Changing pork business affects pork prices and quality

Food Review, May-August, 1997 by Steve Martinez, Kevin Smith, Kelly Zering

Consumers want high-quality products at reasonable prices. The American pork industry has heard this message loud and clear. Pigs are being selectively bred to produce leaner, higher quality, and competitively priced meat. The entire industry from the farmer to the processor to the grocery store or eating place is undergoing a transformation.

Just 10 years ago, a third of all hogs were found on farms that had more than 1,000 hogs. Today, more than two-thirds of all hogs are produced on farms with more than 1,000 pigs. Many pork packers and processors obtain a steady supply of high-quality hogs by entering into contractual arrangements or by owning production facilities and breeding operations.

In the hog industry, production for the open market is being replaced by long-term contracts and vertical integration. In 1970, 2 percent of hogs slaughtered were obtained through contracts and integrated operations. By 1993, this percentage had increased to 11 percent, and packers expect 29 percent of hogs will be obtained through contracts and integrated operations in 1998.

How the hog industry is organized and how it does business affects consumers' pocketbooks and product selection. Changing methods of acquiring hogs by packers can reduce packing costs and improve the quality of pork products, which affect retail prices and the quantity of pork consumed. We used an economic model of the U.S. pork industry to estimate potential retail price changes that result from new ways of transferring hogs from producers to packers. Under the assumptions of our model, coordinating hog production and processing operations results in 19-percent leaner products. The corresponding production efficiencies and changes in consumer demand result in retail prices of pork falling as much as 1 cent per pound. But the direction and size of price changes depend on the proportion of hogs that are affected by new methods of acquiring hogs, and the value that consumers place on higher quality pork.

Consumer Preferences Encourage Changes in Pork Industry

Gaining greater control over quantity and quality has become very important in the highly competitive U.S. food sector. Households want high-quality, safe, and convenient foods with desirable nutritional qualities. To meet this demand, pork companies are introducing new products, such as Smithfield Foods' Lean Generation brand-name line of lean, fresh pork products and Farmland Foods' line of "moisture enhanced" fresh pork. Moisture-enhanced pork, like a deep-basted turkey, does not dry out or toughen if over-cooked. Also, a more ethnically diverse U.S. population is creating niche marketing opportunities for new pork products. For example, the chorizo Mexican-style sausage is being marketed to the growing Hispanic population and eating places that serve Mexican food.

Likewise, more food consumed away from home suggests that suppliers must be able to provide large quantities of consistently high-quality, uniform products to restaurants on a regular schedule. For example, McDonald's requires millions of pounds of high-quality, uniformly sized bacon for its many bacon-topped hamburgers, such as the recently introduced Arch Deluxe sandwich.

Changing Business Arrangements Provide More Control

Technological advances in hog production -- such as innovations in genetics, housing, and handling equipment -- allow firms to expand hog farms and to gain more control over quality. Producers use selective breeding to produce hogs with desirable characteristics -- disease resistance, high lean-to-fat ratio, fast growth, and others. These carefully selected hogs are fed to market weight prior to sale to packers. In the first processing stage, packers slaughter the hogs and cut the meat into wholesale pork cuts. Three-fourths of pork is further processed into sausage, hot dogs, bacon, and other products. Finally, pork products are sold to retailers and eating places.

In the hog industry, methods of vertical coordination are changing. Vertical coordination refers to systematic arrangements for product transfer among different stages of production. This can be achieved in many ways, including open-market exchange, vertical integration, and contractual arrangements.

* In open-market exchange, producers make no commitments to sell their hogs before they are ready for slaughter. The grown hog is sold at the prevailing, or "spot," price.

* When a firm vertically integrates, it brings under its ownership two or more successive stages of production, and thus has greater control over production. For example, a processor that buys or builds hog production facilities is vertically integrating, so hog production and processing is now conducted by a single firm. Smithfield Foods, a leading pork processor, obtains about 11 percent of the hogs that it slaughters from farms that Smithfield Foods owns or leases. Packers acquiring hogs from their own facilities may directly control hog quality through genetic selection and management techniques used in production.