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Economic and Structural Relationships in U.S. Hog Production

by 5m Editor
2 March 2003, at 12:00am

By William D. McBride and Nigel Key, U.S.D.A., ERS - Agricultural Economic Report No. (AER818) - Rapid change in the size and ownership structure of U.S. hog production has created new and varied challenges for the industry. This report describes an industry becoming increasingly concentrated among fewer and larger farms, and becoming more economically efficient. These changes have not come without problems.

The increasing market control and power concentrated among packers and large hog operations, and the manure management problem posed by an increasing concentration of hog manure on fewer operations, are paramount concerns.

Addressing these concerns through regulations would likely impose economic costs that could be passed on to consumers. In addition, the relative mobility of the hog industry means that regulations could result in significant changes in the location of hog production facilities, with ripple effects in local economies.

Balancing environmental and economic interests will challenge policymakers dealing with the implications of structural change in U.S. hog production.

Executive Summary

Rapid change in the size and ownership structure of U.S. hog production has created new and varied challenges for the industry. Once dominated by many small operations as part of traditional crop-hog farms, hog production has become highly concentrated on large operations with pro-duction on several different sites. As of 2002, nearly half of the U.S. hog inventory was owned by operations with more than 50,000 head.

This report assesses key economic and structural issues affecting U.S. hog production. Much of the report uses information from previous research on economic and structural issues in hog production to establish a context within which to present information obtained from a national survey of U.S. hog producers. This report pres-ents detail about indicators, contributing factors, and implications of structural change in hog production, and addresses some of the economic and policy issues impor-tant to agriculture.

The main findings of this report are:

  • The rapid and widespread growth of contract hog pro-duction has substantially raised productivity in the industry. On average, contracting raises total productiv-ity by 20-23 percent and by as much as 50 percent for some inputs. The increase in productivity may result because contracts facilitate the exchange of information between contractors and growers. This information exchange may involve knowledge about feed mixtures or feed timing that results in higher feed productivity and lower labor costs. It is also possible that the goods and services provided by contractors, such as veterinary care, feed, and, especially, the genetic quality of the animals, may be superior to those typically used by independent producers, resulting in healthier animals and more efficient weight gain.

  • The higher level of productivity associated with con-tracting implies that responding to concerns about con-tracting with policies that regulate or restrict contract-ing would likely impose economic costs on the hog industry and could cause pork prices to rise. However, negative producer welfare effects (e.g., loss of auton-omy) or costs to contracting (e.g., increased transaction costs) could offset the potential on-farm efficiency gains from contracting. Off-farm or non-market costs, such as the environmental impact of an increased concentration of animal waste, may also result because of contracting. Available information is not adequate to quantify the overall benefits and costs to society of policies that restrict contracting.

  • The returns to contracting for contractors and contract growers have been largely determined by factors that affect the efficiency of the hog operation, but the size of contracts has not significantly impacted the returns of either party. Production capacity utilization and feed efficiency have had a significant impact on the returns of both contractors and growers. The organization of the contractor's business and the education of the grower have also been important determinants of the returns to contracting. However, the evidence does not suggest that contractors have offered more favorable terms to larger versus smaller grower operations.

  • The potential for excess nutrients resulting from the concentration of hogs on the land is much higher in Southern States than in traditional hog-producing States of the Corn Belt, and among larger versus smaller operations. It is likely that nutrient loading rates from manure match or exceed the utilization capa-bility of the crops grown on many large farms and on many farms in the South.

  • Many hog producers could comply with more stringent regulations on manure management by spreading manure on more of their crop acreage. On average, manure was spread on less than 30 percent of the crop acreage on hog farms. However, the technology used to handle manure on most operations in the South limits the ability to spread manure over more acreage at the same cost. Also, more than half of large operations in the South would still be loading nitrogen at the upper limit of crop utilization if manure were spread over all available acreage.

  • If alternative or innovative manure management tech-nologies are required to comply with more stringent reg-ulation, large and independent operations are in a much better position than small and contract grower opera-tions to make the necessary capital investments. Economies of size in hog production allow large opera-tions to spread the fixed investment for manure manage-ment facilities over more units of output. Contract grow-ers, with lower net farm income and less equity than independent producers of the same size, are less able to afford additional capital investments for manure man-agement. Thus, contractors may need to become more involved with manure management or growers may need to locate other sources of capital.

  • The trend toward fewer, larger, and more productive hog operations will likely continue into the foreseeable future. Many of the highest cost hog operations are small, independent operations, operated by older pro-ducers who plan to soon exit the hog industry. The lowest cost operations are mostly large, produce under contract, and are operated by younger producers with newer facilities.

  • The managerial ability of individual hog producers is probably as important as size economies in lowering the costs of hog production. There is substantial variation in production costs that cannot be attributed to size of operation. The distribution of costs by size of operation indicates that, despite higher average costs among small-and medium-sized operations, many of these operations can produce hogs at a cost that is competitive with larger operations.

  • The comparative disadvantages that an area may have in producing hogs can be overcome with innovative technologies and business arrangements, making the hog industry highly mobile and able to locate where market and/or regulatory conditions are more favorable. Despite higher feed prices in the South and West, cost advantages associated with improved productivity and size economies offset this disadvantage and have spurred growth of the industry in these areas. This mobility also means that hog production could locate to other areas of the Nation or out of the country should market and/or regulatory conditions warrant.

These findings paint a picture of an industry increasingly concentrated among fewer and larger farms, and becom-ing more economically efficient. However, these changes have not come without problems. Concerns about the increasing market control and power concentrated among packers and large hog operations, and from the manure management problem posed by the increasing concentra-tion of hog manure on fewer operations, are paramount.

Addressing these concerns through regulation would likely impose economic costs that could be passed on to consumers. In addition, the relative mobility of the hog industry means that regulations could result in changes in the location of hog production facilities, with ripple effects in local economies. Balancing environmental and economic interests appears to be a major challenge for policymakers dealing with the implications of structural change in U.S. hog production.

Links to Information in this report ...

Chapters are in Adobe Acrobat PDF format and open in new browser.
Frontmatter (Abstract, Acknowledgments) (above/below)
Contents (Here)
Executive Summary (above)
Introduction (98 Kb)
Factors Contributing to Structural Change
Implications of Structural Change
A Roadmap
Background (69 Kb)
Structural Change
Public Policy Concerns: Market Conduct
Public Policy Concerns: The Environment
Indicators of Structural Change
Organizational Innovation
Technological Innovation
Factors Contributing to Structural Change (649 Kb)
Variation in Production Costs
Structural Characteristics by Cost Group
Performance by Cost Group
Economies of Size
Structural Characteristics by Size Group
Performance by Size Group
Regional Diversity
Structural Characteristics by Region
Performance Characteristics by Region
Contract Production
Structural Characteristics by Business Arrangement
Performance by Business Arrangement
Contract Arrangements for Finishing Hogs
Implications of Structural Change (58 Kb)
Contract Production and Industry Productivity
Potential Impacts of Contracting on Productivity
Findings: Contracting and Productivity
The Costs and Returns to Contracting
Distribution of Contracting Costs and Returns
Findings: Returns to Contracting
Manure Management and the Environment
Manure Management Technologies
Manure Application and Crop Production
Paying for Manure Management
Findings: Industry Structure and Manure Management
Glossary (14 Kb)
References (25 Kb)
Appendix I: Measuring Hog Production Costs (15 Kb)
App. II: Modeling the Impact of Contract Production on Productivity (98 Kb)
App. III: Modeling the Returns to Contract Production (30 Kb)
Entire Report (903 Kb)
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Acknowledgments

The authors thank Leland Southard, Noel Gollehon, Jim MacDonald, Marv Hayenga, Kitty Smith, Ralph Heimlich, Jim Johnson, Marc Ribaudo, and Gerry Grinnell for their thoughtful reviews and helpful comments. We are also grateful to Lou King for his valuable and prompt editorial assistance, and to Anne Pearl for her design work.

Source: U.S.D.A., ERS - February 2003