MPR: It May Never Be the Same

It May Never Be the Same
By Mark Steil
November 5, 1999

The farm crisis has touched nearly every sector of agriculture in southern Minnesota but it may be hog producers who have suffered most. It was their fate to be caught between two profit-destroying events: record low prices and wrenching structural changes, which are transforming the hog industry.

When prices collapsed a year ago some farmers began selling hogs and processed meat directly to consumers in hopes of getting a better price. The market has recovered a little this year but prices are still below the break even point. Some farmers wonder if hogs will ever again be the profit center they were a few years ago.

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See MPR Online's extensive collection of stories and resources about the farm crisis in our Trouble on the Farm" section.

EVERYONE IN THE HOG INDUSTRY knew things were changing but the speed and depth of the transformation caught even the experts by surprise. When prices began falling in late 1997, most industry analysts predicted live-hog prices would bottom out around 28 cents a pound. But instead, the market collapsed to near giveaway prices. The bottom turned out to be 8 cents a pound and producers like Joe Malachek added up the damage.

Malachek: Our operation has lost a $1.3 million in the last two years.

Malacheck farms near Redwood Falls and says he's lost money on nearly every hog he's sold the past two years. And he doesn't expect those losses to end anytime soon.

Malachek: There isn't a heck of a lot you can do about it. Either try and ride it out or sell. And I've been in the game for 40 years and I've got two sons that want to take it over, so we're going to try and ride it out.

But that ride has a cost. He's had to borrow money and sell stock to cover the million-dollar-plus loss he's sustained. And his banker is getting a little nervous. Malachek: They haven't threatened to end credit to me but, they talk about restructuring and I'm not for that because all my term notes I'd have to pay higher interest today if we done that. While hog producers hope for higher prices, there are big changes taking place in the industry which may prevent a rapid rebound. One of the most important is how meat-packing companies acquire hogs. More and more of these companies have started their own hog farms to furnish animals for their slaughter plants. University of Missouri-Columbia professor Glenn Grimes says the number of meatpacker owned hogs climbed to record numbers this year.

Grimes: Twenty-five percent of the hogs or there about, will be produced by producers that also are owners or at least part owners of a packing plant.

Grimes says those companies include big names in agri-business like Smithfield, Seaboard and Cargill. Grimes says another 50% of the nation's hogs are raised under contract; that is the farmer delivers hogs for an agreed upon price exclusively to one meatpacker. These contracts have been a lifesaver for many farmers during the price collapse because they guarantee at least a break even price no matter how low the open market goes. But at the same time they reduce the open market competition which can rachet prices up significantly. The contracting boom and meatpacker ownership means fewer and fewer hogs are sold through the so-called spot market, which has been the dominant selling method for most of the century.

In the spot market, a farmer takes bids from several meatpackers and sells to the one with the best price. So drastic are the changes going on that Grimes expects the spot market to disappear in a few years.

Grimes: The trend that we have going says that five years is about the longest that we can expect. For example, in '94 we had 62 to 63 percent of the hogs on the spot market, in '97 it was 43, for January of '99 that spot market was down to 36 percent.

It's slipped even more since then. As the spot market disappears, so are some types of hog producers, including what Grimes calls "the in and outers."

Grimes: Those that had lots of flexibility and if prices were a little bad, why they would exit hog production and then when prices got good, they'd come back in. In the changing of the industry that type of producer has pretty well disappeared.

The impact of these changes became apparent when an oversupply of hogs began driving down prices two years ago. With few "in and outers" left an important mechanism to reduce hog numbers was lost. That left the burden to reduce production on the new-wave hog producers, but for a variety of reasons they are reluctant to cut back. Meatpackers don't want to decrease production because they've got to much money invested in their hog farms. And most of the other farmers can't cut back because they have a contractual obligation to pump out hogs no matter what the market says. This leads to continued high production which dampens price recovery. For the few remaining independent producers, this means selling to a stubbornly under-priced market.

Haroldson: I told me wife when we sold pigs, coming home, I said this used to be a happy day. It isn't anymore.

Southwest Minnesota hog producer Lyle Haroldson.

Haroldson: When you bring a load in and you know that you've got more bills to pay than what it covers. It just creates a real stress out there.

The prospect that Haroldson won't have a spot market to sell to in a few years raises an interesting question. How can he stay in business if he has no place to sell? One option is to sign a contract with a meatpacker.

Haroldson: No, I wouldn't. I'll got to town and work before I do that. Just goes against my morals. I don't like to be a slave to somebody else. Marketing with a big corporation you are going to come out the loser.

That refusal to do business with the corporate scene lead Haroldson and a group of like-minded hog producers to a first in the nation alternative. They plan to build a farmer owned meatpacking plant to process their hogs. They hope to have it open by next May. Each of the 70 or so farmers who've invested in the plant have agreed to deliver a certain number of hogs annually for slaughter, the average being about 1000 head. They'll be paid roughly four cents a pound over the open market price for those animals. At the end of each quarter plant profits will be divided among the members. Most of the meat will be sold under a yet to be announced brand name in grocery stores.

Haroldson: Over 70 percent of the product will be further processed so it will be hams and bacon and the bratwurst and the barbecued pork and of course also the pork chops and roasts and stuff like that too.

While the plant may provide financial security for its members, what will happen to Minnesota's other independent farmers, the roughly one third of all hog producers who refuse to sign a contract. Where will they sell when the spot market disappears? Joe Malechek of the Redwood Falls area says he's not so certain that will happen. He says rapidly developing industrial scale hog production may contain the seeds of its own downfall. He wonders if workers can be found who will invest the same care in hogs he does.

Malachek: Raising these small pigs and handling these sows in the nurseries is a very special job. You've got to give them tender, loving care and you gotta have people out there who like to work with that and I don't know if the processors will be able to put that part together.

So far the answer seems to be yes given the rapid growth of the very largest hog farms. With corporate operation leading the restructuring of the hog business, many small to mid-size farmers wonder if there's still a place for them.

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