More Than the Sum of the Parts
THE ENTIRE PORK SUPPLY CHAIN NEEDS TO WORK TOGETHER TO PRODUCE THE BEST FINISHED PRODUCT.
By Bob Hunsberger
Western democracies were built on the belief that when individuals or businesses act in their own self-interests, the most efficient means of production are achieved. However, the question always is: “What exactly is our individual finterest?”
Of course, the goal of virtually every business is profit. Not necessarily short-term profit but long-term, stable return on invested capital. That focus means suppliers and customers have to be chosen to support the long-term goals.
In ork production, it used to be that all inputs and products produced were commodities. You purchased where you could get the cheapest inputs and sold products where you could get the best price. Of course, to some degree, that still happens. But there are also more complex considerations involved in the decision-making process.
Hog farmers want to have the lowest cost of production possible. As feed is the biggest cost, that means they want the cheapest feed; not a per tonne/ton basis but on a per kilogram/pound of pork produced basis. That parameter is affected by genetic factors, health of the animals, nutrient density and quality of the feed, and reliability of supply.
Feed cost per hog has ried widely over the last twenty years. The following chart shows this based on the cost of corn and soybean meal. Of course, the cost of feed per tonne/ ton can be reduced at various times by using alternative ingredients. Hog farms need to be able to work with their feed suppliers to understand how cost per tonne/ton affects the cost per kilogram/pound of pork produced. The lowest cost per tonne/ton may not result in the lowest cost per logram/pound of weight gain.
The main message from this chart is that feed costs have trended up over the last twenty years. The common response is that farmers need more money for their hogs because costs have increased.
However, maximizing returns may not mean ust picking the market with the highest price today. Instead, it will mean finding a good price but on a long-term basis. That approach means finding processors that are stable, adaptable and have growing marketing opportunities.
The next chart shows the Ontario hog price from 1979 to 2016. Other areas of the continent will look similar. The average price over that time was C$152.65/kg (US$51.93/ cwt) and the trend line was flat. Of course, costs increased so margins decreased. Economists call this the cost/price squeeze.
This squeeze was partly offset by improved efficiencies, including: better growth and feed efficiency, better health, and higher production per sow. Pork produced per sow has improved dramatically in the last 40 years. I can remember an industry meeting in the early 1980s when one of the speakers, the late Dr. Gordon Bowman, said that the average sow productivity in North America was one pig/sow/month, equaling 12 pigs/year. Now, some producers have achieved 30 plus pigs/sow/year.
The same is true of performance measures like feed conversion. Grow/finish conversion has gone from over 3.0:1 to 2.6:1 and individual groups have beat even that number.
These developments are the result of genetic improvements, improved herd health, better environmental controls, more nutrient dense rations and improved animal care, to name a few factors.
Some producers and processors have addressed the cost/price squeeze by supplying specific services and product attributes that helped their customers meet market opportunities. These services may be targeted to niche market opportunities or simply be price sharing arrangements with the packer. Product attributes may also encompass meat quality characteristics like color and texture. The pork industry can improve the supply chain by developing payment systems that reward farmers for the quantity and quality of the meat they produce. There is technology to measure the size of primal cuts and the quality of the lean meat and fat. Iodine levels in fat are related to meat quality.
Some may say that already happens and meat quality is reflected in grading grids. But I don’t think so. There are high indexing pigs with pale, soft meat that do not meet customer requirements.
Farmers think that backfat is a major measure of carcass quality because that’s how they usually get paid. It is true that, at the extremes, backfat is one, but only one, measure of carcass quality. In other words, a very high backfat/low loin muscle pig is never a very good pig. However, for packers, backfat and muscle depth are mostly just a way to buy pigs. Backfat and loin muscle depth are used to formulate payment grids because they are easy to measure and administer. The system is simple and neat. And, generally speaking, this approach moves us in the right direction.
FARMERS AND THE PORK INDUSTRY SHOULD EMBRACE THE TERM “FACTORY FARM.”
For packers, however, the all-important number is the selling price of particular products. And the price of various pork products do not necessarily move together. Recently, for example, the price of bellies has been very strong. A product that accounts for 12 or 13 per cent of carcass weight can account for 35 per cent of the carcass value.
particular cuts, it can have a major impact on the plant profitability. That’s what small plants often do: find a market that pays very well for one or two items and build a business on that.
The price of live hogs, however, is the major determinant of profit for both farms and packing plants. The industry spends a lot of time focused on that number and discussing/ debating which price is the “right” one. For pork processors, the difference between the cost of hogs and the value of pork is the all-important number. That’s commonly called the cutout value. The following chart shows the cutout recent history:
The last six or seven years have generally been good for pork processors. Remember though, while gross margins have increased, so have packer costs. Still this chart may help explain, in part, why American packers are currently expanding capacity. In the last few years, it has been fun to be a pork packer.
So where is the pork industry standing?
For farmers, margins have been squeezed. Feed costs have risen, while hog prices have not risen but have continued to be variable. 2014 was the highest hog price year on record and also the most profitable year for farmers. The margin squeeze has been addressed by improved efficiencies.
For feed suppliers, the game continues to be driven by efficiency. Nutritional knowledge is public domain and no company has secret information that makes their products perform better. Producing feed and feed ingredients requires efficient, consistent, low-cost products that are used effectively at the farm.
Meat packers too, need to be as efficient as possible and, in the packing sector, size matters. Packers need to be large enough to incorporate the latest technologies.
Some processors and producers will try to spin products for specialty markets – antibiotic free, humanely raised, free range, etc. Consumers’ perceptions that “free range” equals happy, healthy pigs is largely contrived. Consumers often don’t know, for example, about the older practice of rings being pierced through pigs’ noses to stop them from rooting up dirt and disease. Pigs may look nice standing out in a grassy meadow but they are seldom healthier than their cousins in a modern production barn.
LOOK AT THE WHOLE SYSTEM AS CONTRIBUTING TO THE QUALITY OF THE FINAL PRODUCT.
Farmers and the pork industry should embrace the term “factory farm.” Cars, clothes, televisions, phones, furniture … you name it, are all produced in factories. That’s a good thing. The factory has strict controls and standards to ensure that the products we buy are high quality and consistent. The same thing is true for animals and food produced by the North American pork industry.
So how does our industry face the future? That future will most certainly include new and stronger competition. Maple Leaf Foods recent bought a company that manufactures plant-based meat replacements. Also, tissue cultured meat is on the horizon. Silicon Valley-type money is investing in future food-producing technologies. The pork industry needs to compete with these developing alternatives on a cost basis. In order to compete, we need to keep lowering costs and selling prices.
The pork supply chain needs to work together to develop pigs that are healthy, disease-resistant, fast growing, feed efficient and even tempered. We need to produce carcasses that have high quality meat with dark color, firm texture and good taste.
To get there, the whole chain must be part of the discussion and operation. Farmers should not try to find the cheapest veterinary services, cheapest replacement gilts, lowest priced feed and highest paying packer on a daily basis.
Rather, look at the whole system as contributing to the quality of the final product. There is no easy answer for the question of how to do this but we need to be willing to open our books with all members of the chain. Packers must better understand their customers’ needs and transfer that information back through the system. We can continue to improve our product and lower our costs. It will require more co-operation to accomplish this goal.
Bob Hunsberger, Pig Farmer