 18. Missouri Yearly Feeder Pig Out Shipments21 Currently Missouri is the sixth largest swine producer in the country. Iowa and Illinois, bordering states, are ranked number one and number four respectively in swine production. These two states also receive over 80 percent of the pigs exported from Missouri. The swine industries of importing states are impacted positively; the complementary industries to swine production, such as the feed mills and processing plants, see increased business and can subsequently increase the number of jobs that they are able to offer thus, experiencing economic growth.
Figure 19. Feeder Pig Out Shipments, Percent of Total Missouri Out shipments to Each State, 200322 More detail of the pig exports is presented in Figure 20. The map details which counties are producing pigs that are exported and where those exports are being shipped. As mentioned in reference to Figure 19, the majority of pigs exported from Missouri go to the nearby states of Iowa and Illinois. However, a considerable number of pigs are shipped as far as Minnesota and South Dakota. As would be expected, pigs leaving the eastern part of the state go east and north and pigs from western Missouri tend to go north and west.
Figure 20. Missouri Pig Exports by Origin County and Destination State, 200423 2.3 Cost of Production Except for those meat packing companies in the U.S. that own or control their own pork production through contracting, swine producers are overwhelmingly “price takers”. In other words, they are selling a commodity and essentially take the price the market or packers offer the day of sale. In any commodity business, the producer must bring their commodity to market per the desired specification of the buyers, but almost entirely affect their own bottom line through cost control and reduction. There are essentially two ways that hog producers lower costs. First, farmers work to minimize the price they pay for inputs (procurement) and secondly farmers strive get the most profitable levels of output from the inputs they use (efficiency). A number of efficiency measures have been discussed above, such as attaining higher number of pigs per litter. Other efficiency goals include reducing mortality, low feed to gain ratios, lowering days to market and reducing non-productive sow days. High levels of efficiency translate into more pounds of pork at the farm gate over which to divide their costs of production. For an individual producer there are efficiencies that can be attained in the short run, this entails doing the best they can, given the facilities, genetics, and feed availability they are endowed with today. In the long term, farmers can improve their genetics or change production systems and adopt new technology and management practices. Often farmers make choices to reduce costs that involve substituting one type of input for another. For example, a capital intensive investment in new facilities may improve animal performance and greatly reduce labor requirements. Since efficiency is primarily a matter of adoption of technology, capital investment and a continuous drive to employ best management practices, much of the equation of cost minimization is not affected by location. This is to say that many inputs such as capital, structures, husbandry practices and genetics cost the same in Iowa and Missouri. But in the long run, geography does affect efficiency if other cost factors associated with location reduce profits; as ultimately profit is needed to pay for new technology, genetics and improved structures. The following section examine some of the aspects of production costs that may vary by location, such as the cost of farm real estate, real estate taxes, feed costs, transportation and farm labor. Another location specific factor that can significantly affect costs of production is government regulation. 2.3.1 Farm Real Estate Values The average value per acre of farm real estate along with the percent change from 2000 is shown in Figure 20. The cost of farmland in Missouri is significantly less than in other major hog producing states. At first glance this may seem to provide Missouri swine producers with an advantage in production. However in reality, differences in land prices may only signal that Missouri has no disadvantage in this area. In modern swine production, the investment in land directly associated with the production unit is negligible relative to the total fixed investment and total cost structure of the operation. For example, to site a 2,000 sow farrow to finish operation may require 50 acres of land or less. If the cost differential is amortized over the life of the facility and translated into cost per hundredweight sold, it would equate to only a penny or two per hundredweight sold over the life of the operation. There can be drawbacks to inexpensive land as well. The price of bare farm land is an excellent indicator of productivity. Highly productive land, which supports a cornsoybean rotation for example, will utilize much higher levels of manure nutrients per acre. Consequently, a hog operation on or near highly productive land will require fewer acres for nutrient management and likely have a lower variable cost of application when fewer acres are covered.
Figure 21. Farm Real Estate Percent Change from 2000-2005 and 2005 Values24 2.3.2 Agriculture Real Estate Taxes Average real estate tax rates for the United States are shown in Figure 21. Missouri real estate tax rates are much lower than in other major swine producing states. Again, the real estate taxes on a modern swine operation are not a major cost item but they are not insignificant. The lower property taxes in Missouri relative to Iowa, could easily translate into a five to ten cents per hundredweight cost advantage for Missouri swine producers.
Figure 22. Average Agricultural Real Estate Taxes per Acre in 199525 2.3.3 Feed Costs The biggest single expense in swine production is feed costs. The prices of corn and soybean meal drive the major component in the cost of hog production. The cost of feed is very much driven by location specific factors, primarily local corn production and supply. A “rule of thumb” for translating corn costs to hog production is based on a 3.0 feed efficiency ratio. A ten cent higher corn cost per bushel will translate into a 50 cent increase in the cost of production per hundredweight, for finishing a feeder pig. For a producer selling 260 pound hogs, that increased cost of production and will decreased revenue by about $1.30 per hog. Figures 23 and 24 depict the corn price basis in the U.S. Basis refers to the difference in the price of a commodity in one place relative to another—typically basis is expressed as the difference in price at a given location relative to the nearby futures price on the Chicago Board of Trade. Basis is used here to compare the relative cost advantage or disadvantage in one location of production versus another. While local basis changes day to day to reflect regional supply and demand conditions, corn prices tend to move higher south and west from the Corn Belt, especially south along the Mississippi River. Because of a record crop in 2004, Figure 23 in many ways is a best case scenario for corn costs in Missouri, but it does show that corn prices, and thus a large portion of feed costs for Missouri swine producers, can be very similar to those of northern Iowa and southern Minnesota producers. The lower panel, Figure 24, illustrates a more “normal” crop year and is a basis map for May of 2003. As can be seen in 24 corn prices in the northern tier counties of Missouri have corn prices similar to that of much of Iowa and lower corn prices than much most of Illinois and Indiana. Most of the state however has corn prices that average at least 25 cents over those in the area of intense hog production in Northern Iowa and Southern Minnesota.
Figure 23. Corn Price Basis Map, December 200426
Figure 24. Corn Price Basis Map, May 200327 Figure 25 is a basis map for soybeans. As there is not available data on soybean meal prices, this map shows an index of prices for soy protein meal. Missouri has two major soybean crushing plants, St. Joseph and Mexico, and it is apparent from the basis map that these plants purchase inputs for meal at very competitive prices. A major cost in meal is transportation as meal must be trucked or railed from the crushing plants.
Figure 25. Soybean Price Basis Map, December 200428 2.3.4 Environmental Regulations For many years the environmental regulations in Missouri have been more stringent than in other states. Missouri has numerous environmental characteristics that pose greater regulatory challenges than in other states and in many ways regulators in Missouri have been ahead of other states in terms of meeting Federal mandates and guidelines. Complying with regulations is another cost of doing business in every industry. For the largest swine producers in the state this has been a greater burden than in surrounding states. Going forward, it appears that environmental regulations in surrounding states will converge on new regulatory guidelines mandated by the U.S. Environmental Protection Agency (EPA) in 2003 and be much more similar than in previous years. When asked, producers will invariably express the most concern with regard to local regulation more so than Federal regulations. Missouri has a relatively poor record of balancing the interests of producers and those of local governments and interest groups. Uncertainty is one of the biggest enemies of any business or industry. Increasing uncertainty typically discourages long-term investment in an affected sector of the economy. The swine industry is no different. The investment climate within the Missouri swine industry and the future competitive position of all Missouri producers will be directly related to the extent that the state as a whole can agree on the parameters within which local government can or can not affect the swine industry. 2.3.5 Farm Labor Farm labor wages have risen strongly in recent years, reflecting a national trend. Missouri farm labor wages tend to be near, or slightly below national farm labor wage rates. In the eight years between January 1997 and January 2005, the price of livestock labor in the Missouri and Iowa survey increased from $6.32 per hour to $10.69 an hour (Table 5). This $4.37 per hour increase reflects a 69% rise in labor costs.
Table 5. Farm Labor and Wage Rates, Missouri and Iowa,* 1997-200229
2.3.6 Transportation Costs A 2003 survey of U.S. swine producers collected information on the transportation of animals. The average distance that firms haul hogs is presented in Table 6. The survey asked firms for the average distance that they typically ship hogs based on the categories. For larger, more spread-out operations, this would be a difficult question to answer. For example, no firms in the 500+ thousand head category indicated that they shipped hogs an average of less than 50 miles, does not mean that these firms do not haul any hogs less than 50 miles just that the average distance is greater than 50 miles. For the smaller firms, most firms indicated they ship hogs less than 100 miles. However a surprising number (over 25%) of the firms marketing between three and fifty thousand head had average hauls of over 150 miles. Firms in the 50 to 500 thousand head category appear to be most consistently located in terms of distance to market in that two-thirds of firms in this category indicated that they shipped hogs between 50 and 99 miles. For the largest firms, (500+ thousand head), 80 percent of firms responded that they haul hogs 100 miles or more on average.
Table 6. Average Distance U.S. Hogs are Hauled for Slaughter 2003: Percent of Firms
Responding by Size Category30
If the figures in Table 6 are multiplied by the respective market shares of each of the size categories (figures not shown) it can be estimated that approximately 41 percent of all hogs marketed in the U.S. are transported 99 miles or less. Approximately 27 percent of all hogs are trucked between 100 and 149 miles. Added together, it is estimated that over two thirds of U.S. market hogs travel less than 150 miles to be sold/slaughtered. Because there are no large scale commercial slaughter facilities in Missouri buying hogs from independent producers, most all of the hogs (other than Premium Standard Farm hogs) must be shipped out of state. Figure 26 illustrates the transportation costs faced by hog producers in getting animals to market. Most of the hogs produced in Missouri are trucked between 125 to 300 miles. As a result, Missouri producers likely have a cost disadvantage of $3-$5 per hog relative to many Iowa and Minnesota producers.
Figure 26. Estimated Transportation Costs Per Hundredweight Live Hogs, 200731 2.4 Regional Swine Price Relationships The terminal market barrow and gilt prices per hundredweight are illustrated in Figure 27. In 2003, the average price per hundredweight was 37.70 dollars, up from 34.10 in 2002. The average price received per hundredweight in 1998 and 1999 was around 31 dollars. For Missouri producers, the biggest price related, competitive issue is the price they receive net of transportation cost. Except hogs produced by and for Premium Standard Farms (PSF) and very small number of locally slaughtered hogs, hogs must be trucked out of state as Missouri no longer has slaughter facilities. Relative to other states, particularly Minnesota, Iowa and North Carolina, producers in Missouri farmers face a much greater distance to the slaughter plants.
Figure 27. Terminal Market Barrow and Gilt Prices, 1950-200332 Figure 28 depicts the deflated barrow and gilt prices in 1967 dollars. As can be seen in Figure 28, the real price of hogs has declined steadily over the last 25 years. The implication is that the purchasing power of 100 pounds of live-weight output from a swine producing farm purchases about one fourth of what it would in 1979. The problem with declining real prices for farm output is that many input prices for items such as concrete, steel, lumber and labor continue to increase with inflation. This is an industrywide phenomenon and is a particular problem as farmers replace facilities built 20 years earlier. When the historical trends of increasing farm size and the exit of medium sized producers is examined in the light of the real hog price trend, it is not difficult to appreciate why these farmers are exiting or expanding. To have maintained a standard of living enjoyed in 1979, a hog producing family farm would have to be selling at least four times as many hogs today as it did in 1979. But in order to achieve that scale, substantial profits for investment would have been needed over that period. Consequently the growth in farm size needed to maintain the standard of living 25 years is actually much larger than the quadrupling mentioned above.
Figure 28. Deflated Barrow & Gilt Prices, 1950-200333 2.5 Contract Production Trends Contract production in the U.S. swine industry continues to expand. Since 1997, researchers at the University of Missouri have been tracking changes in contract production nationwide, as part of the periodic Swine Industry Structure Surveys. For this discussion, parties involved in the contracting transaction are referred to as the “contractor” and the “grower”. The contractor is the party that typically owns the animals, pays for the feed and healthcare and takes the market risk associated with owning the animals. The grower is the party that typically owns the facilities, provides labor to care for the animals and pays fixed and variable expenses associated with owning and operating the facilities, such as taxes, utilities, and hired labor in return for a known payment (or payment schedule). Table 7 provides information on firms that are involved in hog production and that also accomplish some or all of this production through contractual arrangements with growers. The percentages in the table represent the portion of all slaughter hogs in the U.S. raised by these firms from 1997 through 2003 for various sizes of operations. The farrowings are as a percentage of all farrowings reported by USDA. The size categories are based on the annual marketings of these firms and reflect the fact that firms of various sizes engage in contracting activities. In the middle farrowing section, for example, it can be seen that of all slaughter hogs marketed in the U.S. in 2003, 15 percent were farrowed by sows owned by firms that marketed between one and fifty thousand head and engage in contracting transactions. In total for 2003, 68 percent of the hogs raised in the U.S. were farrowed by contracting firms, up from 39 percent in 2000. The right hand section of Table 7 presents the extent of U.S. hog production that is finished by contracting firms. Again, the percentages represent the proportion of all U.S. slaughter hogs marketed by these firms, some of which were raised in facilities owned by the contractors (i.e. not finished under a contract) and/or finished by growers in relationship with the contractor firm. In 2003, 13 percent of U.S. hogs were raised by contracting firms that sold less than 50 thousand head per year, which was slightly higher than the proportion raised by firms in the 50 to 500 thousand head category. In total for 2003, 64 percent of U.S. hogs were raised by contracting firms.
Table 7. Percent of U.S. Hogs Raised by Contract Firms, 1997, 2000 and 2003 34
Table 8 is related to Table 7 in that it reflects the proportion of all U.S. hogs sold by contractors that are actually raised by growers under a production contract. In terms of contract farrowing, 29 percent of all hogs farrowed in the U.S. in 2003 were farrowed in a facility owned by a contract grower. This number relates to Table 7 in that while 68 percent of U.S. hogs are farrowed by contractors (Table 7), 29 percent, or less than half, are from sows on grower farms, farrowed under a contract. On the finishing side, 41 percent of U.S. hogs were finished under a contract in 2003 which is up from 30 percent in 1997. The most significant growth was by contractor firms in the 500+ thousand hogs marketed, referring to the size of the contractor firm or firm that owned the pigs.
Table 8. Percent of U.S. Hogs Raised under Contract, 1997, 2000 and 200335
There are no available statistics on contract production in Missouri. Given the high percentage of the Missouri pig crop that is exported from the state and the large percentage of pigs finished in company owned facilities such as Premium Standard Farms, it is likely that Missouri does not finish as high a percentage of hogs under production contracts as the national numbers. The opening of a slaughter facility in St. Joseph, the approval to open a similar capacity operation in East Moline, IA and the proximity of northeast Missouri to plants in Ottumwa, Iowa and Beardstown, Illinois, will likely increase contract production in the northern half of the state in the future.
1 National Agricultural Statistics Service 2 Economic Resource Service 3 National Agricultural Statistics Service 4 National Agriculture Statistical Service 5 U.S. Department of Agriculture, National Agriculture Statistical Service 6 Economic Resource Service/United States Department of Agriculture 7 Economic Resource Service/United States Department of Agriculture 8 U.S. Department of Agriculture, National Agriculture Statistics Service, 1997 and 2002 Census of Agriculture 9 U.S. Department of Agriculture, National Agriculture Statistics Service, 1997 and 2002 Census of Agriculture 10U.S. Department of Agriculture, National Agriculture Statistics Service, 2002 Census of Agriculture 11Missouri Agriculture Statistics 12Missouri Agriculture Statistics 13Missouri Agriculture Statistics 14U.S. Department of Agriculture, National Agriculture Statistics Service, 2002 Census of Agriculture 15National Agriculture Statistics Service 16National Agriculture Statistics Service 17National Agriculture Statistics Service 18National Agricultural Statistics Service 19National Agricultural Statistics Service 20National Agriculture Statistics Service 21Missouri Agriculture Statistics Service, Missouri Farm Facts 22Missouri Agricultural Statistical Services, Missouri Farm Facts 23Missouri Department of Agriculture 24Economic Resource Service 25Economic Resource Service, Agricultural Real Estate Tax Survey data 26DTN 27McNew, Keven and Griffith, Duane, May 2003 Spatial Basis Report, Agricultural Marketing Policy Center Briefing No. 43, June 2003, Montana State University. 28DTN 29National Agricultural Statistics Service 30Boessen, C., Lawrence, J. D., & Grimes, G. Production and Marketing Characteristics of US Pork Producers, 2003 31Personal communication with Missouri swine producers 32R. Plain. 2004. Swine Outlook. University of Missouri-Columbia. 33R. Plain. 2004. Swine Outlook. University of Missouri-Columbia. 34Boessen, C., Lawrence, J. D., & Grimes, G. Production and Marketing Characteristics of US Pork Producers, 2003 35Boessen, C., Lawrence, J. D., & Grimes, G. Production and Marketing Characteristics of US Pork Producers, 2003
[Commercial Agriculture Home Page] - [AgEBB Home Page ] - [Swine Focus Team Home Page] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
* Based on December numbers.
