There has been much discussion recently about changes occurring in the swine industry. The purpose of this study is to assess the competitive position of Iowa pork producers. A comparison of swine production efficiencies between Iowa producers and the competition is presented. In this report the competition is the highly intensified swine production systems

Hillburn, Chris

Kliebenstein, James

Stevermer, Emmett

Trede, Larry

There has been much discussion recently about changes occurring in the swine industry. The purpose of this study is to assess the competitive position of Iowa pork producers. A comparison of swine production efficiencies between Iowa producers and the competition is presented. In this report the competition is the highly intensified swine production systems.</p

Digital Repository @ Iowa State University (ISU)

AA Comparison of Iowa Swine Productionwith Its CompetitionbyChris HillbiirnJames KliebensteinEmmett StevermerLarry TredeStaff Paper No. 184Research assistant, Department of Economics, Iowa State University; AssociateProfessor, Department of Economics, Iowa State University; Professor, AnimalScience, Iowa State University; Associate Professor, Agricultural Education,Iowa State University.There has been much discussion recently about changes occuring in theswine industry. The purpose of this study is to assess the competitive position of Iowa pork producers. A comparison of swine production efficienciesbetween Iowa producers and the competition is presented. In this report thecompetition is the highly intensified swine production systems.Pork production, like most other agricultural enterprises, has traditionally and historically been a fragmented industry. This is where large numbersof small and mediuju-sized producers exist, none having a significant marketshare nor the power to shape industry events. However, pork production iscurrently undergoing changes that may have major structural implications. Thedemographics of the pork industry indicate the number of hog operations in theUnited States declined by 56 percent, from 871,000 to 396,000, during the 1970to 1985 period. In Iowa the number of hog operations declined from 91,000 to43,000, down 53 percent.Despite the decrease in the number of hog operations, production of hogsand pork has not declined. Hogs per farm increased from an average of 77 to132 head in the United States and from 177 to 21A head in Iowa during the1970-1985 period.In addition to the demographic changes noted above, the nature of porkproduction has also changed, at least for some producers. These changes haveoccurred through technological improvements such as environmentally controlledconfinement production facilities, improved breeds that produce leaner hogs,and improvements in nutrition and medicine.Do these technological advances imply other structural changes in porkproduction? It is quite probable that they could, as strong parallels existin other agricultural enterprise, notably in broilers and cattle feeding.Both of these sectors under went major technological advancements. There werealso substantial shifts in the regional distribution of broilers and cattlefeeding.- For example, in the 1960s cattle feeding shifted from the Corn Beltand Northern Plains to the Southern Plains. Cattle feeding changed from ani industry where the dominant producer was a small (less than 1,000-head capacity) farmer-feeder in the Corn Belt to one where large commercial feedlots inthe Southern Plains and Western States dominated. It should be noted thatthis rapid growth of cattle feeding in the Southern Plains was also accompanied by a rapid growth of feed-production in the region.Pork production too has undergone major technological change, but theCorn-Belt (and Iowa) still dominate pork production. However, major changesin pork production have occurred largely outside this traditional hog producing region. Relatively large, specialized operations with large investmentsin technology and facilities have been established outside the Corn Belt.To assess the implications of these changes in pork production for Iowaproducers, it is useful to characterize the "competition" as far as possiblein terms of facilities, management, labor, overall performance, etc. Thischaracterization may well describe some Iowa pork producers also.Facilities are typically large and technologically advanced. Confinement^ facilities dominate, but owing to differences in climate, land costs, andmanure handling costs, these confinement facilities are not directly compar-able to confinement facilities in Iowa. None the less, production costs canbe comparable as they compete in the swine production industry in a one enterprise.These operations are characterized by specialized management. Labor ishired and trained to the specific tasks of pork production. Productivityfigures shown in Table 1 indicate that while pork production is not a majorindustry in the region it does not detract from labor efficiency.The latest technology is involved in the mechanized handling of feed,water, wastes and ventilation. This means that fixed assets have grown inimportance and to a large degree, these fixed assets have substituted forlabor. There is also a trend for these producers to become specialized inswine production, i.e. one producer specializes in furnishing feeder pigswhile another producer specializes only in the gestation, farrowing, nurseryphase of swine production.Comparisons of Iowa pork producers and competitors for the period 1983-1986 are provided in Table 1. Iowa producers are divided into the top 1/3 andlow 1/3 return groups. - The Iowa groups are similar in size, while the competition averages 5,000 head marketed per year, more than three times the sizeof the Iowa average. The competition had an advantage in total cost per cwt.of pork produced of $4.77 over the Iowa top 1/3 group and an advantage of almost $15 over the Iowa low 1/3 group.Breaking down total costs into its components, competitors had a feedcost per cwt. of pork produced advantage of $3.23 over the Iowa top 1/3 group.This accounted for 68 percent of the total cost difference of $A,77 betweenthese two groups. When compared to the Iowa low 1/3 group there is a feedcost difference per cwt. of pork produced of $7.74, accounting for 52 percentof the total cost difference. It should be noted that these cost figuresbased on an average corn price of $2.50 per bushel. This standardizationareprocedure slightly overstates feed cost for Iowa producers relative to thecompetition as the ration cost was higher for the competition as will be seenbelow. In the current market with lower corn prices the cost differenceswould be less.The competition used 32 less pounds of feed to produce 100 pounds of gainthan did the high Iowa one-third group. The competition also had an advantageof three more pigs/sbw/year over the top Iowa one-third group and an advantageof more than four pigs/sow/year over the low one-third group.The competition's fixed costs were lower than either of the Iowa groups,with a cost advantage of $1.27 per cwt. of pork produced over the top Iowaone-third and $4.26 advantage over the low Iowa one-third. Since the competition is characterized by large investments in fixed facilities, it appearsthat this higher capital investment has improved efficiency enough to offsetincreased production costs. However, owing to differences in facilities, climate, land costs, and manure handling costs, this conclusion needs furtherstudy.The information presented above indicates that Iowa producers face competition from the relatively large producers operating in regions where littlefeed is produced and where pork production has not been a major enterprise.These competitors have utilized advanced facilities, technology, and specialized management and labor to gain production cost and efficiencies.To further assess the competitive position of Iowa producers, the IowaState Swine Records for 1986 were sorted into the top 10 percent and 20 percent of producers by profit per cwt pork produced. Table 2 provides information on these two groups as well as the competition for 1986.This information shows that the top 20 percent of Iowa producers arehighly competitive. The Iowa top 20 percent and the competition have similarfeed costs ($19.41 vs. $20.11) per cwt. of pork produced. The advantage istipped to the top Iowa managers when slaughter hog market weight is considered. Iowa producers were selling a 240 pound hog while the average marketingweight for the competition was 225 pounds. Total cost of production actuallyfavors the top Iowa managers, even though the competition is superior inpigs/sow/year (14.42 vs. 18.5), feed efficiency (3.63 vs. 3.40) and death loss(14.95% vs. 10%). The competition has a higher diet cost/cwt. ($5.38 vs.$5.01) and higher fixed costs. While fixed costs were not available singularly for 1985 for the competition, information from Table 1 would indicate thatthese are likely in the $5.00 range. This is $1.00 to $1,50 higher than forthe top Iowa producers.The best Iowa producers were competitive with 4.58 fewer pigs per sow peryear and .42 fewer litters per sow per year. The competitive picture wouldchange dramatically through production strategies which increase these production levels.The top Iowa producers weaned 8.10 pigs per litter while the competitionweaned 8.8 pigs. The competition produced 2.1 litters per sow per year whilethe top Iowa producer reached 1.78 litters per sow. Again, a rather dramaticdifference.The information presented indicates that the best Iowa managers are competitive. The drawback to this is that it only represents 20 percent of theproducers. The industry needs to be setting the sights where, at a minimum,the average Iowa producer has production efficiencies similar to the competition.Net profit data were not available for the competition. However, basedon the assumption of a $51.80 per cwt. hog price, average size of operation(1,260 hogs marketed), and 1985 production costs ($30.78) the net profit forthe Iowa top 20 percent would be approximately $60,915 per producer. For thecompetition, based on the same hog price, their production costs ($32.50) andaverage size (5,000 hogs), net profit would be $216,200 per producer. Ofcourse this relationship would reverse itself during loss years if it isassumed that market price is not impacted by value sales.This profit comparison breaks down into a net margin per cwt of pork produced of $21.02 for the Iowa top 20 percent versus the competitions net marginper cwt. of $19.30. These figures suggest a relatively flat average costcurve, implying that producers on the scale of the Iowa top 20 percent arecompetitive in terms of cost of production with large producers. However,given the larger size (5,000 head) of the competition total profit would bemuch larger. However, this remains subjective since returns data on the competition are not available. Also, Iowa producers may have profit being generated from other farm enterprises as well. This would not be the case for thecompetition.It is clear that the top 20 percent of Iowa producers are in a reasonablystrong competitive position. The data indicate further that it is not necessarily size that provides the competitive advantage, but rather productionefficiency. This implies that management intensity is the key to remainingcompetitive in pork production. Simply being larger is not necessarilybetter, since top managers with smaller operations are competitive in terms ofcosts with operations three times their average size. Simply becoming largerwill not solve production efficiency problems for producers with low production efficiencies.Previous studies have indicated the existence of economies of size. Forexample, one study indicated that 35 percent of the feed cost advantage oflarger producers (5,000 or larger) was due to lower input purchase price (i.e.discounts on bulk purchases). But, this study also indicated that 65 percentof the feed cost advantage of large producers was due to superior efficiency.This would indicate that economies of size in hog production are primarilymanagement driven, not size driven.There appears to be little reason to feel that pork production will shiftin mass to larger operations and regions outside the midwest. However, thefact that the competition has been able to offset the regional advantages ofIowa producers indicates that the intrinsic advantage of pork production inthe Corn-Belt region can, to some degree, be offset by advanced technology,management e2q>ertise, and, to some extent, size of operation.While the top Iowa producers are in a strong competitive position muchwork remains to be done. This is clearly indicated by the overall cost advantage of the competition compared to the Iowa average, low one third group, andeven the top one third group. Only Iowa's top 20 to 25 percent are in thisstrong competitive position. Methods need to be established to aid development and expansion of management intensity. Iowa's producers cannot hope tosingle handedly develop this management intensity. Iowa's typical swine farmis diversified as contrasted with the competition. This diversification cancause problems with intensive management of each enterprise. Diversificationcan be advantageous too during time of profit swings between enterprises.The bottom line is that smaller operations in the Midwest can be competitive and can survive. The key to their success and survival is not new - itis management. As before, the top notch managers will survive.Facilities and technology also will play a major role in survival andcompetitiveness. While interregional differences and lack of data prevent anyj specific conclusions in this area. It does appear that the competition hasbeen able to offset the higher costs of production associated with higherinvestment in fixed assets through improved efficiency. This points out acommon sense guideline for swine producers. That is the main issue forsurvival is to improve efficiency first, through technology and management,and then, perhaps, grow in size. E^ansion will-not solve production efficiency problems.Iowa pork producers can fully utilize their intrinsic advantages andachieve the same types of results as the competition or even improve uponthese results. If the competition has achieved overall cost leadershipthrough efficiency, Iowa producers who respond to this competition will beable to do as well or even better. This represents the most effectiveresponse Iowa producers can make to this competition.9-Table 1. Comparison of Iowa Producers with Competition (1983-1986)Feed cost/cwt*Fixed cost/cwtTotal cost/cw.tPigs/sow/yrFeed efficiencyAvg. Hd. Mkt,/Yr.IowaTop 1/323.756.7738.2015.013.721422IowaLow 1/328.279.7648.4013.724.091171^Assumes an average corn price of $2.50/bushel.Competition20.535.5033.43183.45000Table 2.10Comparison of Iowa Top 10 and 20 Percent with Competition (1986)(Farrow to Finish)Iowa Top10%Iowa Top20%IowaAverage CompetitionFeed cost/cwt 18.77 19.41 22.56 20.11Fixed cost/cwt A.05 A.23 6.53 N/ATotal cost/cwt 29.30 30.78 38.02 32.50Pigs/sow/yr 13.95 14.42 14.12 18.50Feed efficiency 3.61 3.63 4.05 3.4Avg. Hd. Mkt./Yr. 1036 1260 1249 5000Pigs weaned/litter 7.93 8,10 7.98 8.8Litters/sow/yr 1.76 1.78 1.77 2.1Death loss 15.02 14.95 16.10 10Diet cost/cwt 5.22 5.38 5.80 6.01

English

A Comparison of Iowa Swine Production with Its Competition

http://lib.dr.iastate.edu/cgi/viewcontent.cgi?article=1181&context=econ_las_staffpapers

A Comparison of Iowa Swine Production with Its Competition

Abstract

Similar works

Full text

Available Versions

Digital Repository @ Iowa State University (ISU)