Market Preview: Producer Retirement Program

US - Weekly US Market Preview provided by Steve R. Meyer, Ph.D., Paragon Economics, Inc.
calendar icon 9 June 2009
clock icon 5 minute read

This week’s World Pork Expo was far from a celebration of, or by, the nation’s pork industry. Old friendships were renewed, some business was transacted and knowledge was shared just as in the past. But the specter of a summer that will quite possibly bring no profits to already beleaguered producers hung heavy over the normally festive occasion. And there was little news to change the moods or the outlook.

The hottest topic in most conversations was the Producer Retirement Program (PRP) officially unveiled at Expo. PRP is an Iowa corporation with a one-member, one-vote structure like a cooperative. Organizers hope to raise $50 million that would then be parceled out on a bid basis to PRP members willing to remove sows from production for two years. The program is patterned after the Cooperatives Working Together (CWT) milk production buyouts of the past few years. All producers with sows are eligible to be members. Organizers have been talking to the nation’s largest sow owners for several weeks, but no membership or participation announcements have been made.


The first question regarding PRP is: “Is it legal?” The Sherman Anti-Trust Act prohibits sellers of products from colluding to increase prices – whether by price agreements or by restricting output. And it does not matter whether the sought-after price levels are reasonable. Price fixing is a per se (read that as “every time”) violation of the Sherman Act.

The exception to this rule is for agricultural cooperatives that meet the standards of the Capper-Volstead Act. Such co-ops (like CWT, which is a cooperative of individual dairy cooperatives) have limited immunity from anti-trust actions.

PRP is not, to my knowledge, a Capper-Volstead co-op, but organizers have apparently run their plan by federal authorities and been told that it is legal because it does not require assets to remain unused and sow owners can re-enter the business by simply paying back any money received from PRP. That makes sense, since the participating firms can still respond to market signals.

The second question is much more difficult to answer: “Will PRP be effective?” The characteristics that make the plan legal will also limit its effectiveness. If people getting out can easily get back into production, how will supplies be reduced and prices increase? But PRP has little choice on this issue as the plan must first meet legal requirements.

Another challenge is participation. Any effort like this faces a huge “free rider” problem where any individual will benefit even if they do not participate. Eliminating free riders is a primary benefit from having a mandatory pork checkoff. And beyond participation, in general, is the question of who is participating.

Key is Participation

Organizers have been talking to the nation’s largest sow owners for several weeks, but no membership or participation announcements have been made. I have to believe that the largest firms must participate if PRP has a chance. How does one get producers to pitch in $20/sow on 2.5 million sows if the big boys aren’t doing a lot of the pitching?

The big trick will be to convince Smithfield Foods to buy in when they have already cut 10 per cent of their sows and the company is none too happy that others have not followed suit. Some don’t believe Smithfield actually made these reductions. I do because I have heard it from several different sources in the company. Employees talking the “company line” never surprise me, but getting the people I know to look me in the eye and lie would be, in my opinion, very difficult indeed. I know them and I don’t believe anyone could accomplish that feat.

To Learn More

The final challenge will be patience. If the PRP is effective, we will not see higher hog prices from this effort until at least nine months after the reduction begins. Nothing has started yet.

My biggest question is this: “Will PRP get any sows out of production that would not go out of production anyway, given the financial status of the industry and the latest blow to profits and cash flow?” The answer to that depends greatly upon how fast PRP can get underway. The level of financial stress is now very, very high and there are rumors of widespread sow reductions by some firms previously believed to be quite strong. For PRP to play a part, it must move fast.

I encourage producers to look at the facts for themselves and make up their own minds. You can find more information here. You can also register at this site for one of four information webinars to be held Tuesday, 9 June.

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