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DAVID KRUSE

By Staff | Apr 12, 2013

While today it feels like it happened in another galaxy far, far away – I used to produce hogs. In fact, producing hogs was the first financially successful thing that I did when I began to farm in 1973.

I did some farrowing, starting with heat lamps in pens in an old barn and pasture farrowing, transitioning to feeding about 5,000 head of feeder pigs annually in partnership with my father. My first experience with hogs was with 400 head, mostly scruffy pigs that I bought at a farm sale and did all the work on.

I sold them for a $30 per head profit with which I bought my first tractor, a 1066 IHC. They paid for it in total. How many pigs would you have to raise today to buy a tractor? Our hog operation was always considered a supplement to our cattle operation. Our hog buildings are now buried so there are no remnants of that past still above ground. We used to market our hogs to local buying stations or direct to packing plants.

I fed hogs into the early 1990’s until the industry structure began to change – something that producers more stubborn than I are still struggling with.

I recently received this response from a subscriber to my market comments.

“I am an independent pork producer and have grown weary of your repeated opinion that I have ‘no future in this industry.’ If you would review your comments over the last 30 days, on at least 15 of those days I have been told I have ‘no future’.”

I get it. I know how he feels. There is nothing that is going to change the fact, however, that the hog industry structure has destroyed any prospect of long-term viability for a commodity hog producer today.

Commodity hog production, where producers independently own hogs, including production hedged using commodity hog contracts, has been relegated to the past. It is over. You can fight it, but it is over. The integrated industry structure that the industry has evolved into makes that a fact.

I was part of the conversation/debate of the evolution of hog industry structure. I forecast that if packers were allowed to raise hogs that after a few more cycles, the packers would eventually raise the hogs.

If you like working with hogs you can continue to do so, raising hogs owned by someone else on contract, hopefully making a little money contract finishing, selling pig spaces and retaining the manure to fertilize crop production.

The commodity market will no longer produce enough profit periods to offset the loss periods because of the industry structure.

Another avenue for hog production is to avoid the commodity market by producing for the specialty market. Niche markets offer higher prices for hogs, but typically come with their own supply chain obstacles to go with the opportunities.

One niche producer told me that he was forced to quit because the restriction on use of antibiotics was resulting in an intolerable death loss. There are many such restrictions. There are many production efficiencies in commodity hog production that cannot be captured by niche producers. The niche supply chain has such a higher cost of production that it is uncompetitive with commodity hog production. That goes to the heart of niche production in that the market for those willing to pay such a premium for pork is limited. There is no argument that the commodity hog producing industry with its integrated structure is producing the low-cost product, competitive globally. They too are being forced to adapt to niche restrictions such as gestation pens and restricted use of ractopamine as even commodity consumers are getting more demanding.

I fought to defend the interests of independent commodity hog producers right up until what I considered the end of the war when the integrators won and took over.

I was always amazed at how delusional some commodity hog producers and their pseudo-producer organizations were over their viability in an integrated industry structure. Sen. Chuck Grassley R-Iowa, who also produced hogs in another life, understood it and tried unsuccessfully to protect the independent industry structure legislatively to no avail. Most commodity hog producers have continued to produce hogs because they raise enough of their own feed to subsidize the feed costs. They sell their $7 corn from their grain operation for $5 bushel to their hog operation. If there was some pot of gold at the end of the rainbow for doing that, it would be one thing, but the industry structure will never allow them to touch any gold.

To the independent pork producer the first thing that I should say is that I believe that you produce hogs, not pork. If you produced pork you would be integrated into enough of the supply chain to have a viable future.

Control has become concentrated to just a few in the industry.

Given the industry structure, (for the 16th time) independent hog producers have no viable economic future in the industry. They will bleed you dry.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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