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Pork Powerhouses 1999: Packing Down the Industry

Smithfield takes control in turbulent year for pork producers

The pork industry was stunned, but not really surprised when word came September 1 that Smithfield Foods had signed a letter of intent to acquire Murphy Family Farms. After a year when cash hogs fell to $8 per cwt and producers of all sizes were going broke, news that the world’s largest pork packer was buying what was once the world’s larges pork producer was not the shock it might have been. Click here to view the Pork Powerhouses ranking list. 

(Photo: In January, Smithfield bought the former Western Pork Production Corp. of Yuma,  Colorado (pictured in 1996). Now called Smithfield Foods West, it's home to 12,000 sows.)

Murphy buy fits the plan

Certainly, Smithfield has always been up front about its vertical integration strategy. The pending purchase of Murphy Family Farms and its 325,000 sows fits perfectly into that plan. It’s also no surprise that a large pork producer not vertically integrated would have lost money in the last year and be a candidate for a buyout. The Murphy transaction, to be effective January 1, 2000, includes the assumption of $170 million of debt and liabilities, plus 10 million shares of Smithfield common stock (about $460 million total).

The deal was “too good an opportunity to let pass given the value of the assets and the current political and environmental barriers to further internal expansion,” says Joseph W. Luter, III, chairman and CEO of Smithfield Foods, in a statement.

“We expect the industry to continue consolidating, and Smithfield Foods will continue to lead that consolidation,” said Luter. The acquisition, if finalized, means Smithfield will produce 60% of the hogs it kills.

Besides Murphy, Smithfield has made other large purchases in the past year. It bough Western Pork Production Corporation in Colorado in January (12,000 sows), J&K Farms of North Carolina in April (15,000 sows), and Carroll’s Foods of North Carolina in May (180,000 sows). Smithfield also purchased or entered into joint ventures with companies in Poland, Mexico, France, and Canada.

Nightmare for many

While Smithfield’s vertical integration strategy plays well on Wall Street, it’s a nightmare for many pork producers. “Luter is like a vulture sitting in the tree waiting for the guys in North Carolina to dies,” says one producer.

“It is Joe Luter’s intention to buy it all,” says another producer. “He doesn’t care about farmers. He’s got a plan, and he’s pursuing it. He’s not looking a opinion polls. So far he’s successful. Look at all the packers – he is positioned better than any of them.”

Smithfield is not the only Pork Powerhouse with a vertical integration strategy. Of the 10 largest producers in the ranking this year, half own packing plants.

While Smithfield’s growth in the past year came from acquisitions, not true sow expansion, Seaboard Corporation is another story. With a packing plant in Guymon, Oklahoma, Seaboard added 20,000 new sows to the already flooded industry and has no plans to stop growing.

When the permits come through, Seaboard will have an additional 29,000 sows, says vice president Mark Campbell. Seaboard already has $10 million invested in the new sow sites.

Campbell, who is working on siting a new packing plant for Seaboard, is amused by the National Pork Producers Council’s notion that building a producer-owned packing plant is the answer to the industry’s woes.

“Without the proper structure, it will be a fast learning experience for them,” says Campbell. “Historically, there has not been big money in the packing business.”

Big money or not, the portion of sows in the swine industry owned or tightly controlled by packers is rapidly increasing. The only major pork packer that does not own sows is IBP, and many producers feel that when IBP does make a move in that direction, it will be a big move.

Laws not stopping integration

State laws preventing packers from owning hogs, such as in Iowa and South Dakota, are not stopping the trend toward vertical integration. Around Walnut, Iowa, thousands of pigs are fed annually by RGB Farms, Inc., of Warsaw, North Carolina. The president and director of RGB is Ronald G. (Greg) Brown. Brown is also president of Brown’s of Carolina, which manages 170,000 sows and is owned by Smithfield Foods.

The pigs are born in North Carolina, shipped to Iowa at weaning, and sold to RGB Farms for finishing. At slaughter they are sold to John Morrell packing company, which is owned by Smithfield. It’s a paper shuffle.

This same type of shuffling may now be used for the 1.5 million pigs fed annually in Iowa on contract by 220 growers for Murphy Family Farms. Smithfield cannot legally own those pigs. If the Murphy deal is finalized, the Smithfield pigs heading to Iowa will have to change ownership at the border. Splitting off the Iowa operation and selling it before January is also possible. Before Smithfield finalized the Carroll’s Foods sale in May, 7,200 sows in Iowa with Carroll’s Foods of the Midwest were sold to Sonny Faison, CEO of Carroll’s. That unit is now called Pork Plus.

Hormel Foods is also involved in a pig transferring process. Mountain Prairie, LLC, whose investors include Hormel and Bell Farms, owns 25,000 sows in Bent County, Colorado. At weaning, the pigs are shipped to South Dakota and sold to Sun Prairie, also owned by Bell, for finishing on Rosebud Sioux Indian land. Then the pigs are sold to several packers, including Hormel, for slaughter. “We are coordinated instead of integrated,” says Rich Bell. “We coordinate production and put together a system.”

When will it end?

So the industry consolidation and integration goes on, seemingly without end. There are 1 million more sows vertically integrated (counting the pending sale of Murphy Family Farms o Smithfield) than in 1994. About 700,000 of those have gone into production in the past five years. This expansion helped lead to record low market hog prices last winter.

What is most puzzling about Pork Powerhouses numbers this year is the lack of sow liquidation. In 1998, the largest 50 producers had 2.6 million sows. That number didn’t change this year, despite rock bottom prices.

“I don’t know of any liquidation going on,” says Nelson Waters of Coharie Farms in Clinton, North Carolina. “People just switch a few sows around. I don’t believe I’ve ever seen an industry that wants to self-destruct as bad as this one does.”

Tyson may cut back more

The industry’s best hope for sow liquidation, say many large producers, rests with Tyson Foods. Tyson closed its Alabama swine operations in August and sent sows to market. It dropped from 123,000 sows last year to 110,000 this summer. More changes are planned, says John Thomas, head of Tyson’s pork division.

Struggling along – not expanding, to contracting – is how many of the largest producers describe their operations this year. “We are all standing like deer in the headlights,” says Dave Luers of D&D Farms (22,000 sows). “We don’t know when to run. The market has been so low the bankers don’t even know when to get out.”

Swine veterinarian Larry Rueff of Greensburg, Indiana, calls it an “ugly, sad time” to be a pork producer. Rueff and partners own 8,800 sows as part of Prema-Lean Pork, #49 on the ranking.

“It’s been no fun the last 10 months,” says Rueff. “I’m just glad we’re still alive.” He says the industry is suffering from paralysis, with the knockout punch on the way.

“Everyone is asking, “Why haven’t people sold more sows?” Well, we were all hoping for $45 hogs all summer. We didn’t get them.”

Hatfield is ‘horizontally coordinated’

The Pennsylvania pig business is like the Chesapeake Bay’s tributaries – there’s only one place for the raw material to go. The place for pork is Hatfield Quality Meats near Philadelphia. The company has been killing hogs since 1895, but has never owned many sows. That may soon change.

This summer, Hatfield set up an entity called Pleasant Valley Foods, and hired Bob Ruth. In the past two years, Ruth has put 4,200 sows into production in central Pennsylvania under the name Ruth Family Farms. Hatfield now owns half of those sows. Hatfield also purchases hogs from Jerry Hostetter of Hostetter Management Company in Lititz, which manages 20,000 sows.

Hostetter owns some of those sows, and some are owned by Wenger Feeds, which bought most of the White Oak Mills sows last year.

Confused? You are not alone. Pennsylvania producers are trying to sort out what Hatfield owns and doesn’t own, but there is no question who is in control. “It’s a complicated maze,” says one producer. “It’s a scheme to get production in place, and behind it all is Hatfield.”

Hatfield’s strategy is “horizontal coordination,” not vertical integration, says John Reininger, director of fresh pork. “Our desire was not to own hogs, but we became concerned with that viability of pork producers in Pennsylvania. We needed to get actively involved to assure a supply of hogs.”

Concerned with producers

Reininger points out the 25-cents-per-pound price floor Hatfield set last winter as an example of its concern about producers. “Our philosophy is to extend a helping hand whenever we can,” he says. “In 104 years, we have had really good relationships with producers.”

If hog prices tank again this winter, will Hatfield reset the price floor? “I don’t know. It cost us big bucks,” says Reininger.

The industry is changing, says Reininger, and the old “you sell them, we buy them” method doesn’t work as well anymore.

“We are not actually saying, ‘let’s go own them all,’ but if we can’t find the right producers to work with, it may come to that,” he says. The bottom line is this, says Reininger: “We have to have a supply of hogs.”

Maschhoffs proud of independence

Making the Pork Powerhouses ranking for the first time has its pluses and minuses, says Ken Maschhoff of Maschhoff Pork, Inc. in Carlyle, Illinois, (#36 with 16,300 sows).

“We’ve tried to be low profile, but most people around here know we are a large operator,” says Maschhoff. “If we weren’t on the list, it would raise questions.”

Maschhoff, who farms with his wife Julie, and brother Dave and Dave’s wife Karen, has doubled sow numbers in the past two years, and built a $3 million feed mill and a boar stud. “We have a good story to tell,” says Maschhoff. “We are 100% family owned, and we are networking with other independent producers in the area who want to be part of a family-owned company.”

How has the family been able to expand in the face of dismal hog prices the past year? They use a “firm and deliberate approach to marketing” and use the futures market for protection, says Maschhoff. “We know our costs and sell above them whenever possible. We never leave corn and soybean meal uncovered.”

Produce for much less

The Maschhoffs plan to grow, not just survive. “I believe independents have an advantage over many larger corporate farms, because we can produce for less,” says Ken. “Knowing how crippled the rest of the industry is, I anticipate actually moving up the list as other producers merge and sell out.”

Yet, Maschhoff knows vertical integration is coming, even for them. “It’s our next goal – we realize we have to do that, it is out of our reach to own a plant, but we are hoping to work with someone.

“We will be one of the 50 major survivors in this business.”

Pork Powerhouse sow growth trends:

  • Top 5 in 1994: 559,000 sows
  • Top 5 in 1999: 1,213,000 sows
  • Top 10 in 1994: 827,000 sows
  • Top 10 in 1999: 1,626,000 sows
  • Top 25 in 1994: 1,069,600 sows
  • Top 25 in 1999: 2,208,078 sows
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