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Pork Processing Highly Concentrated, Hog Production Vertically Integrated

Pork Processing Highly Concentrated, Hog Production Vertically Integrated

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Over the past two decades, independent hog operators that sell their livestock on open markets have nearly disappeared in the face of massive consolidation in the pork-processing industry. Two out of three hogs are slaughtered by the four largest pork processors. These companies not only slaughter and process the hogs, but they exert tremendous control over farmers through production and marketing contracts. Pork processors increasingly own the hogs they slaughter. This vertical integration and control of the hog sector has pushed hog prices down and encouraged hog operators to get big or get out.
Over the past two decades, independent hog operators that sell their livestock on open markets have nearly disappeared in the face of massive consolidation in the pork-processing industry. Two out of three hogs are slaughtered by the four largest pork processors. These companies not only slaughter and process the hogs, but they exert tremendous control over farmers through production and marketing contracts. Pork processors increasingly own the hogs they slaughter. This vertical integration and control of the hog sector has pushed hog prices down and encouraged hog operators to get big or get out.

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Published by: Food and Water Watch on Mar 22, 2010
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Pork Processing Highly Concentrated,Hog Production Vertically Integrated
Over the past two decades the number of hog farmsdeclined by 70 percent, from more than 240,000 in 1992to fewer than 70,000 in 2007.
1
Despite the collapse inthe number of farms, the number of hogs remained fairlyconstant as the scale of operations exploded. In 1992,less than a third of hogs were on farms with more than
2,000 animals; by 2004, four out of ve hogs were on
these giant operations; by 2007, 95 percent of hogs wereon operations with more than 2,000 hogs.
2
 
Mergers Drive Hyper-Consolidation
Since the 1990s, a wave of mergers and acquisitions has
signicantly increased consolidation in the pork-packing
industry. The volume of hogs slaughtered increased byonly about a quarter between
 
1996 and 2006,
3
but thenumber of hog slaughter plants actually decreased by30 percent during the same period.
4
In 1995 the top four
pork packers slaughtered less than half of the hogs (46percent), but by 2006, the top four rms slaughtered two-
thirds of the hogs.
5
 
Since the 1990s, Smitheld Foods devoured competi-
tors in both the production and processing industries.
With the 2000 acquisition of Murphy Farms, Smitheld
became the largest hog producer in the country. In 2006,
Smitheld purchased the second-largest hog producerand sixth-largest pork processor, Premium StandardFarms.
6
At the time, Smitheld operated packing plants
O
ver the past two decades, independent hog operators that sell their livestock onopen markets have nearly disappeared in the face of massive consolidation inthe pork-processing industry. Two out of three hogs are slaughtered by the four largestpork processors. These companies not only slaughter and process the hogs, but theyexert tremendous control over farmers through production and marketing contracts.Pork processors increasingly own the hogs they slaughter. This vertical integration and
control of the hog sector has pushed hog prices down and encouraged hog operatorsto get big or get out.
FOOD
0100,000200,000300,000400,000500,000600,000700,000800,000
       1       9       8       0       1       9       8       1       1       9       8       2       1       9       8       3       1       9       8       4       1       9       8       5       1       9       8       6       1       9       8       7       1       9       8       8       1       9       8       9       1       9       9       0       1       9       9       1       1       9       9       2       1       9       9       3       1       9       9       4       1       9       9       5       1       9       9       6       1       9       9       7       1       9       9       8       1       9       9       9       2       0       0       0       2       0       0       1       2       0       0       2       2       0       0       3       2       0       0       4       2       0       0       5       2       0       0       6       2       0       0       7       2       0       0       8
Number of Hog Operations, 1980-2008
Source: USDA, NASS
 
in seven states, and Premium Standard operated plants in
two.
7
The merged companies accounted for 20 percent of 
the nation’s hog production (through packer-owned hogs)
and 31 percent of hog slaughter — with the companies’own hogs accounting for half of the hogs it slaughtered.
8
 
The merger also reduced the number of pork processors in
the Southeast from two to one, forcing farmers to pay hefty
prices to ship their hogs hundreds of miles to the next-clos-est packer in the Midwest.
9
Even before the merger, the re
-
duction in regional competition had already helped to pushdown the price of hogs by 10 percent in the Southeast.
10
 The U.S. Department of Justice approved the merger and de
-termined that “the merged rm is not likely to harm compe-
tition, consumers or farmers” because “independent farmerscurrently ship, and have the ability to increase shipments of,
market-weight hogs to plants outside” the Southeast.
11
 
Pork Packers Control FarmersThrough Hog Contracting
The pork industry has pushed farmers to produce hogs un-
der contract instead of buying hogs from them on the open
market. Contract proponents contend these arrangementsprovide stability for producers and reduce market pricerisks, but farmers may merely be exchanging price risk for
other downsides in the terms of the contracts.
12
Farmers risklower (if more stable) prices, the loss of autonomy, abusive
contract terms and the possibility that the buyer will go
out of business. Four pork processors in North Carolinadeclared bankruptcy in 2009, which imperiled the contracts
of the farmers that supplied hogs to the processors.
13
As the pork industry consolidated during the 1990s,
contract production grew to dominate the hog sector. In
1993, almost all of hog sales (87 percent) were negotiatedpurchases between farmers and pork packers or processors(known as “spot market” sales). By 2006, nearly all of hogs(90 percent) were controlled by the pork packers eitherthrough packer-owned hogs (20 percent) or production-contracted hogs (70 percent).
14
 
Pork Packing Four-Firm Concentration
Source: USDA, Hendrickson Heffernan
1985
32%40%46%57%64%66%
1990 1995 2000 2003 2006
010%20%30%40%50%60%70%80%
 
The use of hog production contracts and packer-owned
hogs depresses the spot price for hogs. Average monthly
hog prices were $75 per hundredweight between 1989-1993 (in 2009 dollars), when the minority of hog farmsused contract production. During the 2004-2008 period,
average monthly hog prices were $52 per hundredweight, a31 percent decline.
15
A USDA-funded study found that a 1percent increase in the use of packer ownership or contractproduction causes the spot market for hogs to fall by anearly the same amount (0.88 percent).
16
 
The terms for hog production contracts can signicantly
disadvantage producers. Some contracts provide a strictmanagement manual for contract growers that eliminatesfarmer autonomy.
17
Contracts can require farmers to buildor upgrade facilities, which can require signicant invest-ments for farmers. For a typical hog nishing operation, six1,100-head hog houses typically cost between $600,000
and $900,000.
18
In 2005, three out of ve hog operators (61percent) were required to make these capital investments.
19
 
Contract operators are also responsible for securing per-
vmits for disposing of hog manure and the environmentalliability associated with any manure disposal.
20
Hog opera
-tors that rely on a steady contract relationship with a packer
or processor are unable to complain about shoddy treat
-
ment or unfair terms for fear of retaliation that could endtheir business.
21
Some contracts even have a provision that
allows the pork packer to evict farmers from their own hogbarns and force them to hire company-selected managersto nish the hogs if the packer decides that the farmer wasnot properly caring for the livestock.
22
 
020406080100120
    N   o   v  -    0    8    J   a   n  -    0    8    J   a   n  -    0    7    J   a   n  -    0    6    J   a   n  -    0    5    J   a   n  -    0    4    J   a   n  -    0    3    J   a   n  -    0    2    J   a   n  -    0    0    J   a   n  -    9    9    J   a   n  -    0    1    J   a   n  -    9    8    J   a   n  -    9    7    J   a   n  -    9    6    J   a   n  -    9    5    J   a   n  -    9    4    J   a   n  -    9    3    J   a   n  -    9    2    J   a   n  -    9    1    J   a   n  -    9    0    J   a   n  -    8    9
    P   r    i   c   e   p   e   r    h   u   n    d   r   e    d   w   e    i   g    h   t ,    i   n    2    0    0    9    d   o    l    l   a   r   s
Real Farmgate Hog Prices, 1989-2008
Source: USDA

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