Production-Packer Match Point

Producer output and packer capacity must coincide.

To function efficiently, the U.S.-Canadian pork sector must be a well-tuned interaction of mainly independent businesses. Input suppliers, producers, packers, processors, retailers and foodservice operators must all be “on the same page” in order to deliver to consumers the correct quantity of pork products with the right characteristics in a timely manner.

Stated more succinctly — producers and packers had better be in step with demand! The relationship of producer output and packer capacity is critical to accomplishing this task and maintaining producer prices at equitable levels.

Packing Capacity Benchmark

Prior to 1980, the U.S. pork packing sector was comprised of widely scattered, mainly multi-species, multi-story plants that usually operated just one shift daily. Those characteristics made plants quite flexible and allowed them to easily handle large seasonal variation of hog supplies. At times, fourth-quarter slaughter represented 30% of the year's total.

But those plants also reflected old technology and business models that left them vulnerable to innovative competition.

The competitive balance of the meat industry began to change dramatically by the 1970s. Chicken had gone from being a by-product of the egg business and a relative luxury, as President Hoover promised “a chicken in every pot,” to supplanting pork as a low-cost source of meat protein.

Pressure on pork packer margins and relatively lucrative labor contracts at the major packers of the day — Wilson, Swift, Hormel and Morrell — set off a period of labor unrest that was to open the door for new competitors.

Enter IBP. Iowa Beef Processors had already revolutionized beef slaughter and fabrication with low-cost, frequently non-unionized, efficient operations and boxed beef products. IBP promised to do the same in pork slaughter and fabrication, putting greater competitive pressure on established pork packers.

The advent of species-specific, single-story, high-throughput pork plants began a long period of tight margins that rationalized pork slaughter capacity by driving old, inefficient, poorly-located plants out of business.

That rationalization process collided with higher hog output for the first time in the fall of 1994, when cyclically higher hog numbers and diminished slaughter capacity caused delays in orderly marketings. Live hog prices fell to disastrous levels in the mid-$20s.

The occasion, though, did provide one positive outcome: For the first time in virtually anyone's memory, we had a clear idea of the total capacity of U.S. pork slaughter facilities. A benchmark had been established. Little did we know how important this concept would become just four years later.

Importance of Packing Capacity

The packing-processing sector performs the absolutely necessary function of transforming live hogs into wholesale and retail cuts. It cannot be quickly replaced, and must be paid to perform those services.

Furthermore, no one in the packing-processing sector decides how much to produce. That decision rests solely with the people who breed and farrow sows.

For the pig-pork system to work well, packers must have enough capacity to slaughter and process whatever number of pigs producers can deliver at near optimal market weights in a given time period. If that number nears the capacity of packing facilities, packers' marginal cost (total cost added by the last unit processed) increases dramatically.

Since consumer prices are based, in the short run, on demand and not costs, the increase in packer marginal cost is taken out of the price paid for pigs. Obviously, this can spell potentially disastrous results for producers.

Figure 1 shows the strong negative relationship that existed between slaughter capacity utilization and hog prices from 1994 to 2003. High utilization in the fall of 1994, 1998 and 2002 resulted in low hog prices. Low utilization in 1996-1997 and the summers of 2000 and 2001 resulted in high prices. Note that utilization rates of over 100% in this graph are the result of computing average daily slaughter, using monthly slaughter and the number of slaughter weekdays in a month. The extra slaughter is accomplished by operating extra weekday hours and Saturdays.

This negative relationship between these two variables fell apart to some degree in 2004 because of a huge increase (12%) in hog demand. That increase was the result of higher domestic pork demand, record levels of pork exports and, at least from July 2004 through June 2005, tight packer margins. It appears that the negative relationship has reasserted itself since mid-2005, as capacity utilization has increased and hog prices have fallen.

U.S., Canadian Capacity

U.S. and Canadian slaughter capacities, by plant and company, for 2004 through 2006 are shown in Tables 1-3. Note that Canadian capacity is weekly, while U.S. capacity is daily. Right-justified names in the company column (i.e. Morrell, Farmland) represent companies purchased by the current owner, whose name is left-justifed (i.e. Smithfield) in that same cell.

No expansions of U.S. capacity are anticipated this year. But some capacity increases are quite subtle. Packers often increase throughput without adding plants, plant size or equipment, simply by developing new operational techniques. In fact, the current estimate of U.S. capacity is likely low for this very reason.

Need evidence? Consider the fall of 2004 (Figure 1). Very high-computed capacity utilization — even higher than that of the fall of 1998 — was not accompanied by extremely low prices. This probably occurred because our estimate of capacity is a bit too low, and thus, our computed utilization rate is a bit too high.

Packers aren't necessarily lying about their capacity; they just have every incentive to operate a plant in a manner that increases its output, and they don't always make those changes public.

According to the Canadian Pork Council, Canada's packing sector will grow this year as Olymel completes the expansion of its Red Deer, Alberta plant; the RDA plant in Quebec opens; and two other plants expand slightly.

Plans are in place for significant capacity growth in both the United States and Canada in 2007 and 2008. Table 4 shows these increases, including new plants in Moline, IL, and Winnipeg, Manitoba. The combined increase of 32,850 head/day would represent a 6.4% increase of current combined capacity.

What Does It All Mean?

These data suggest that U.S.-Canadian packing capacity will likely be sufficient for the foreseeable future. Higher U.S. hog supplies and relatively constant Canadian output through the fall of 2007 will increase utilization rates, but likely will not drive them to the problematic levels of years past.

If all planned capacity expansions actually occur, the growth rate of slaughter capacity will be higher than the growth rate of hog production through 2008. This will drive capacity utilization rates lower, putting positive pressure on hog prices and negative pressure on packer margins.

The latter raises the question: “What plant(s) may close?”

The U.S. list provides no clear answers. The plants that are usually considered suspect (Sioux Falls, SD; Monmouth, IL; Louisville KY;) have either seen major modernizing investments, or owe their owners little in terms of fixed costs.

While margins may get tight over the next two years, they are not likely to fall short of variable costs for any long period of time. Consequently, these plants will likely continue to operate. There simply isn't much vulnerable capacity in the United States.

On the other hand, Canada presently has excess slaughter capacity, and the planned expansions will increase that excess.

A number of Canadian plants are older and, at least by U.S. standards, less efficient. The current reduction of the Canadian sow herd, output difficulties related to porcine circovirus-associated disease (PCVAD), and a Canadian dollar that creeps closer and closer to par with the U.S. dollar will put economic pressure on the weaker plants.

The biggest risk for pork producers in both the United States and Canada is that plant closures will be delayed long enough for any reduction in capacity to again coincide with a significant increase in hog numbers. When and if that happens, we could see a repeat of the '98 hog price disaster.

Should the planned sow herd expansions occur, some believe that another 100,000 to 150,000 sows will be added in the United States. There is a greater risk of such a replay. The pork sector simply will not work in the long run with production and packing sectors whose sizes do not match.

Table 1. Estimated Daily Slaughter Capacity (U.S. Plants — Market Hogs and Light Hogs)
(Company headquarters in parenthesis)
Fall 2004 Fall 2005 Projected Fall 2006
Rank Company City/State Plant Co. Total Plant Co. Total Plant Co. Total
1 Smithfield Foods (Smithfield, VA) Tar Heel, NC 32,000 32,000 32,000
Smithfield, VA 7,800 Closed Closed
Gwaltney, VA 9,500 10,800 10,800
Morrell Sioux Falls, SD* 14,400 14,400 14,400
Sioux City, IA 14,500 14,500 14,500
Farmland Crete, NE 10,400 10,400 10,400
Denison, IA 9,200 9,200 9,200
Monmouth, IL 9,000 106,800 9,000 100,300 9,000 100,300
2 Tyson Foods (Dakota Dunes, SD) Waterloo, IA 19,200 19,200 19,200
Logansport, IN 14,500 14,500 14,500
Storm Lake, IA 14,500 15,000 15,000
Col. Junction, IA 9,800 9,800 9,800
Madison, NE 7,500 7,500 7,500
Perry, IA 6,800 72,300 6,800 72,800 6,800 72,800
3 Swift (Greeley, CO) Worthington, MN 17,500 17,500 17,500
Marshalltown, IA 18,500 18,500 18,500
Louisville, KY 10,000 46,000 10,000 46,000 10,000 46,000
4 Excel (Wichita, KS) Beardstown, IL 18,000 18,000 18,000
Ottumwa, IA 18,000 36,000 18,000 36,000 18,000 36,000
5 Hormel (Austin, MN) Austin, MN 18,000 18,000 18,000
Fremont, NE 8,800 26,800 10,500 10,500
Clougherty Los Angeles, CA 7,300 7,300 7,300 35,800 7,300 35,800
6 Prem. Std. (Kansas City, MO) Milan, MO 7,300 7,300 7,300
Clinton, NC 10,000 17,300 10,000 17,300 10,000 17,300
7 Seaboard (Shawnee Mission, KS) Guymon, OK 16,000 16,000 16,000 16,000 16,000 16,000
8 Indiana Packers Corp. (Delphi, IN) Delphi, IN 12,500 12,500 12,500 12,500 12,500 12,500
9 Hatfield Quality Meats (Hatfield, PA) Hatfield, PA 10,200 10,200 10,200 10,200 10,200 10,200
10 Sara Lee (Cincinnati, OH) West Point, MS 6,200 6,200 6,200 6,200 6,200
11 Triumph Foods (St. Joseph, MO) St. Joseph, MO 8,000 8,000 8,000 8,000
12 J.H. Routh (Sandusky, OH) Sandusky, OH 4,200 4,200 4,200 4,200 4,200 4,200
13 Meadowbrook Farms (Rantoul, IL) Rantoul, IL 4,000 4,000 4,000 4,000 4,000 4,000
14 Sioux-Preme (Sioux Center, IA) Sioux Center, IA 3,500 3,500 3,500 3,500 3,500 3,500
15 Greenwood (Greenwood, SC) Greenwood, SC 3,000 3,000 3,000 3,000 3,000 3,000
16 Fisher Ham and Meat (Spring, TX)** Spring, TX 1,500 1,500 1,500
Navasota, TX 500 2000 500 2,000 500 2,000
17 Spectrum Meats (Mount Morris, IL) Mount Morris, IL 1,600 1,600 1,600 1,600 1,600 1,600
18 Yosemite Meat (Modesto, CA) Modesto, CA 1,500 1,500 1,500 1,500 1,500 1,500
19 Leidy's (Souderton, PA) Souderton, PA 1,400 1,400 1,400 1,400 1,400 1,400
20 Vin-Lee-Ron (Mentone, IN)** Mentone, IN 1,100 1,100 1,100 1,100 1,100 1,100
21 Martin's Pork Products (Falcon, NC)** Falcon, NC 1,000 1,000 1,000 1,000 1,000 1,000
22 Cloverdale Foods (Minot, ND) Minot, ND 920 920 920 920 920 920
23 Verschoor Meats (Sioux City, IA)** Sioux City, IA 800 800 800 800 800 800
24 Peoria Packing (Chicago, IL) Chicago, IL 750 750 750 750 750 750
25 The Pork Company (Warsaw, NC)** Warsaw, NC 750 750 750 750 750 750
26 Independent Meat (Twin Falls, ID) Twin Falls, ID 650 650 650 650 650 650
27 Masami Meat Co. (Klammath Falls, OR) Klammath Falls, OR 650 650 650 650 650 650
28 DeKalb Co. Packing (DeKalb, IL) De Kalb, IL 500 500 500 500 500 500
29 Carleton Packing (Carlton, OR) Carleton, OR 375 375 375 375 375 375
30 Lowell Packing (Fitzgerald, GA) Fitzgerald, GA 350 350 350 350 350 350
31 Parks Family Meats (Warsaw, NC) Warsaw, NC 300 300 300 300 300 300
32 Morris Meat Packing (Morris, IL) Morris, IL 200 200 200 200 200 200
33 Southern Quality Meats (Pontotoc, MS)** Pontotoc, MS 130 130 130 130 130 130
TOTAL TOP & LIGHT HOG CAPACITY 380,875 390,775 390,775
TOTAL SOW AND BOAR CAPACITY 20,800 20,800 20,800
TOTAL HOG SLAUGHTER CAPACITY 401,675 411,575 411,575
*2,600 hd/day of capacity is counted for sows.
**These plants mainly slaughter light pigs (total:5,780 head/day).
Table 2. Estimated Weekly Slaughter (Capacity Canadian Federally Inspected Plants)
Fall 2004 Fall 2005 Fall 2006
Rank Company City Province Plant Company Plant Company Plant Company
1 Olymel Vallée-Jonction Quebec 35,000 35,000 35,000
St-Valerien Quebec 38,000 38,000 38,000
Brochu St-Esprit Quebec 15,000 27,000 27,000
Brochu St-Henri Quebec 15,000
Fletchers Red Deer Alberta 45,000 148,000 60,000 160,000 80,000 180,000
2 Maple Leaf Foods Brandon Manitoba 45,000 45,000 45,000
Burlington Ontario 43,500 43,500 43,500
Charlottetown Prince Edward Island 5,000 5,000 5,000
Berwick Nova Scotia 6,000 7,500 7,500
Lethbridge Alberta 6,500 6,500 6,500
Schneider Winnipeg Manitoba 17,500 123,500 17,500 125,000 17,500 125,000
3 Quality Meat Packers Toronto Ontario 30,000 30,000 33,000 33,000 33,000 33,000
4 Abattoir St-Alexandre St. Alexandre Quebec 15,500 15,500 20,000 20,000 20,000 20,000
5 Du Breton Rivière-du-Loup Quebec 18,000 18,000 18,000 18,000 18,000 18,000
6 Mitchell's Saskatoon Saskatchewan 18,000 18,000 18,000 18,000 18,000 18,000
7 Springhill Farms Neepawa Manitoba 18,000 18,000 18,000 18,000 18,000 18,000
8 Trahan Yamachiche Quebec 12,000 12,000 15,000 15,000 15,000 15,000
9 Agromex St-Blaise Quebec 10,000 10,000 12,000 12,000 13,000 13,000
10 Conestoga Breslau Ontario 12,500 12,500 12,500 12,500 12,500 12,500
11 RDA Les Cèdres Quebec 10,000 10,000
12 Britco Export Packers Langley British Columbia 6,000 6,000 6,000 6,000 6,000 6,000
13 Lucyporc Yamachiche Quebec 3,500 3,500 4,500 4,500 4,500 4,500
14 Kamouraska St-Pascal Quebec 3,500 3,500 3,500 3,500 4,000 4,000
15 Trochu Meats Trochu Alberta 3,500 3,500 3,500 3,500 3,500 3,500
16 J&M Meats International Warburg Alberta 3,000 3,000 3,000 3,000 3,000 3,000
17 Hébert Ste-Hélène-de-Bagot Quebec 2,500 2,500 2,500 2,500 2,500 2,500
18 Oronor Lorrainville Quebec 1,000 1,000 1,000 1,000 1,000 1,000
19 Giroux East Angus Quebec 1,000 1,000 1,000 1,000 1,000 1,000
20 Sturgeon Valley St. Albert Alberta 1,000 1,000 1,000 1,000 1,000 1,000
West Perth / Newco Mitchell Ontario 5,000 5,000
Worldwide Pork Moose Jaw Saskatchewan 5,500 5,500
Best Brand (formerly Forgan) Winnipeg Manitoba 10,000 10,000
TOTAL WEEKLY CAPACITY 451,000 457,500 489,000
Source: Canadian Pork Council
Table 3. Estimated Daily U.S. Slaughter Capacity (Sows & Boars)
Fall 2005 & Projected Fall 2006
Rank Company Plant Plant Co. Total
1 Morrell Sioux Falls, SD 2,600* 2,600
2 Jimmy Dean (Sara Lee) Newburn, TN 2,600 2,600
3 Johnsonville Watertown, WI 600
Momence, IL 1,350
Oldham's Sausage Holton, KS 600 2,550
4 Pine Ridge Farms Des Moines, IA 2,500 2,500
5 Pork King Packing Marengo, IL 2,000 2,000
6 USA Pork Products** Hazellton, PA 2,000 2,000
7 Abbyland Foods Curtiss, WI 1,700 1,700
8 Bob Evans Farms Bidwell, OH 200
Xenia, OH 300
Hillsdale, MI 300
Galva, IL 300
Owens Sausage Richardson, TX 600 1,700
9 Odom's Little Rock, AR 1,000 1,000
10 Calihan Peoria, IL 425 425
11 F.B. Purnell Sausage Simsonville, KY 400 400
12 J.C. Potter (Atlantic Premium Brands) Durant, OK 400 400
13 Williams Sausage Company Union City, KY 400 400
14 Dean Sausage Atalla, AL 225 225
15 Wampler's Sausage Lenoir City, TN 200 200
16 Gunnoe Sausage Goode, VA 100 100
TOTAL 20,800
*Morrell sow capacity is estimated. Sioux Falls plant kills both top hogs and sows.
** USA Pork Products kills 80% boars, 20% butcher hogs.
Table 4. Expected New Market Hog Slaughter Capacity, 2007-2008
New Capacity In:
Company Plant 2007 2008 Source of New Capacity
Triumph Foods (St. Joseph, MO) St. Joseph, MO 8,000 Second shift
Moline, IL 8,000 New plant, first shift
Trim-Rite (Carpentersville, IL) Freeport, IL 4,000 New plant — break ground Q2-'06, open Q2-'07
Premium Standard Farms Milan, MO 2,700 Expansion — planned opening Q2-'07
Farmland Foods Denison, IA 1,150 Expansion — adding 1,150 hd/day in 2007
TOTAL NEW U.S. CAPACITY 15,850 8,000
OlyWest (Canada) Winnipeg, MB 9,000 New plant — Olymel, Hytek & Big Sky
TOTAL NEW U.S.-CANADA CAPACITY 15,850 17,000

PRRS Virus Still Number One

We continue to learn more about PRRS virus.

While porcine circovirus-associated disease (PCVAD) steals some of the limelight at swine veterinary meetings and in monthly hog publications, let there be no doubt that porcine reproductive and respiratory syndrome (PRRS) virus is still the number one challenge around which the majority of our prevention, management and biosecurity strategies are built.

Striving to Prevent Reintroductions

Our industry is in the process of trying to develop “area” or “regional” plans to eliminate this virus, since it has proven extremely difficult to prevent costly reintroductions of the disease.

We continue to learn more about PRRS virus transmission and have improved our ability to detect its presence through a variety of testing methods. Biosecurity measures have achieved new levels following research on disinfectants, “trailer baking” and transmission.

And more research continues to be promoted and funded through multiple organizations and industry groups.

Keeping all this in mind, the PRRS virus continues to stay one step ahead of us in many instances.

While the task won't be easy, I encourage everyone to promote efforts towards eliminating PRRS virus from our industry.

Case Study No. 1

A 2,000-sow, farrow-to-finish farm had been dealing with PRRS in nursery/grow-finish for several years. Grow-finish performance, average daily gain and feed efficiency had been subpar. Mortality was continuously above target and veterinary medicine costs were higher than target levels.

The facilities consisted of multiple sites, with the sow herd, nursery and finishers separated. By adding isolation/acclimation facilities and extending acclimation time, the farm developed a stable sow herd. For several months, the sow herd was able to produce negative pigs at weaning.

Intense diagnostic monitoring of adult and preweaned piglets was performed to verify consistent production of negative pigs.

In 2004, a rolling depopulation and repopulation were performed, in which all nursery and finishing facilities were emptied and refilled with PRRS-negative pigs. At one point, the entire farm was believed to be PRRS-negative.

However, after approximately six months, the farm broke again with PRRS in grow-finish with the resident strain of PRRS virus. Investigation led us to believe that internal trucks and trailers were the most likely culprits for reintroduction of the virus.

A new truck wash and additional trailers were purchased in 2005, and a rolling depopulation and repopulation again performed. The sow herd remained stable and produced negative pigs. Employees at this site were actively involved in biosecurity protocols, and were very adept at revealing areas of potential breakdown.

The unit has marketed PRRS-negative pigs for the past six months. Average daily gain, feed efficiencies, mortality, culls and veterinary medical costs have all improved.

Case Study No. 2

A 1,500-sow, farrow-to-wean production system expanded to 2,400 sows. The sow farm was PRRS-positive, but stable, and had been utilizing a commercial PRRS vaccine for the past three years in the sow herd.

During expansion, the contract gilt supplier switched sources of replacements and inadvertently brought a new PRRS virus onto the farm.

In November 2005, over 200 abortions were recorded, and the vast majority of live piglets were very poor quality. While the abortions peaked at 30 in one day, they continued sporadically for 45 days. It was apparent the herd did not get consistent exposure throughout sows and gilts.

Live virus inoculation was performed in March 2006 by mass-vaccination of the entire herd within 10 days. Another small blip of abortions occurred, but by 14 days post-vaccination, abortions had essentially ceased.

The farm will stay with the present gilt supplier. Additional off-site isolation/acclimation facilities are now being used to provide an extended “cool-down” period. Truck and trailer procedures are being reviewed and modified. The gilt supplier is now performing more extensive PRRS monitoring.

Our current goal is to attain positive but PRRS-stable status of the sow herd, producing negative weaner pigs. Ultimately, we would like to take this herd PRRS negative.

Summary

These two cases illustrate the need for the industry to push for regional and continental elimination or eradication of the PRRS virus.

With diligence, persistence and a concerted effort throughout, I believe we can ultimately win this battle.

2006 Masters of the Pork Industry - Wendell & Dell Murphy

 2006 Masters of the Pork Industry - Wendell & Dell Murphy

Sit down for a visit with Wendell Murphy and his son, Dell, and some words will flow easily into the conversation — dedication, hard work, community, family.

Another word has crept into their daily vocabulary in recent years — diversification.

The story of Murphy Family Farms' phenomenal growth from feeding feeder pigs in dirt lots behind the mill at Register's Crossroads, NC, to the world's largest pork production system is widely known. When the family business sold to Smithfield Foods in 2000, many thought the Murphy family's chapter on pork production had closed.

Not so. The Murphy's retained some of the family-owned farms with the understanding that they would raise hogs under contract for Smithfield Foods.

As 42-year-old Dell explains it: “Anything that goes in or on the pigs is the integrator's (Smithfield's) cost. The parts and pieces that don't go in or on the pig are generally the contract growers (Murphy's) responsibility.”

The current Murphy-owned farms provide Smithfield with 3-week-old or 10-week-old pigs, depending on the facility they come from, then raise them in finishing barns to about 270 lb.

“Each time they move, Murphy-Brown (the production arm of Smithfield Foods) pays a fee for our facilities and services, the same as occurred under the original Murphy Family Farms contract,” explains Wendell.

But the sale left the Murphy's without an infrastructure to support their farms. They formed Murphy Family Ventures (MFV) to help fill that void.

Dell sees the services of the MFV swine production group as comparable to the Midwestern model of veterinary clinics and consultants assisting with management of pork production systems. “That's only done on a very small scale in North Carolina,” he explains. “We'd be interested in helping others add value to their systems and to utilize our production management services more efficiently.”

The MFV swine production group, which has grown to 625 employees, now manages nearly 150,000 sows, roughly 3.2 million feeder pigs and nearly 375,000 market hogs annually in North Carolina and Missouri.

“North America has all the sows it needs,” says Wendell. “So, we will update our existing production facilities as needed, and focus on diversifying our investments.”

Beyond Hogs

Murphy Family Ventures provides support services to all businesses owned by the Murphy Family and others. MFV is currently comprised of eight divisions and about 800 employees. In addition to swine production services, MFV Support Services division provides management support to grain sales, hospitality services, golf and recreation, turkey production, land development (River Landing), portable storage (Pack-M) and investment management services.

While Wendell Murphy expanded the hog enterprise, his brother, Pete, concentrated on developing a private, gated community nestled on the banks of the Northeast Cape Fear River near Wallace, NC. Opened in 1996, River Landing boasts over 1,400 acres and features homesite options with prominent custom home builders offering multiple designs.

The meticulously planned community features walking and biking trails, a 36-hole Clyde Johnston-designed championship golf course, a tennis complex, junior Olympic-style swimming pool, regulation basketball and volleyball courts and an elaborate fitness center. Just outside the gate sits The Mad Boar Restaurant, an award-winning Holiday Inn Express & Suites and an upscale convenience market.

Dell assumed management of the land development division in late 2003. “We come from the commodity side of the hog business, where low cost is everything,” he explains. “To be flat honest, the amount of money we've spent on amenities — at one point, I thought we were out of our minds. But, without question, the quality and the marketing of what Uncle Pete originally set up has really made it successful. We have doubled sales each of the last three years.”

River Landing is located in Duplin County, the largest hog-producing county in the nation. Planned expansion will envelop an early Murphy Family Farms' pork production site, long since closed. “Never in the world would I have ever thought that property in rural Duplin County would sell like this,” admits Wendell.

Veering off in a totally different direction is MFV's Pack-M, a franchise under the parent company known as 1-800-PackRat. Pack-M deals in 12- or 16-ft. portable units that are delivered for on-site storage or removed to an environmentally controlled warehouse.

“When we started thinking about a new venture, that is not something I would have ever thought about,” admits Wendell. “But, around here, mini-warehouses are everywhere — and they're all full.”

MFV owns the franchise rights to 40 locations in the Southeast. Six locations are scheduled to open in 2006.

Reflections of '98

The 4-5 years prior to the Smithfield sale were rough years.

“It was awful,” remembers Wendell. “We had always been so conservative. From the time we opened our feedmill in 1962 until 1998, we had never had a losing year.

“When you see yourself losing that much money, like in '98, I guess I became paranoid,” he continues. “It suddenly appeared to me that the packer-processors were trying to use that as an opportunity to drive the producers out of the business so they could integrate. Clearly, I was wrong about that.”

In truth, Murphy expected the hog industry to go the route of the poultry industry, so he had been negotiating with Smithfield Foods' Joe Luter, off-and-on, for a decade. “Every time we would get close to a deal, the complexities would make me uncomfortable and it would fall apart,” he says.

Murphy investigated building or buying a packing-processing facility, but by the late-'90s, getting a permit was impossible, and attempts to purchase a plant were exhausted.

“I felt like we needed to own a processing plant if we were going to own all of these hogs,” Wendell explains. “We wanted to hedge our bet on the downside of the market. It would have helped offset some of the losses on our live hogs in '98 and '99. If we'd been successful in doing that, we probably would not have sold Murphy Family Farms,” he says.

“I do want to dispel one notion, however, because there were a lot of people that probably thought we were in a distressed situation. That absolutely was not true,” he assures. “Yes, we had lost millions. But, we had made and saved millions, too. We were a strong company when we merged with Smithfield.”

Beaten Down

“From the day we opened our milling business on Labor Day in 1962, with zero dollars in the bank, until February 1995, when the (Raleigh) News & Observer ran their so-called ‘Boss Hog’ series, nobody ever enjoyed their career like I did,” emphasizes Wendell. “My daddy, brother and brother-in-law were the labor force, the management, the financial officers. It was so much fun; you just can't imagine how much pleasure I got out of getting up and going to work every day.”

The Boss Hog articles focused on the supposed negative environmental impact of the substantial growth of hog production in North Carolina.

“When ‘Boss Hog’ came along, the pleasure went south,” he continues. “From 1995 until 2000, when the merger occurred, I spent almost zero time working and managing the business. I spent all of my time trying to deal with the political fallout that was coming as a result of that newspaper.

“When the News & Observer wrote the series, at first it was really painful. It was directed at the hog industry in general, but more specifically, it was directed at me. According to the series, I was the one who had served in the legislature and had gotten all of the laws passed that made it easier for farmers to raise hogs. And, I was responsible for all of the lagoons. Every hog that ever pooped in North Carolina was my responsibility!” he states.

For five years, Murphy withstood what seemed to be a daily barrage in the state's most influential newspaper. “In 1999, my craw was full, so I decided to go ahead with the merger. It was a conservative thing to do, but I had been beaten so hard by the News & Observer, and politically, that I just couldn't take it any longer. When we did the merger, it all went away,” Murphy says.

“I'm often asked, in hindsight, if it was the right thing to do,” he continues. “Financially, probably not. We probably would have made more money if we had kept the hogs, with the way the hog market's been the past several quarters. We probably would have made a lot more money than we got for the business. But, I'm pretty sure that I'm going to live longer. The fun was gone. So, yes, it was the right thing to do.”

Sustained by Family Values

Murphy family members profess to be conservative by nature, an attribute they inherited from family elder Holmes Murphy, a Depression-era survivor.

As Dell tells it, his grandfather's conservative values were impressed upon his father, and passed on to him. “I think that has been a major key to our family's success. It doesn't sound like a blessing, but in a way it has been. It makes you humble and appreciative.”

Another family attribute is a dedicated work ethic that has sustained the Murphys from the developmental years to the present. “The most important thing that my Dad taught me was to work, and to enjoy working. I think that was the greatest thing of all,” Wendell declares.

Also important was the emphasis Wendell's parents placed on education. “They made it clear, 12 grades were not it — you were going to college,” he notes. Holmes Murphy set aside an acre of tobacco for that purpose, and Wendell tended that acre. He treasures the education he gained at North Carolina State University as a result. Today, he serves as chair of the school's Board of Trustees.

Dell, too, credits his father for his work ethic. Outside the family, he recognizes Randy Stoecker, currently president of production operations for Murphy-Brown-West, and Jim Stocker, retired president of Murphy Family Farms.

“As the company grew and Dad was in the legislature, I was trying to get in the groove,” Dell explains. “They were my mentors — Jim from the conservative point of view, and Randy as a visionary. As the company grew, the support of such talented people as Jerry Godwin, and the scientific efforts of Terry Coffey, Jim Ludes and Jeff Turner, were invaluable.”

“We are proud that Smithfield Foods chose the Murphy Family Farms management team to manage their hog production assets nationwide,” adds Wendell.

“I try not to reinvent philosophy,” says Dell. “Everything that I learned from my Dad and Granddad is working: Treat people with respect; treat them like part of the family; and do things that are inconvenient at times, if that's what you need to do.”

Wendell reinforces the thought: “That's one thing I learned early on — if you're just going to do what's convenient, you're going to leave a lot of important things undone.”

Hedging: The "Longs" and "Shorts" of It All

Several years ago, Ohio State University agricultural economist Carl Zulauf researched the question of whether producers were better or worse off using a systematic hedging system to price their hogs. He investigated the price received from habitually selling hogs on the futures market four or six months into the future and compared that to the price received if the producer simply sold on the cash market.

Zulauf's conclusions held no big surprises to veteran hog market observers and producers -- you got a lower price when you hedged.

There is a very good reason for that result. Someone else is taking a good portion of the risk when you hedge and you have to pay him or her to do it. But that raises the question: Why isn't there someone who actually wants to take the opposite position so we don't have to compensate them?

Which brought us to the point of just who might be natural short- and long-position holders in the hog futures markets. Of course, hog producers are natural "shorts." They have the physical commodity and in order to hedge, they need to take an opposite position in the futures market. By that reasoning, packers should be natural "longs" since they need the physical commodity (i.e. are short physical hogs) and would take the other side on the futures market. The same argument could be made for meat buyers who may be able to cross-hedge various wholesale cuts in the hog contracts.

But the reality of the situation is that packers did not hedge their hog needs often. The reason is that they are margin players. If hogs go up, they can push up meat prices to cover costs. It may take a few days or weeks, but they can eventually get that done.

This lack of long positions leads to packers frequently ending up in net short positions in the hog futures market because they systematically sell futures to manage the risk they take on when they do cash contracts with producers. The cash contracts make them long in physical hogs, so they become hog hedgers to manage that risk.

Bottom line: There were not many natural long position holders in hog futures and, thus, the shorts had to pay speculators to take the risk. As Milton Friedman pointed out: "There's no such thing as a free lunch."

Enter commodity index funds. Economic literature has for many years identified commodities as a useful component for balancing an investment portfolio because they tend to be negatively correlated with equities. Goldman Sachs initiated its commodity index in the early '90s as an investment tool that allowed portfolio managers to hold commodities without trading individual products or contracts. They got little traction until commodities started to take off in the late '90s.

The Goldman Sachs Fund and others are now a major force in commodity markets. Each fund is potentially unique in the products it buys, the proportions of different commodities or commodity classes that are held, and how they re-balance (never, frequently based on rules, actively managed, etc.). But one thing is consistent: They are long commodities. They own futures contracts because they think commodity prices will rise.

Having a natural long in the market is almost certainly good for pork producers. The funds actually want to be long and will probably do so without extracting a risk premium. I'm not aware of any formal research that has looked at whether this new natural long agent does, in fact, reduce the risk shifting cost of hedging hogs, but that result is certainly logical and would make a very good working hypothesis for a project

On the other hand, producers need to be aware of how the indexes operate in order to build effective personal strategies. The key issue is "the roll" -- when the Goldman (and many other funds) roll from being long in one contract to being long in the succeeding contract(s). This action puts downward pressure on the nearby contract and upward pressure on deferred contracts.

The Goldman index rolls on the 5th to the 10th business days of the month prior to expiration. Today, for instance, is the last day of the role out of June Lean Hogs and into July. There are other funds that are moving away from this time period by a few days on either side, since commodity volumes at the Chicago Mercantile Exchange (CME) basically double during the roll and it taxes the system somewhat. But this lengthening of the roll period will likely smooth the effect of the funds by spreading out the sell-buy activity.

So what does all of this mean to you?

First, be aware and watchful of your position as the roll period approaches. This month's roll has been rather uneventful from a price movement standpoint, but some can be pretty exciting, especially if cash markets are declining at the same time (i.e. January of this year). The buy side of the roll, though, may provide selling opportunities for producers.

Second, remember what you already know: New things can be good or bad, depending on your vantage point. Anecdotal evidence from cattle traders is that commodity funds have supported cattle prices by $4 to $7 over the past couple of years. Commodity fund ownership often exceeds 10% of cattle on feed. Such a positive price effect is great for feeders but hard on packer margins.

Third, realize that we do not have much solid research on the effect of the funds, especially on Lean Hogs. We think they have a positive impact; 50,000 to 60,000 long contracts have to affect the market, don't they? But I don't know of any hard and fast evidence at present.




Click to view graphs.

Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: steve@paragoneconomics.com

FDA Removes Weight Limit on Paylean

The U.S. Food and Drug Administration (FDA) has approved a label change for Paylean, a Type A medicated feed article for swine.

The new approval permits Paylean to be fed to pigs weighing at least 150 lb. during their final 50 lb. to 90 lb. of gain regardless of market weight. Prior to the change, the label allowed the use of Paylean in pigs weighing up to 240 lb.

The new label (available at www.elanco.us or 800-428-4441) also stipulates Paylean be fed between 4.5 grams to 9 grams/ton of feed in a complete ration containing at least 16% crude protein. The label also notes that recent clinical registration data suggests no statistical difference between the effects of the 4.5- and 9-gram level. Also, the 18-gram/ton feeding level has been removed.

The change to the Paylean label provides increased marketing flexibility for producers seeking to match packer weight preferences, according to Elanco. It also reaffirms the product’s efficacy at the 4.5- and 9-gram level when fed to any market weight.

Paylean has a zero withdrawal time prior to slaughter.

Pork Export Value Validated

The role and importance of U.S. pork exports and the value of specific cuts internationally were objectives of a “Value of Pork Exports” study conducted by the U.S. Meat Export Federation (USMEF).

“This study brings clarity to the value of the export premiums paid by customers in other countries in excess of U.S. prices,” explains John Hinners, USMEF vice president of industry relations. “In addition, it provides us with an array of valuable information about where we have been and need to go regarding U.S. pork exports.”

The study placed total pork export premiums for 2004 at $270.6 million. The items generating the largest premiums for U.S. producers, by volume, were: bellies, 67,100 tons; loins, 142,434 tons; butts, 44,471 tons; tenderloins, 27,652 tons; and picnics, 185,741 tons. Premiums for these five cuts represented 74% of the total export premiums received in 2004.

The study also estimated in 2004 that the United States exported the “pork equivalent” of 10.862 million hogs worth $22.64 more per head than their domestic counterparts.

Pork Exports Continue Climb

U.S. pork exports including variety meats rose 21% in volume to 229,792 tons in the first two months of 2006, compared with the same period in 2005.

Those exports were also 10% higher in value at $438.5 million, according to the U.S. Meat Export Federation (USMEF)

U.S. pork exports to Japan dropped 8% in volume to 55,087 tons, and were 9% lower in value at $152.7 million, compared with 2005.

U.S. pork exports to Mexico, the number one market in tonnage, rose 29% in volume to 73,655 tons, and 17% in value to $96.0 million, says the USMEF.

Mr. Keppy Goes to Washington

Agriculture Secretary Mike Johanns has appointed Iowa pork producer Glen Keppy as associate administrator for the Farm Service Agency (FSA).

Keppy will oversee management of FSA farm and farm loan programs and commodity operations activities.

Keppy and his family have owned and operated a diversified crop and livestock operation in eastern Iowa for 34 years.

Keppy has served in numerous trade posts, including chairman of the National Pork Board’s Foreign Trade Commission and the board of directors of the U.S. Meat Export Federation.

Lautner Named Lab Director

Beth Lautner, DVM, Johnston, IA, has been named director of the Agriculture Department’s Animal and Plant Health Inspection Service’s National Veterinary Services Laboratory (NVSL) in Ames, IA.

Most recently she served as director of the Plum Island (NY) Animal Disease Center and before that was vice president for science and technology at the National Pork Board.

NVSL is comprised of several testing laboratories that diagnose domestic and foreign animal diseases and provide diagnostic support for disease control and eradication programs.