FOOD

Pork Processing Highly Concentrated, Hog Production Vertically Integrated
Fact Sheet • March 2011

O

ver 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. Number of Hog Operations, 1980-2008
800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0

Over the past two decades the number of hog farms declined by 70 percent, from more than 240,000 in 1992 to fewer than 70,000 in 2007.1 Despite the collapse in the number of farms, the number of hogs remained fairly constant 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 five hogs were on these giant operations; by 2007, 95 percent of hogs were on operations with more than 2,000 hogs.2

Mergers Drive Hyper-Consolidation
Since the 1990s, a wave of mergers and acquisitions has significantly increased consolidation in the pork-packing industry. The volume of hogs slaughtered increased by only about a quarter between 1996 and 2006,3 but the number of hog slaughter plants actually decreased by 30 percent during the same period.4 In 1995 the top four pork packers slaughtered less than half of the hogs (46 percent), but by 2006, the top four firms slaughtered twothirds of the hogs.5 Since the 1990s, Smithfield Foods devoured competitors in both the production and processing industries. With the 2000 acquisition of Murphy Farms, Smithfield became the largest hog producer in the country. In 2006, Smithfield purchased the second-largest hog producer and sixth-largest pork processor, Premium Standard Farms.6 At the time, Smithfield operated packing plants

Source: USDA, NASS

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

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-closest packer in the Midwest.9 Even before the merger, the reduction in regional competition had already helped to push down the price of hogs by 10 percent in the Southeast.10 The U.S. Department of Justice approved the merger and determined that “the merged firm is not likely to harm competition, consumers or farmers” because “independent farmers currently ship, and have the ability to increase shipments of, market-weight hogs to plants outside” the Southeast.11

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 negotiated purchases 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 either through packer-owned hogs (20 percent) or productioncontracted hogs (70 percent).14

Pork Packing Four-Firm Concentration
80% 70% 60% 50% 40% 30% 20% 10% 0

64% 57% 40% 32% 46%

66%

Pork Packers Control Farmers Through Hog Contracting
The pork industry has pushed farmers to produce hogs under contract instead of buying hogs from them on the open market. Contract proponents contend these arrangements provide stability for producers and reduce market price risks, but farmers may merely be exchanging price risk for other downsides in the terms of the contracts.12 Farmers risk lower (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 Carolina declared bankruptcy in 2009, which imperiled the contracts of the farmers that supplied hogs to the processors.13

1985

1990

1995

2000

2003

2006

Source: USDA, Hendrickson Heffernan

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 19891993 (in 2009 dollars), when the minority of hog farms used contract production. During the 2004-2008 period, average monthly hog prices were $52 per hundredweight, a 31 percent decline.15 A USDA-funded study found that a 1 percent increase in the use of packer ownership or contract production causes the spot market for hogs to fall by a nearly the same amount (0.88 percent).16 The terms for hog production contracts can significantly disadvantage producers. Some contracts provide a strict management manual for contract growers that eliminates farmer autonomy.17 Contracts can require farmers to build or upgrade facilities, which can require significant investments for farmers. For a typical hog finishing operation, six 1,100-head hog houses typically cost between $600,000 and $900,000.18 In 2005, three out of five hog operators (61 percent) were required to make these capital investments.19 Contract operators are also responsible for securing pervmits for disposing of hog manure and the environmental liability associated with any manure disposal.20 Hog operators that rely on a steady contract relationship with a packer or processor are unable to complain about shoddy treatment or unfair terms for fear of retaliation that could end their business.21 Some contracts even have a provision that allows the pork packer to evict farmers from their own hog barns and force them to hire company-selected managers to finish the hogs if the packer decides that the farmer was not properly caring for the livestock.22

Real Farmgate Hog Prices, 1989-2008
120

Price per hundredweight, in 2009 dollars

100

80

60

40

20

0
Nov-08 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-08

Source: USDA

What You Can Do
USDA, the Department of Justice and Congress allowed concentrated agribusiness power to reach these unprecedented levels. They can take concrete actions to curb market power that harms consumers and farmers. Tell your member of Congress to support a ban on packer and processor ownership of livestock and reform the rules for using captive supply contracts, practices that let meat companies manipulate the prices paid to farmers for their livestock. They can start by cosponsoring the Livestock Marketing Fairness Act. Tell the U.S. Department of Justice to re-examine the major agricultural mergers that have been approved in the past decade to determine what effect the mergers had on the marketplace, farmers and consumers. The U.S. Department of Justice should also place a moratorium on any proposed agricultural and food company mergers by the top four firms in any subsector. To learn more about how to restore competition in agriculture and our food system, go to www.foodandwaterwatch. org/fairfarmbill.

Endnotes
1 Key, Nigel and William McBride. USDA ERS. “The Changing Economics of U.S. Hog Production.” Economic Research Report 52. December 2007 at 5; USDA, NASSS 2007 Census of Agriculture. 2009 at Table 21. Key and McBride (2007) at 5; USDA NASS. 2007 Census of Agriculture. 2009 at Table 20. USDA Grain Inspection, Packers and Stockyards Administration. “Assessment of the Livestock and Poultry Industries: Fiscal Year 2007 Report.” May 2008 at 10. USDA Grain Inspection, Packers and Stockyards Administration. “Assessment of the Livestock and Poultry Industries: Fiscal Year 2007 Report.” May 2008 at 11. MacDonald, James M. and William D. McBride. USDA ERS. “The Transformation of U.S. Livestock Agriculture: Scale, Efficiency, and Risks.” EIB-43. January 2009 at 25; Hendrickson, Mary and Bill Heffernan. Department of Rural Sociology, University of Missouri-Columbia. “Concentration of Agricultural Markets.” April 2007. Martinez, Steve W. USDA Economic Research Service. “The U.S. Food Marketing System: Recent Developments 19972006.” Economic Research Report Number 42. May 2007 at 28. U.S. Department of Justice. Press release. “Statement of the Department of Justice Antitrust Division on its Decision to Close Its Investigation of Smithfield Inc.’s Acquisition of Premium Standard Farms Inc.” May 4, 2007 at 2. Martinez (2007) at 28. American Antitrust Institute’s Transition Report on Competition Policy: Chapter 8 Food. 2008 at 292. American Antitrust Institute (2008) at 292. U.S. Department of Justice. (2007) at 1-2. U.S. Department of Justice. (2007) at 1. Ovaska, Sarah. “Hog farmers reel as buyers go bankrupt.” Raleigh News-Observer. November 20, 2009. Martinez (2007) at 27. USDA NASS. Agricultural Prices Annual Summaries. 19902009. RTI International. Prepared for GIPSA. “GIPSA Livestock and Meat Marketing Study: Volume 1: Executive Summary and Overview – Final Report.” January 2007 at ES-10. Hayes, Lynn A. Farmers’ Legal Action Group, Inc. (FLAG). Testimony before the Senate Committee on Agriculture, Nutrition, and Forestry. April 18, 2007 at 3. MacDonald and McBride (2009) at 10. MacDonald, James and Penni Korb. USDA ERS. “Agricultural Contracting Update, 2005.” Economic Information Bulleting No. 35. April 2008 at 17. Moeller, David. Farmers’ Legal Action Group, Inc. (FLAG). “Livestock Production Contracts: Risks for Family Farmers.” March 22, 2003 at 4. Domina, David and C. Robert Taylor. Organization for Competitive Markets. “The Debilitating Effects of Concentration in Markets Affecting Agriculture.” September 2009 at 65. Hayes (2007) at 3.

2 3 4 5

6

7

8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

For more information: web: www.foodandwaterwatch.org email: info@fwwatch.org phone: (202) 683-2500 (DC) • (415) 293-9900 (CA) Copyright © March 2011 Food & Water Watch

Sign up to vote on this title
UsefulNot useful