AgDM newsletter article, July 1997

Positioning your pork enterprise in a dynamic industry

John LawrenceBy John Lawrence, Extension Economist, 515.294.6290, jdlaw@iastate.edu

Everyone recognizes that the pork industry is changing rapidly.  And they agree that these changes are important for determining what types of swine operations are successful in the future.  But there is little consensus about what the industry will look like in the future.  While this uncertainty can be unnerving, it should not prevent producers from setting a course or future direction for their operation. 

The changes are being driven by key uncertainties that, depending on their outcome, will impact the direction of the industry.  These uncertainties include:

The outcome of these uncertainties is a source of constant speculation by industry experts.  However, as the name implies, the outcome of these uncertainties is essentially unknown.

So we need to use these uncertainties to build alternative scenarios or pictures of what the industry may look like in the future.  Each scenario is based on different assumptions about the outcomes of the various uncertainties.

Once the scenarios have been developed, pork producers need to decide how they will fit of compete in each scenario.  This becomes the basis for their long-term business strategy.

Consider three possible scenarios or pictures of how the pork industry may look in the future.  These scenarios are based on different assumptions about the uncertainties listed above. 

Scenario 1 – Good times

Scenario 1 is good news for existing producers. Export and domestic demand for pork grows for all types of pork products ranging from high quality to processing quality.  The current system of open markets between packers and producers remains in place. 

There are no major advancements in cost of production efficiencies or pork quality by anyone in the industry.  Large producers are not able to expand rapidly, if at all.  Feed prices remain at the current overall level but become more volatile.

Scenario 2 – Brand name products

Scenario 2 is good news for innovative producers but presents problems for late adopters.  Both export and domestic demand increases for pork products with brand names.  Because of the move to products with brand names, the current system of open markets between producers and processors declines and is replaced with a coordinated system.  Due to this move to a coordinated system, improvements in production systems and product quality occur rapidly.

In this scenario there are substantial barriers to the expansion of large scale producers in the Midwest.  However, they are able to expand in the High Plains and other regions.  Feed prices remain at their current overall level but become more volatile.

Scenario 3 – Tight margins

Scenario 3 paints a picture of a growing pork industry driven by cost efficiencies and tight profit margins.  The demand for pork in the domestic and export markets grows slowly.  Supplies increase more rapidly resulting in tighter margins.

The current system of open markets between packers and producers remains in place.  New technologies to improve production efficiencies and pork quality emerge regularly and are adopted quickly by large scale producers who expand rapidly.  Feed prices decline and become more stable.

Summary of scenarios

Below is a summary of the scenarios outlined above.

 

Scenario 1

Scenario 2

Scenario 3

Pork demand

Increase all types

Increase branded

Slow growth

Market coordination

Open markets

Coordinated systems

Open markets

Efficiency and quality

Slow increase

Systems improve

Rapid increase

Expansion barriers

Very high

High in Midwest

Very low

Feed Prices

Current level but volatile

Current level but volatile

Low level and stable

Implications for producers

One of these three scenarios, or a variation of it, may emerge in the years ahead. The question facing pork producers is, How should I position my pork enterprise to be competitive in the future. Each scenario requires a different strategic management response to be successful.

Scenario 1 (Good times) is the most forgiving if strategic mistakes are made.  Producers who do nothing in terms of strategic decisions about their future and continue their operations as they are presently will continue to be profitable.

Scenario 2 (Brand name products) provides advantages for producers who develop long-term relationships with packers, processors, and input suppliers.  Producers who do not have these relationships will be residual suppliers for a lower value market.

Scenario 3 (Tight margins), everyone has equal access to the market.  However, the scenario clearly favors early adopters of new technology.  Margins will narrow and pork producers will be forced to expand to maintain income levels.

Because we don’t know which scenario will emerge, pork producers may want to prepare a strategy for all three.  No strategic preparation is needed for Scenario 1.  Developing close working relations with packer/processors and genetics companies will help prepare you for Scenario 2.  However, if Scenario 2 does not emerge, you have made no fixed capital investment in the strategy.  So you retain your flexibility to adapt to another scenario.  To compete under Scenario 3, producers must focus on lowering costs.  However, even if Scenario 3 does not emerge, investments in lowering costs will pay-off in Scenarios 1 and 2 with larger profit margins.

Summary

Pork production in the Midwest has traditionally been more profitable than many other farm enterprises.  However, the industry continues to evolve and poses new opportunities and challenges for producers.  While focusing on the day-to-day management decisions of the hog enterprise is critical to its success, the most important decisions producers will make is how to position their swine enterprise to be profitable and competitive in tomorrow’s pork industry. 

 

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