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Are Large Operators "Living High On The Hog?"

by 5m Editor
12 December 2007, at 10:49am

US - Large livestock production operations have proven there is an economy of scale, but have they gained an even larger advantage in recent years over mid-sized operations from low prices of corn and soybean meal, asks Stu Ellis, University of Illinois Extension.

Stu Ellis, University of Illinois Extension

For decades farmers have called hogs the “mortgage lifter,” and the 1920’s provide the feed value relationship in the hog-corn ratio. Around 40 years ago when Wendell Murphy’s feed mill used hogs to clean up the gleanings, a new livestock production economy was created that would grow to a large scale. That scale drew the attention of economists Elanor Starmer and Timothy Wise at Tufts University, whose research into the production economics of confinement feeding operations rhetorically asks if the playing field has been tilted to benefit the larger operations because of low priced feed inputs.

Starmer and Wise report that poultry was being vertically integrated in the 1920’s but the past 20 years has sped up the process in poultry, swine and beef. The poultry “industry saw its average feed efficiency double between 1945 and 1970, while labor productivity rose an annual average of 10.5% over the same period. Overall production costs dropped by nearly 90 per cent between 1947 and 1999.”

They quote USDA statistics that the hog inventory housed in facilities with 2,000 or more animals increased from 37 per cent in 1994 to nearly 75 per cent by 2002. They quote other USDA day that economies of scale are most evident between small and medium operations, leveling off as operations grow beyond 2,000 head.

Declining prices

The Tufts University economists say the 1996 Farm Bill eliminated price supports that remained from prior supply management policies and brought about declining commodity prices, increased production levels, rising input costs, and stagnant or declining net farm income. They say supporters of the policy hoped the US would gain more world trade, but improved technology caused yields to increase, and prices to drop. Critical of current farm policy, Starmer and Wise say, that this paper suggests that one of the major beneficiaries from recent changes to US farm policy has been the industrialized livestock sector generally, and industrial hog operations in particular. They are among some of the largest buyers of US corn and soybeans - industrial hog operations spend some 60 per cent of total operating costs on feed made largely of these two components.

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"... One of the major beneficiaries from recent changes to US farm policy has been the industrialized livestock sector."

Starmer and Wise

The researchers calculate that costs of production for corn and soybeans from 1986 to 2005 was almost always higher than the market price, based on statistics from domestic and international sources, and the margins widened after the 1996 Farm Bill.

“As a result of their ability to purchase corn and soybeans on the market at a price below cost of production, industrial hog operations received, in effect, a discount on their feed from below-cost corn and soybeans. We estimate this discount to be 10% in the earlier period and 26 per cent in the post-reform period,” they says.

The economists contend low grain prices after 1996 allowed large livestock operations to save an average of $945.3 million per year in feed costs. These estimates suggest that industrial hog operations gained considerably from policy changes in 1996 that fed overproduction and provoked lower feed-market prices.

Starmer and Wise say that since government payments tend to inflate land values, the price supports provided by the 1996 Farm Bill impacted land values, and a subsequent deflation of land values would affect the corn production cost by four per cent and the soybean production cost by six per cent. They further believe those adjustment shrink the discounted cost of feed, but it still provides a benefit to the livestock industry.

Unavailable to smaller farms

The nearly US$1 billion savings in feed costs, say Starmer and Wise, was not available to the smaller operations that grow their own feed. “The availability of low-priced hog feed on the market may have contributed to a structural transformation in hog production, encouraging the growth of industrial operations by giving them a cost advantage over diversified competitors.”

The Tufts University economists hypothesize that large operations saved 2.4 per cent to 10.7 per cent in operational costs from “lax environmental regulations,” which they detailed in their report; and combined with discounted feed costs their overall operational savings totaled 17.4 per cent to 25.7 per cent compared to diversified crop and livestock farms which had smaller herd numbers.

With rising commodity prices, market values are expected to be above production costs for the next five years say Starmer and Wise, which would represent a 29% increase in the cost of feed for large confinement hog operations. They believe diversified operations will regain some economic advantages and may out-compete larger operations.

Summary

Lower commodity prices, based on the marketing loan program in the 1996 Farm Bill, provided low costs of corn and soybean meal that allowed large increases in the number of large livestock feeding operations. Their economy of scale, according to the research, may have resulted more from government policy than from operational economics, with diversified crop and livestock operations being disadvantaged. Higher commodity prices anticipated in the next few years will return diversified operators to a better economic position.

Source: Farms.Com

5m Editor