1. Competitive Structure of the Leading Pork Exporting Countries Marvin L. Hayenga Professor of Economics Iowa State University

2. General considerations Typically, global markets are only components of a raw commodity Comparative Supply-Demand of each component in each country determines what crosses borders in trade; e.g. pig tails in China, ham in the U.S., bacon in the U.K.

3. General considerations Low hog production cost not a sufficient index of competitiveness Processing and merchandising costs and services provided cannot be overlooked in competitive analysis Value received (!!) versus cost is critical determinant of market share Exchange rates -- a wild card in global market competition

4. Leading Exporters United States Canada Denmark The Netherlands

5. Factors Driving Structural Change Economies of Size--Production, Processing, Distribution Changing Consumer Demands and Market Conditions, e.g. health, WalMart Adoption of New Technologies The Country’s Infrastructure System Environmental Regulations!!!

6. Factors Driving Structural Change Food Safety Risks; Trace back is becoming required Disease Outbreaks/ Risks

7. The U.S. Pork Industry Increasing Trend Towards Fewer, Larger Operations Expansion Into Corn-Deficit Regions –Less Strict Environmental Regulations –Bulk Grain Purchasing –Technologically Advanced Production Systems

8. Three-Site Production Systems Sows, Early Weaned Pigs, and Finished Pigs at Separate Sites--Low disease risk Used Primarily By Larger Farms –Own Feed Mills –Own Trucking Fleets Increased Efficiency and Quality Control Continuing Trend in the Future

9. Processing Industry Trend Towards Value-Added Processing Increased Concentration –Ten Largest Firms Control 80% of Slaughtering Capacity Closer Links to Producers –Marketing Contracts Packer Ownership of Pigs Small, but Increasing

10. Pork Contracting Increased Volume Consistency For Processors A Way to Provide Quality Pigs That Can Be Given a Processor Brand Over 70% of Pigs Delivered Are Under Long-Term Contracts or Direct Ownership of Processor

11. Long Term Growth Environmental regulations, neighborhood political constraints increasingly affecting location of production and processing Vertical chain linkages becoming essential to satisfy changing market environment Will remain a leading exporter

12. Canadian Pork Industry Number of Pig Farms Has Decreased by over 75% in Last 20 Years Reputation for High Quality Pork Processors Typically Small, High Cost Plants; Two Larger Plants Now Built or Planned, Wage Structure Lower More Direct Sales and Contracts Being Made with Packers

13. Pork Production Increasing Number of Large, Specialized Hog Farms Economies of Size are Being Realized Pork Production is Spreading West –Lower Feed Costs Than Before –End of Rail Subsidies Have Lowered Costs

14. Pork Processing 15 % of hogs are slaughtered in U.S. Top Eight Firms Accounted For 76% of Slaughter in 1998 Slaughtering is Much Slower, and on a Smaller Scale Than in the U.S. –No Plants Double-Shift –Lower Carcass Weight –30% Lower Productivity than the U.S.

15. Marketing System Marketing Partially Controlled by Provincial Marketing Boards –Progressively Less Restrictive –More Producer-Packer Relationships Pig Pricing Based on a Carcass Premium/Discount Matrix –Incentives to Produce Lean Hogs Grading Done By Federal Inspectors –National Pig Classification System

16. Long Term Growth Western Canada growth beginning rapidly--large area with few neighbors, low grain cost, current technology in production and processing Greatest potential share increase in world pork market

17. The Dutch Pork Industry Major European Exporter Until the Classic Swine Fever Outbreak Pork Produced on Small Family Farms Number of Farms Expected to Decrease Strict Environmental Regulations Many Small Slaughtering Plants

18. Prior growth Dutch ports importing cassava provided cheap CHO’s versus protected grains in EU; gave The Netherlands a competitive advantage in EU pork production Declining protectionism gives a more level competitive playing field

19. Pork Production Number of Farms Decreasing, Size Increasing Large Finishing Operations Accounted For 9% of Farms, 38% of Hogs Technologically Advanced Production Systems –All-In-All-Out Production –Nearly 100% Artificial Insemination

20. Environmental Regulation Act on Manure and Fertilizers (1987) –Manure Quota Assigned Per Unit of Land –Every Pig Farm Must Now Account for Production and Distribution of Manure New Facilities Must Have 50% Lower Ammonia Emissions Expansion Expensive, Only by Exchanging Manure Rights With Others

21. Pork Processing Many Recent Mergers Have Taken Place In 1998 Three Groups Controlled Two- Thirds of Total Slaughter Plants are Very Slow, High Cost –400 Head per Hour –6-7 Hours per Day –5 Days per Week –Virtually All Are Single Shift

22. Pork Processing Slaughter Plants Do Very Little Value- Added Processing Estimated Total Cost of $30-$35 per Head with Moderate Processing, $14 for No Additional Processing in 1998 With Little Value-Added Processing, Packer Profitability is Low

23. Long Term Growth Highly restrictive environmental constraints May not get back to prior levels of production; may export pigs (or pig farmers) to neighboring countries rather than pork products

24. The Danish Pork Industry Customer Oriented Pork Industry World’s Leading Exporter of Pork High Cost Structure, Lean Pigs Regulations in Place to Preserve Environment Rapid Consolidation in the Pork Processing Sector

25. Pork Production Production Doubled From 1975-1995 More Specialization, Concentration, and Larger Herd Sizes All Hogs Traced Back to Source For Quality Assurance Regulations in Place Regarding Manure Storage and Spreading –High Manure Management Costs

26. Pork Processing Farmer Cooperatives Dominate Breeding, Feed, Slaughter, Processing and Distribution Systems All Hogs Marketed Through One or Two Year Contracts 54 Companies in 1970, 3 Today Danish Crown Controls 80% of the Slaughtered Pigs

27. Pork Processing Processing Focuses on Customer Specifications, Adding Value High Processing Costs, More Differentiated Products Compared to Other Countries All Activities Coordinated by an Umbrella Organization: Danske Slagterier

28. Long Term Growth Environmental restrictions clearly limit growth potential Will continue to be successful in world market despite costly production and processing; value added in production and processing is the trade off

29. Summary: Environmental Concerns/Regulations Increasing Importance in all countries Tighter Linkages Between Producers, Processors and Customers are Emerging Increasing Size is Achieving Economies Where Limits Have Not Yet Been Reached Canadian Growth--Greatest Potential!!