AgDM newsletter article, May 1998

Iowa’s pork processing industry

John LawrenceBy John Lawrence, Extension Livestock Specialist and Director of the Iowa Beef Center, 515-294-6290, jdlaw@iastate.edu     

(first in a series of two)

In addition to being the largest producer, Iowa is the largest pork processing state.  There are 11 packing plants in Iowa that process at least 2,500 hogs per day, with a combined capacity of 95,000 hogs per day. These facilities and other smaller meat processors account for approximately 7 percent of all of Iowa’s manufacturing jobs.

In 1994, about 32 percent of the nation’s hogs were processed in the state (Figure 1).  By 1996, that share had fallen to 28 percent as Iowa hog numbers declined and processing facilities expanded outside of the state.

The supply of hogs is the most significant factor in plant site selection, but packers also prefer to locate in communities that can support a labor force.  In addition to Iowa, packers are located in southern Minnesota, eastern Nebraska, northwest Illinois and Indiana.  New plants have been built in North Carolina and Oklahoma where rapid hog expansion has occurred.

Expansion in the 1980s

The three largest beef packers entered the pork processing sector in the 1980s.  That brought about a major reinvestment in packing infrastructure and plant expansion.  Iowa switched from being a hog exporter to a hog importer in 1987 (Figure 1).  In 1996, Iowa packers imported approximately eight million hogs from other states and Canada to keep their plants operating near capacity.

Figure 1.  

fig. 1 Iowa's share of US market hogs and US commercial slaughter

Largest processing firms

The firms in the top four slots have changed a lot over the years.  Smithfield, the largest as shown in Table 1, was fourth in 1994 and eighth in 1990.  The company expanded by building the largest plant in the world in North Carolina (now processing 26,000 per day), and acquiring John Morrell plants in the Midwest. 

Now at number 2, IBP was in the top slot for several years.  They continue to grow slowly.  IBP added new Indiana plant capacity but closed the Council Bluffs plant in April 1997. 

Farmland has increased in size, while Hormel has declined in size.  Seaboard opened a new plant in late 1995 in Oklahoma, and is moved it to a double-shift in 1997.

Table 1.  Estimated Pork Slaughter Plant Capacity (1997)

Rank

Company

Daily Capacity
(1,000 head)

Capacity Share
(Percent)

1

Smithfield

80

19%

2

IBP

73

17

3

Swift (ConAgra)

39

9

4

Excel (Cargill)

38

9

5

Hormel

35

8

6

Farmland Foods

34

8

7

Seaboard

15

4

8

Thorn Apple Valley

14

3

9

Indiana Packers

 13

3

10

Lundy’s

 8

2

 

 

349

82%

Source: Meyer, S.R.. "U.S. Hog Slaughtering Capacity, February 1996,"  NPPC Pork Industry Economic Review, March 1996.

Industry concentration

The pork processing industry is becoming increasingly concentrated as the percent of hogs processed by the four largest firms increases.  This percentage is estimated to be as high as 55 percent in 1997, up from about 32 percent in 1985.  However, by comparison, the hog four-firm concentration ratio is considerably less than steer and heifer markets (80 percent) and sheep and lamb markets (74 percent) as shown in Table 1.  The ten largest pork processors control more than 80 percent of the nation’s hog slaughter capacity.

Excess slaughter capacity

Pork processing capacity has traditionally exceeded pork supply.  However, processing capacity limits were reached for the first time in decades during the fall of 1994, resulting in sharply lower hog prices.  Since then, packer capacity has increased nearly 15 percent between 1994 and 1997 and is expected to remain in excess of hog supplies in the years ahead.  Much of the increased capacity is being built outside of Iowa but some will compete for hogs that are currently being shipped to Iowa plants.

Processor collusion?

The steady trend toward greater concentration in hog processing has aroused concern about the possibility of anti-competitive conduct in the slaughter hog market.  Specifically, producers sometimes worry that big packers may be able to use their market power to depress hog prices below competitive levels. 

There is little evidence to justify these fears.  In a 1991 study, Schroeter and Azzam found little difference between actual prices for hogs and their estimates of "competitive" prices.  Nor have packer earnings shown indications of monopoly power. 

In addition, by using American Meat Institute survey data, it can be shown that hog packer average net earnings never exceeded 1.6% of sales during 1979-87.  Although this occurred before the recent sharp increase in concentration, by examining packer margins it appears that little has changed in the past 10 years.

Packer margins 

Although packer margins are both seasonal and cyclical, they have remained relatively constant in recent years as packers fought for market share. In general, the packer’s share of the farm-to-wholesale margin as shown in Figure 2 is about the same as it was in 1980, reflecting improved packer efficiency and stagnant nominal wages. The wholesale-to-retail sector margins have increased over the period about at the rate of inflation.  The farmer’s share of retail pork expenditures has declined to an average of 35 percent in the 1992-1996 period compared to 50 to 60 percent during the 1970s.

Figure 2

Figure 2. Share of retail pork dollar by market segment

Further processing

A trend within the processing sector is for packers to move into further processing to capture part of the wholesale-to-retail business.  More deboning, trimming and further processing is occurring at the slaughter plant.  In 1987, 81 percent of the product left the plant as primal or fabricated products.  By 1992, it had risen to 92 percent.  Another example of this trend is the purchase of Food Brands (a food service company) by IBP.  It is now a major supplier of the food service sector.

Meat industry employment

Meat packing and processing jobs tend to be relatively low paying.  Meat packing and processing jobs are relatively low skilled jobs and packers can operate their plants at acceptable levels with relatively high turnover rates and inexperienced employees.

Meat industry wages were 82 percent of manufacturing wages in 1987 but fell to 71 percent of the manufacturing level by 1992.  After adjusting for inflation, meat industry wages dropped 24 percent from 1987 to 1992.  Part of the declining farm-to-wholesale margin in Figure 2 is attributed to stable or falling wages in meat processing between 1987 and 1992.

Summary

Does Iowa need to raise hogs to have a viable pork packing industry?  The simple answer is yes.  While Iowa packers haul hogs great distances to existing plants, a predictable supply of hogs in close proximity is the most important criteria in choosing a site for a processing plant.  Current plants can be operated by transporting hogs from other regions.  But packers will be reluctant to reinvest in existing facilities if the supply of hogs in the long run is inadequate.

(next month – Competition in Pork Processing)

 

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