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WHICH COMES FIRST? Build a processing plant and the hogs will come, or build enough hog barns and the packers will show up? Purdue’s Chris Hurt says it’s packers and producers working together that drives the pork industry.

U.S. pork industry a system that delivers to consumers

Hog Outlook: Here’s a look at that age-old question — do packers or producers drive expansion? The answer may surprise you.

The pork industry has grown recently. In 2014, the U.S. produced 22.8 billion pounds of pork, and in 2019, I expect that amount to rise to 26.8 billion pounds. The industry has grown about 18% over five years, a 3.3% annual compound rate.

Our industry isn’t just the production of hogs, but also the processing, packaging and distribution system that delivers pork products to domestic and global consumers. It’s an efficient system that provides marketing services that link pork producers with pork consumers.

This raises the “chicken or egg” question of which comes first. Do pork producers increase production and then packers expand processing capacity in that region? Or does a packer build a facility and then producers expand production to fill that capacity?

Surprising answer
In today’s highly coordinated pork industry, neither production nor processing comes first. Rather, expansion of production and processing comes at the same time.

Today, it’s generally believed that a packer will have 70% or more of the hogs it will process already arranged to come. There are multiple ways this close coordination occurs between producers and packers. Several larger packers own a portion of the hogs they process. This is called integration, as packers control some of their supplies by entering hog production.

A second type of coordination between packers and producers is a contractual marketing agreement in which the producer assures a given supply of hogs to a packer in turn for an assured market and generally some price premiums or incentives.

Finally, there is the cooperative model. Several large producers band together to build their own packing capacity. There are variations on each type.

Seek balance
There needs to be reasonable balance between hogs produced and packer capacity. In 2016, the number of hogs was high in relationship to packer capacity. This relative shortage of packing capacity meant packer margin was high. USDA estimates packers received 70 cents spent by the consumer on a pound of retail pork. Average retail price of pork during the period was about $3.75 per pound.

In the past three years, packing capacity has risen about 7%, with new plants at Coldwater, Mich.; Windom, Minn.; and Sioux City, Iowa. These additions helped restore balance between hogs produced and hogs that could be processed. Packer margin dropped back to 60 cents per retail pound of pork bought by consumers in 2018.

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Years ago, pork producers viewed a high packer margin as taking away from their share of retail pork dollars. However, today producers recognize the tightly coordinated producer-packer system they operate in. What’s important is that everyone in the system operates at top-quality and peak efficiency to deliver high-quality pork at great value to consumers.

Hurt is a Purdue University Extension agricultural economist. He writes from West Lafayette, Ind.

TAGS: Marketing
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