Industry brief: US Pork
Of the meat packing industries in the US, pork production is the most vertically integrated. The leading pork packing companies own thousands of sows themselves, and have direct contracts with most of the other hog packers. Unlike beef, where there is an intermediary industry, the feedlots, pork goes directly from the farm to the slaughterhouse. And with the big pork packers now packaging and marketing the majority of their products, they have also diminished the role of in-store butchers. In addition to bacon and ham, most pork chops are now branded, pre-packaged products which arrive at the supermarket ready to place on the shelves, much like Cheerios or Dannon yogurt.
It wasn't long ago that most hogs were raised by family farmers, then sent to local slaughterhouses to be processed. As pork production has become more industrialized, smaller farmers have been squeezed out. Decision-making has become centralized in a handful of companies, and hog farmers are either employees or dependent contractors.
The concentration has been inexorable. In 1985, the top four pork packers controlled 32% of the market. By 1998, the top four controlled over 56%. The recent acquisition of Farmland's pork holdings by industry leader Smithfield pushed the top four's market share to over 63%.
Beyond that, each of the top four pork companies are now part of extended food giants. Smithfield Foods has moved in a major way into beefprocessing. #2 IBP, the leading beef packer, was acquired this year by Tyson, the #1 chicken producer (beating out Smithfield). Swift, the #3 company, is a spin-off from agribusiness giant ConAgra, which still owns over 40% share in the company. Cargill, through its Excel subsidiary, is the #4 pork packer, and it is second only to IBP/Tyson in beef and a major player in grain. A major portion of Hormel, the #5 producer, is owned by the Hormel charitable foundation. Nevertheless, it too has tries to branch out, and is now the #1 turkey processor in the US. All five companies have intensified their production of ready-to-eat meals and food service supplies. All have made efforts to go international, and we suspect that will be the biggest area of growth in the near future.
Top US pork packers
| Company |
Market share |
| Smithfield |
26% |
| Tyson/IBP |
17% |
| Swift (ConAgra) |
11% |
| Cargill/Excel |
8% |
| Hormel |
8% |
Hog farming is concentrating, with Smithfield leading the way. That company now raises over 11 million hogs each year, which is about 25% of the nation's production. Other rival lag behind in directly owning the hogs they slaughter, but they are moving in that direction.
Smithfield is also leading the way in patenting its own hog strains in order to dominate even more the whole process. Thanks to these reengineers hogs, Smithfield in 2001 launched its Smithfield Lean Generation Pork, a lower-fat, lower-cholesterol pig that it has branded at a higher price than its regular pork. That allows the company to charge more for its products, while not changing its costs.
Last summer, when the issue of Smithfield's acquisition of Farmland's pork operations came before the Senate Judiciary Committee for antitrust consideration, a non-profit consumer and farmer rights group, the Organization for Competitive Markets, offered an interesting brief on hog pricing. First a general statement of the way in which both consumers and suppliers are affected by industry concentration:
Horizontal concentration and vertical integration in the food and agriculture sector has harmed food producers and consumers, while the gross margins for retailers and processors increase each year. Farm gate prices for meat have trended lower during the last 20 years as consolidation increases. This is due to oligopsony market power on the buy side of the processors.
Yet consumers do not benefit - rather they continue paying more for pork. Consumers do not benefit from low live hog prices, nor do they benefit from the so-called efficiencies claimed by the packers.
But what's really interesting is the analysis of how hog prices are set, not through the working of the whole market, but by a small, easily manipulated segment of the market
Vertical integration takes the form of packer owned hogs, and various types of contracted hogs. Ninety percent of the hog contracts pay the producer through a formula price based upon the open market price reported each day by USDA's Market News Service.
In theory, the 13% of the non-vertical hogs set the price for the open market price reports. In practice, three to five percent of the hogs traded set the price. These are the hogs actually negotiated between packers and producers in the Iowa-Southern Minnesota market, the price setting market.
Concentration in the industry and a tacit agreement between the packers means that it is more likely that hog prices will be bid down, rather than up, as should be the case if demand is high. "In today's concentrated packer environment, we have dominant firms interacting in a very thin market. This scenario exponentially increases their ability to drive prices lower as compared to a situation where the dominant firm bought all their hogs from a high-volume open market."
The farmers are all the more vulnerable because they are absolutely dependent on market timing. In other markets, suppliers can hold out until prices go up. But hogs have a brief period of readiness for the market. Hold out too long, and the meat is less desirable and the costs of feed keep mounting. That means that the pork packing oligopoly holds all the cards in the negotiations. "In economic industrial organization terms, hog farmers are unable to exercise countervailing market power through withholding hogs from the market. Rather, hog farmers have to sell - even at "fire sale" prices - because they can't hold withhold supply to force bidders to pay more over time."
The tight pork oligonomy uses its market power to hold down its costs. The use the interests of incumbency to discourage new rivals, and they use vertical integration to break up farmer co-operatives, And now they are exporting their business model abroad, especially to China and Eastern Europe, where the fragmented markets and high demand give them major opportunities.
