Industry Structure/Integration: What are the Options for the Canadian Pork Industry?

By Jerry Bouma and presented at the 2006 Banff Pork Seminar - The Canadian pork industry is poised to build on its current position as the world’s largest pork exporter.
calendar icon 22 August 2006
clock icon 8 minute read


Indeed Canada stand’s in a most interesting position as the largest production surplus region in closest proximity to the worlds’ largest and fastest growing food deficit region – the Pacific Rim. Broad developments worldwide – particularly in Western Europe, suggest that as a major supplier of pork, Europe’s position will diminish over time in response to growing environmental, social and competitive pressures.

In contrast, the massive restructuring of the U.S. industry, as well as low cost of production in regions such as Brazil, pose new competitive threats to the Canada’s position as the leading exporter.

Despite public concerns over large-scale confined livestock operations, Canada has considerable expansion capacity specific to hog production. Nowhere is this more true than in Western Canada. Hog densities in the West are very low in comparison to many hog production regions around the world.

For example, hog population density in the Netherlands is 38 times greater than in Alberta; it is 30 times greater in Denmark (Toma & Bouma, 2000). Somewhat closer to home, Dupin County in North Carolina has a larger hog population than the entire Alberta inventory and a density factor that is 183 times greater. The prospect for substantial future growth raises the question of optimal structures and strategies. What should these be? Should the Canadian industry pursue the integrated structures that are currently re-shaping the U.S. industry?

On the other hand, are there lessons to be learned from the European cooperative structures characteristic of the Netherlands and Denmark that have had so much success over the past 50 years? Or are there new emerging collaborative structures such as value chains that provide another organizational option? This paper addresses these questions by examining the strengths and weakness of each of the aforementioned structures and concludes by providing recommendations that address the growth challenges facing the Canadian pork industry. It dwells mostly on the U.S integrated model, which is perhaps the most familiar and seemingly most relevant option.

History – What can be learned?

The question of appropriate business structures and growth models provides cause for a momentary reflection on history. Clearly change is continuous. But what does history teach us? A cursory review of the European experience illustrates that over the past 500 years, no fewer than eight great powers have experienced the proverbial ‘rise and fall’. (Spain, France, Prussia, Austro- Hungarian, England, Germany (twice), and the U.S.S.R). In the meantime the ‘new world’ arose to prominence and within a period of 100 years, the USA became an economic and military power unequalled in human history. Similarly, a scan of the corporate world indicates that very few companies listed on public exchanges exceed 50 years of age. And something well known among the farm community, family businesses rarely survive more than two generations.

Two essential conclusions can be drawn:

  • Growth in all cases is the result of a unique set of political, economic and social conditions – conditions that continually change; and
  • The factors that contribute to successful growth will ultimately cause the organization to fail, if it does not adapt.

The challenge for survival therefore becomes one of understanding the change drivers and continuously making the necessary adjustments.

Organizational Models: The US Integration Model

Over the past 20 years, the US pork industry has experienced a dramatic restructuring. Most of this change has been led by the emergence, and now dominance, of large scale integrated pork production systems. Indeed the changes have transformed the US into becoming one of the most competitive pork industries in the world. The observation that US pork exports have increased for 15 consecutive years is testimony to this competitive position. Currently four corporations account for 65% of total slaughter capacity. Furthermore, the processing sector accounts for 25% of the entire US production base.

Overall, 30 corporations account for nearly 50% of all production. Meanwhile the traditional small-scale family hog farm is nearing extinction (Informa, 2004). The rapid rise of the US integrated model is a manifestation of the substantive efficiencies that can be realized through increased scale coupled with the implementation of advanced management and production systems.

Efficiencies are captured on several fronts including:

  • Economics of scale in the purchasing of inputs – namely feed, breeding stock and animal health services and supplies.
  • The ability to attract highly qualified management and technical staff.
  • The capacity to supply large scale flows of uniform production that match processing plant shift requirements. This provides market power, and places the integrated operation in a much more favorable position when contracting with processors.
  • The ability to capture the total margin through the entire production and processing phases

Indeed, the integrated model lends itself to a series of progressive expansion steps in terms of increasing sow herd size:

  • A 3,000-sow herd enables the delivery of 1 truckload of finished pigs to the processor each day;
  • A 9,000-sow herd warrants the establishment of a 100,000 ton per year feed mill;
  • A 50,000-sow herd enables the operation to establish major long term supply contracts;
  • The 200,000-sow herd is sufficient to supply an entire packing plant operating two shifts per day.

Each step represents another set of opportunities to reduce costs and/or improve market position. The integrated model is characterized by a singularity of objectives executed by a focused management structure that employs effective command and control systems: in essence – a small group of decision makers responsible for the large scale business enterprise. Thus the integrated operation is able to move very quickly. Further, the integrator has the ability to attract outside investment (both equity and debt) due to the attractiveness of the potential returns. Finally, the model by virtue of its size and attractive economic benefits for a rural community is able to exact considerable political influence at the State and local government level – a feature that has the potential to generate both positive and negative consequences.

Arguably, one would expect integrated hog operations to be located in close proximity to where feed (the largest input factor) is produced. In fact this has not occurred and the actual geography of US pig production is perhaps the model’s most surprising feature. Witness the rapid rise of a massive industry in North Carolina and more recently Oklahoma – both States with little or no history in either hog or feed grain production. In effect, the natural disadvantages have been overcome by the inherent efficiencies described earlier. A recent analysis of the US pork industry (Informa, 2004) makes a most interesting observation. To quote:

The behavior of key firms and state legislation have been more important than natural resources (or natural advantage) in determining whether a regional industry will expand or contract.

Thus the integrated model’s greatest strength is perhaps its greatest weakness – namely it’s reliance on political benevolence for location and continuance. However the sheer scale of these operations and growing public discourse is generating much concern regarding the management of manure, the impacts to air and water, as well as the long term well being of local workers and the community itself. The literature abounds with such concerns as demonstrated by a recent paper (Ikerd, 2003), which identifies 10 reasons why rural communities need to be concerned about large-scale hog operations. These are:

  • Hogs Stink.
  • The work is not healthy for people.
  • Piling up too much stuff in one place causes problems.
  • Consumers have little if anything to gain.
  • Continuing regulatory problems are inevitable.
  • Hog factories destroy public confidence in agriculture.
  • The future of the community is turned over to outside interests.
  • The decision making process can rip communities apart.
  • Hog factories degrade the productive capacities of rural people.
  • Tomorrow’s problems are disguised as today’s solutions.

Many of these arguments are familiar to the Canadian hog industry. However, it is critical to point out that the economics and politics that have to date favored the integrated model are in a state of change. Firstly, economics are increasingly moving toward a ‘total systems’ approach which addresses both direct and indirect cost factors; secondly, the political climate is changing in response to two fundamentally opposing dynamics – namely the declining influence of the farm lobby versus the rising influence of the environmental sustainability agenda. Politics is all about people. As positions change, so to will conditions that have facilitated and enabled the operation of the integrated model.

Further Information

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Source: Paper presented during the 2006 Banff Pork Seminar Procedings

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