SF Special: How Contract Feeding Changed the Hog Industry
One evening last summer, a dozen seasoned hog industry leaders gathered around a table in Algona, Iowa, to reminisce about the history of the modern pork business. Wendell Murphy, 80, was visiting from North Carolina, and he wanted to meet again with folks he did business with 30 years ago when he was getting his Midwest contract hog feeding company started.
In the late 1980s, Iowa farmers, those who made it through the farm crisis of that decade, were looking for ways to improve their financial position. They needed to diversify and find extra income outside of corn and soybean production. Pork producers were still mainly independent family farmers, but they were becoming aware that the industry in North Carolina was expanding and integrating rapidly. Many felt threatened.
Rich Degner was CEO of the Iowa Pork Producers Association (IPPA) when Murphy came blowing in from the East Coast with the radical (for Iowa) notion of contract feeding.
“It was not easy to transition an association with thousands of members, many of whom did not like production companies,” says Degner. “The production companies were frustrated that we weren’t helping to move things along more quickly. We went through a time where we weren’t liked by anyone.”
A close call
Dermot Hayes, economics and finance professor at Iowa State University, was just starting his career when Murphy came to the state to push contract feeding. Many farmers pushed back.
“Everything you saw about it in the press was negative,” says Hayes. “If you believed the community activists, contract feeding would drive everyone out of the countryside.”
Pork producers, the justice department, and the Iowa DNR were all reading the tea leaves, says Hayes. “It was a close call about what happens next. Iowa almost walked away from this opportunity.”
Hayes was an assistant professor without tenure, but he took a chance. “I kind of got hot about the situation and thought somebody needed to write about the positives,” he says. He wrote a 14-page report and sent to the Des Moines Register.
“The point I was trying to make was that contract production was going to be good for Iowa,” says Hayes. “Contract feeding had the potential to renew rural Iowa, create jobs, help the soil with manure, increase corn basis, and increase corn yields. This was a good thing.”
The Register published the entire essay in the Sunday edition over two full pages. While some readers complained about “the hogwash” he had written, says Hayes, others saw a huge investment opportunity. Pretty soon, state representatives were seeing potential for hog growth in their counties.
Today, swine production alone provides over $228 million in taxes each year to Iowa, he says. “Those kind of numbers help. The industry is not nearly as unpopular as it used to be.”
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When the chain broke
When Bob Malloy, an Iowa attorney concentrating on agribusiness, got his law degree, he swore he was not going to practice in the bankruptcy court or do debtor creditor law. That was in the late 1970s when agriculture was booming, farmers were tearing out fences, selling their sows and cows, and making plenty of money just grain farming. From 1975 to 1982, land values went from $600 to $4,000 an acre in north-central Iowa.
Then Fed chairman Paul Volcker skyrocketed the interest rates. Once they topped 9%, grain farmers couldn’t make it, says Malloy. “The chain broke. The interest was eating them up. I was standing in bankruptcy court every other day trying to keep a farmer on the farm.”
Farmers were desperate for alternative income, so Malloy was willing to listen when Wendell Murphy wanted to meet for lunch in Goldfield, where Murphy Farms had a tiny office, to talk about contract feeding pigs.
“The first question he asked me was, ‘What kind of feed conversion did the best Iowa pork producers get?’ I said, ‘3.9 pounds of feed for a pound of gain.’ He looked at me kind of stunned.
“He said if we can’t get better than that he wasn’t going to be here very long,” says Malloy. “He wanted to get 2.6. I said, ‘Golly, I don’t know how you are going to do that.’ His response was, ‘Well, we better.’”
Malloy penciled out the returns for his clients. “If you had a three-barn site at that time you would earn more profit than farming 1,000 acres,” he says. “The grain farmers’ mentality was, if I just get more acres I will make more money, but it wasn’t working. They would ask me what to do. I said, there is this little bitty office in Goldfield. Go talk to those folks.”
He didn’t realize how controversial his connection to Murphy would be. “When I started working with those folks, talk about controversy. Grain farmers who earned it the old fashioned way – by inheriting it – and who didn’t have any debt, came and took their files because they heard I might be working with contract producers.”
It all worked out in the end. “There are farmers who I stood in bankruptcy court with back then who put up contract hog barns and are successful today,” says Malloy.
Al Bormann and his younger brother, Pete, farmed with their father near Liversmore, Iowa, in the 1980s. “I don’t like to talk about the ’80s,” says Bormann. “It was a tough time in my life and in everybody’s life. We suffered, but we managed to survive and get through it.”
They kept their farrow-to-finish operation independent. “We did everything on our own; that’s the way we’ve always done it,” says Bormann. “It was hard for people who had been independent all their lives, going back generations, to suddenly be in a contract situation.”
That said, they didn’t resent those who went on contract. “For a lot of people, it was their only way out,” says Bormann. “We realized those people would not be here if it wasn’t for contract feeding, and the community would not be here if all those people left. We saw the incredible number of people who left Kossuth County in the 1980s. It would have been worse. Wendell offered people a way to stay. We did appreciate that even though it didn’t really fit with our independent thinking.”
Scare up the money
Tim Healy was a new swine specialist for Farm Credit in 1990. His first account was Murphy Family Farms. Healy, now a vice president at Farm Credit, had to tell the seasoned credit committee, “why I had to scare up $10 million for this Wendell Murphy guy from North Carolina.”
The credit committee’s job is to shoot holes in whatever you ask for, says Healy. Thankfully, Murphy had shared financial information with him. “I just threw that on the table and said, ‘I’m not real smart, but if this guy is going to be making the payments, we need to be making more of these hog barn loans.’ They hemmed and hawed, and thought we were going out on a limb, but agreed.”
Thirty years later, says Healy, all those barns still have hogs in them, generating income for the growers who spent $300,000 back then. “What a success story,” he says. “We’ve never had a foreclosure or even a late payment. I’m still financing contract finishers.”
Kirk Haack, with Farm Credit in Emmetsburg, Iowa, said one of his clients, a grain farmer who owns three contract hog sites with three buildings on each, told him recently that he would not be farming or have a legacy for his children without the hog barns.
“In the 30 years we have been financing those barns, we have never had a late payment,” says Haack. “There are dozens of success stories of people farming today who wouldn’t be if it hadn’t been for this relationship. It’s really a wonderful thing.”
The packer’s view
Bob Hansen was the lead contact on the Murphy account with pork packer IBP (which sold to Tyson Foods in 2001). He remembers that IBP CEO Bob Peterson, now deceased, initially couldn’t believe the growth of the hog industry in North Carolina. Peterson traveled there in 1989 and visited Murphy, Bill Prestage, and Sonny Faison, CEO of Carroll’s Foods, to see for himself.
“In Bob’s mind, the Iowa pork producer had the lowest cost,” says Hansen. “He couldn’t figure out how anybody could compete with that 250-sow guy in Iowa.”
The large North Carolina producers protected their numbers well, says Hansen. “Bob came back, and he still didn’t get it.”
Soon afterward, swine breeding stock company PIC came to see Peterson at his headquarters in Dakota City. “Bob was telling them that nobody was going to beat this Iowa producer in cost of production,” says Hansen.
PIC told him he was wrong. “They showed him the cost differences,” says Hansen. “Bob understood the bottom line. He said, ‘We have to figure out how we are going to get modern hog production into Iowa.’”
Murphy’s packer in North Carolina wasn’t happy about his move to the Midwest. When Joe Luter, who was the CEO of Smithfield, heard that Murphy was coming to Iowa to raise hogs, he said, “Wendell, what are you thinking? Why are you going out there to teach them how to raise hogs?’” recalls Murphy.
IBP tried to build a packing plant in North Carolina, says Hansen, “But we got chased out by Smithfield at every spot we went. We didn’t get a plant built there, and shortly after that the moratorium went in place.” IBP built a new plant in Waterloo, Iowa, instead. By 1994, Hansen was in charge of the “Smart Hog Budget” for IBP. That was a line item for pigs that were efficient, he explains.
Doing business in the 1990s
Gary Machan was head of procurement for IBP at the time, and recalls the lengthy price negotiations that went on between Peterson and Murphy vice president Randy Stoecker.
“Randy not only told us what we were going to pay for his hogs, but how we were going to cut them, and, more importantly, how we are going to sell this meat.”
Murphy recalls the first time he went to Bob Peterson’s enormous office on the top floor of the IBP headquarters. “I thought I was going to have to get the key to heaven to ever make it to his office,” he says. “There he was in this huge room.” Peterson’s desk was practically a throne, he remembers, and the pork producers who met with him were given low chairs.
“He was as serious as a heart attack,” says Murphy. “With all that being said, I had great respect for Bob Peterson and the company.” The respect was mutual, says Hansen.
“We made a deal that lasted a long time,” says Stoecker.
Big Changes in 1999
When Smithfield Foods bought Murphy Family Farms in 1999, the clock started ticking to end the Murphy relationship with IBP.
“It was initially disappointing for us, because we had developed such a great relationship with these guys,” says Conley Nelson, head of Smithfield in the Midwest today.
“It was a sad day when Smithfield bought Murphy,” says Machan. “These are businesses, but they are still run by people. When you develop the relationship we had, it’s sad.”
“It was a sad day for me, too,” says Murphy.
Taking a look back at the 1980s, Machan gives the packer’s perspective. IBP, up until then a beef processor, saw that Iowa was an exporter of hogs. “Loading and shipping hogs was a lot more expensive than loading a truckload of meat and shipping the meat,” says Machan.
In the 1980s there was apprehension and fear about investing money in agriculture, says Machan, particularly in hog production. “The packing house business was going broke. Every packing plant in Iowa was for sale or in bankruptcy with the exception of Hormel and Farmland. The Morrells, Wilson, the Raths . . . all for sale. IBP was entering a business where packers were all going under.”
When IBP engineers turned the old Storm Lake plant into an efficient plant, the company knew it could be competitive,” Machan explains.
IBP focused on procuring pigs from modern hog production in modern facilities on a contract basis. The capital going into new contract facilities gave the company the confidence that there were going to be hogs in those buildings one way or another, says Machan. “Somebody was going to own hogs and use those buildings.”
By the late 1980s, many pork packers were building and remodeling plants in Iowa, and adding second shifts. “We had the hogs,” says Machan, simply. “The contract feeding model helped the transition of ownership on farms. It kept the packing industry alive.”
Murphy was the pioneer in contract feeding and did it right, says Hansen. “That paved the way for a lot of other companies to do the same. You had to do it right, or you fell by the wayside.”
Building net worth
Stoecker says one of the most rewarding things for him is knowing how many farmers were helped. “Many of those folks felt the breath of the wolf on their neck in the ’80s,” he says. “I am impressed with how many of them have been judicious with the money they earned contract feeding. They haven’t wasted it. They have built net worth, family legacies, and opportunities for their family and children.”
Fifty years ago, says Stoecker, “There were a million hog producers in the country and we were waist deep in cheap corn. We had packing plants running at 50% capacity, buying stations were as thick as thistles, and we were net importers of pork. We were sorry in pig production, we just didn’t know it. We had all the resources to do it, but as a country we weren’t very good.”
The industry was in a transition of quality in the 1980s, says Stoecker, going from a highly-variable source of pigs coming into the plants to one with a much narrower level of variation and higher level of quality, even at heavier hogs. “The chicken industry was chasing us,” he explains.
Stoecker says he enjoys talking to growers who started with Murphy 30 years ago and are still raising hogs. “Their buildings are paid off, they’ve added two or three sites, and some of them have their kids working with them,” he says. “They are worried about taxes and transfer of assets, things they weren’t worried about in the ’80s.”
Wendell Murphy looks around the table at the industry veterans. “My dream worked because of the people in this room and the contract growers throughout our organization,” he says. “I am so proud of the success of our contract growers and others who worked for us. I’m really happy that we’ve all been successful together.”
What it Means
Pat McGonegle, the current CEO of IPPA, says the contract growing network Murphy built, “is one of the pillars of the industry in our state. That is what makes Iowa thrive today.”
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There are twice as many hogs in Iowa today than there were in 1990, 47 million vs. 22 million, with half of the industry based on contract production, says economist Hayes. Job holders in the state hog industry today total 53,000, not counting the packing industry, he says. “That is a direct result of Wendell’s notion that corn farmers could be great at finishing hogs.”