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Pork Powerhouses 2003: Independents Take a Stand

Three years ago one of the largest independent pork producers in the U.S. looked at his industry and didn’t like what he saw. 

(Photo: Minnesota producer Bob Christensen and several other Pork Powerhouses are building a packing plant in St. Joseph, Missouri.)

“With packer consolidation, our options for selling our product had been reduced,” says Bob Christensen. The Sleepy Eye, Minnesota, producer is #8 on the exclusive Pork Powerhouses ranking, with 94,000 sows. Wary of the industry’s reliance on packer contracts, Christensen began to consider another option. If you can’t beat them, join them – he would enter one of the most literally cutthroat businesses in the world and become a pork processor. Click here to view the Pork Powerhouses list

Christensen and several other Pork Powerhouses, including #10 Hanor and #21 New Fashion Pork, are shareholders in the new packing company Premium Pork, LLC (the name will soon change). The company, with former Seaboard Farms chief Rick Hoffman as CEO, has purchased land in St. Joseph, Missouri, and is breaking ground this fall on a new pork processing plant to be up and running by fall 2005. 

All investors are producers

About 40 other independent producers are also involved, including members of Allied Producers Cooperative in Kansas, Minnesota, Iowa, and Nebraska. All shareholders are at different investment levels depending on the number of pigs they will commit to the plant. Christensen sells to three different packers today and plans to continue this diversification after the St. Joseph plant is running.

“All our hogs will not go to the new plant,” he says. “It’s like a 401(k) – you keep it diversified.”

The group first looked at buying existing processing operations, but decided to go with new technology. The plant will focus on food safety and meat quality. Cost is $120 to $130 million. It will kill 1,000 hogs an hour, all of consistent genetics for uniformity and meat quality. 

Strong balance sheets

The venture is unlike any tried in the past, says Myrl Mortenson, managing partner of The Hanor Company, with 73,500 sows. Shareholders are top-of-the-industry producers with strong balance sheets and the will to succeed, he says. “The producers involved in this are the best in the industry at production,” says Mortenson. “And we picked the best leader in Rick Hoffman. He’s been there and done it.” Hoffman was CEO of Seaboard when the company built its Guymon, Oklahoma, plant. 

“We understand the concepts,” says Mortenson. “We are real producers putting our own money at risk. This bodes well for the whole industry.”

This sort of thing has never been done before on this size and scale, says Brad Freking of New Fashion Pork in Jackson, Minnesota, with 33,000 sows. The displacement of market hogs going to the new plant will drive up the cash market, he predicts. “There will be more competing bids; it’s positive for all pork producers.”

The key to profitability for those involved, says Freking, is the cost structure on the production side. “Our huge underlying competitive advantage is our live cost of production vs. the packer integrators. They can’t touch us on the live side. We will put pigs into the plant 3¢ a pound, $8 a pig, cheaper than the competition. 

Other large pork producers, including Mike Terrill of integrated Clougherty Packing Company in Los Angeles (#28), are watching the development with interest. “This new plant has the most potential to change the industry in the next three to five years,” says Terrill. “These are smart guys involved. It’s risky, but they have a good model.”

In Illinois, producer Ken Maschhoff (#24) says, “My hat is off to the producers involved. It’s good for the rest of us if it works. We view any new capital into the packing industry as positive. For independent producers like us, it’s the best thing in the world.”

Doubters are out there as well. “Those guys are going to have to fight for market share,” says a North Carolina producer. “They are going into the market with no brand. Their product has to be cheaper. We’re in a plain old commodity business and cheapness always rules.”

A packer-integrator points out that, “The processing reality is you have to sell the entire carcass, every piece, and there are a lot of pounds going through. You need good consistency and good quality, and that is tough.”

The risks of the packing industry, says Christensen and his partners, are well known to all shareholders, and strategies are in place to deal with the challenges. Wait and see, they say. They are moving forward. “We don’t see any other option looking down the road,” says Freking. “We’ve been transferring revenue from live production to processing since 1998. Some days we can’t get bids for our pigs on the open market. The writing is on the wall. It needs to happen.”

Christensen is confident in their plan. “We are moving from the mentality of selling live hogs to selling protein,” he says.  “When you take a business model like this with a known supply of hogs and a new plant focused on food safety and quality, who is not going to be in the market for our product? The consumer will want our pork vs. buying pork from an old plant sourcing hogs from a mixture of farms.”

Smithfield charges ahead

As for Christensen and his group make plans for their plant, the world’s largest integrated packer-producer, Smithfield Foods, continues charging full speed ahead. Smithfield is attempting to purchase both Farmland Foods (#18) and Alliance Farms (#27). The Alliance purchase is close to complete; the Farmland purchase was stymied when Cargill submitted a high bid of $385 million on September 12.  An auction process overseen by the bankruptcy court involving parties interested in purchasing Farmland will take place in early October. 

If Smithfield buys Farmland and Alliance, it would add three packing plants and 68,500 sows to its arsenal, bringing total U.S. sow ownership to 825,000. That is more than 12 times as many sows as it owned in 1994. Back then, the nation’s largest pork producer, Murphy Farms, had a mere 180,000 sows. Now Murphy is owned by Smithfield Foods.

Internationally, Smithfield’s reach extends farther. On top of its U.S. sows, Smithfield has 93,041 sows internationally, with two operations in Mexico and one each in Brazil and Poland. Total worldwide sows for Smithfield at press time was 849,267 … and growing.

According to Jerry Godwin, president and COO of Murphy-Brown, a subsidiary of Smithfield Foods, the company plans to grow to 80,000 sows in Mexico, 25,000 in Brazil, and 50,000 in Poland within five years. However, this past year was not a growth one for Brazil, with no new sows added there for Smithfield. Both grain prices and hog prices moved against them, explains Godwin. The Brazil pig business “is breakeven, touch and go. We are not building more barns there until the markets turn. Our plans are on hold.”

Poland has also been troublesome for the company, with slower growth than expected. “We decided not to be so aggressive about how quick we put sows in,” says Godwin. “We want to do it well.” He says Smithfield is working on getting all the farms in compliance with both Polish and European Union animal welfare and environmental rules.

Didn’t work in Poland

Smithfield met “severe opposition” when it went into Poland, says Hans-Wilhelm Windhorst, University of Vechta, Germany. “Smithfield came into Poland with their U.S. attitude – we are the biggest and best – and it didn’t work immediately, as they soon realized,” says Windhorst. “Local farmers, business people, and politicians alike fought their expansion plans. Poland is not like the rest of Europe. They have a different mental attitude. Some guys who played an important policy role in the past are still in leadership positions or are pulling strings in the background.”

As for growth plans in the U.S., those continue for Smithfield as they have for several years, focused on acquisitions. “We won’t put in more sows,” says Godwin. “There are already enough hogs in the U.S. If there is a good buy and sows become available, we would look at that.”

Efficiency is top of mind for Smithfield as it looks at Farmland. Smithfield president and COO Larry Pope says (if and when the acquisition is completed) the company will work with Farmland management to generate efficiencies. “Farmland production is significantly more costly [than Smithfield pork production],” says Pope. “We will work with contract farmers to make them more efficient. We need those farmers as badly as they need us.”

As for the packing side of the business, he says, “we may need to make capital investments, which we will, to make plans more efficient.” Pope calls the Farmland brans, “a very strong brand; a successful brand with a lot of potential.” However, “there is a lot of profit potential still buried in there. We will broaden the brand.” 

In the past year, the Farmland pig system has become more cost-effective, eliminating uncompetitive feed and pig suppliers and increasing throughput in the barns, says Jerry Leeper, vice president of Farmland’s livestock division. “We streamlined a lot of stuff. The last three years we have taken $11 a head out of costs,” says Leeper. “Our pork business has continued to perform well throughout this time, despite the uncertainty.”

Big problem is credit

What’s happening with the rest of the Pork Powerhouses? Some are running from creditors. Some are for sale. Some are buying. Most are waiting and hoping for better times. 

“The big problem is credit,” says one Midwestern producer. “There are not huge numbers of banks that will lend to the swine industry. Bankers got their crawfull of bad loans. When credit becomes an issue, hog operations get sold.” 

The summer hog market didn’t reach as high for as long as anyone hoped. In early September, cash hog prices were no more than $40 per hundredweight.  Feed costs were rising. Packers were having trouble moving pork. The tone of producers turned dour. 

Kent Haden at MFA (Missouri Farmers Association) markets 250,000 pigs for independent producers. “A lot of them have had all they’re going to take,” says Haden. “There is a drastic need for several months profitability. We need more than breakeven; we need sustained profit. We all thought the summer was going to heal us.”

Grow fast, step back

Lackluster markets mean changed plans for some Pork Powerhouses. After adding 15,500 sows in the past year, Ken Maschhoff of Carlyle, Illinois, is “stepping back” and putting growth on hold after a disappointing season of prices.

“The summer was not as good as we anticipated,” he says. “Summer is over, and we didn’t get what we thought we would. We all thought ’04 was going to be our savior, and it’s not going to be much above breakeven.”

Future growth, says Maschhoff, will have to be “acquisition that falls right into our lap. We’ve made a strategic mind-set change here to no longer add any sows through new construction. The industry has plenty of sows. If anything comes our way, we’ll go that route. But we are not looking to add a lot of sows here in the next year.”

Besides Maschhoff, a few others expanded this past year. Wakefield Pork in Minnesota (#23, with 31,400 sows) picked up a farm or two and is building more sow space this fall. “We are a little long in finishing, so we want to even out the production system,” says owner Steve Langhorst. “This is the least amount of building we’ve seen in Minnesota in a long time.”

Hatfield owns more

In Pennsylvania, there has been little true growth, but lots of consolidation and integration. The region’s largest packer, Hatfield Quality Meats, bought farms from Wegner Feeds, Purina, and JDH Farms, boosting its sow count to 41,100. 

“We don’t want to own any more sows than we have to own to fill our kill,” says Bob Ruth, head of production for Hatfield. “Pig ownership is a necessary evil to fill the plant. We are still buying 30% of our animals on the open market from small farmers and would like to expand those purchases.”

Tyson owns less

Tyson is down to 65,000 sows from 107,000 two years ago. John Thomas, president of the pork division, calls it restructuring. “We are not interested in increasing vertical integration,” says Thomas. “The industry from a profit standpoint is not out of the woods yet. There is still not enough liquidation. We are refining our business and improving efficiency.”

Seaboard Farms, aggressive in past years, is also slowing, adding a scant 1,600 sows in the past year. The company has 213,600 sows total. “We grew so fast for several years,” says senior vice president Mark Campbell. “Now with supply-side pressure on prices, we are reluctant to build more bricks and mortar. We will wait until the market can support it.”

Seaboard continues to secure permits in Texas for both a new packing plant and pork production capacity. Campbell will give no time frame for breaking ground. “It will be a time line of our choosing, and I can’t tell you more with accuracy. It will be a market-cased decision, based on an economic evaluation.”

Campbell is watching the developments of Christensen and his partners in their packing venture in St. Joseph. The location is one Seaboard considered three years ago for a plant, before deciding to look at Texas instead. 

“We wish them well and hope they are successful,” says Campbell. “It’s a tough business.”

Yikes! Look at all those Canadian pigs

If you think there are a lot of Canadian hogs coming into the U.S., you are right. They are flowing south at double the rate of one year ago, which has helped drive down U.S. hog prices. The U.S. ban on Canadian beef and cattle after a case of mad cow disease there caused a glut of meat in Canada. 

“We are marketing more hogs to the Midwest, but not by choice,” says Florian Possberg, CEO of Big Sky Saskatchewan (with 26,000 sows). “We were selling to four plants in Canada, and one shut down in Manitoba and three have backed off numbers. We normally only send 3% or 4% of our production to the U.S., but next week [late August] we will send 50%. And it’s costing us a lot of money to do it.”

The swine industry in Canada “has been turned upside down” by the mad cow situation, says Possberg. When the borders closed, pork demands plummeted as consumers snatched up cheap beef that couldn’t be exported. “There were traffic jams in Saskatoon to buy ground beef,” says Possberg. 

Thanks to mad cow disease and poor hog markets, “Expansion came to a grinding halt” for Big Sky Farms, says Possberg. The company won’t be turning dirt on sow units in the foreseeable future, and other companies are thinking the same. Of the list below, ranking eight largest producers in Canada, nobody is planning to expand in the next year. Quebec is still under a building moratorium, and everyone else is weary from years of past expansion, averaging 5% annually for Canada as a whole.

Still, Possberg is hopeful. “I’ve been in business since 1975 and found that when the last bit of optimism is sucked out of you, that’s when the industry turns around.”

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