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Articles from 1999 In August

Vertical Integration - Sometimes A Solution To Market Failure

Vertical integration is getting a lot of press today. Technically, it occurs when a firm in the market chain purchases and operates other forward or backwardly linked businesses in the same final product chain.

Farmers are the original vertical integrators in that they frequently own the means to produce the feed supply, the grind and mix facilities to produce feed, the animal production processes and the trucking needed to take the finished animals to market.

It is a solution sometimes employed when markets fail. What is the function of markets and why do they sometimes fail?

Markets are a means for buyers and sellers of products to come together to exchange goods or services. The principal function of markets is to determine price. When markets are working well, prices serve the function of efficiently allocating resources to different production processes in an economy.

All things being equal, higher market prices call forth more production in areas needed or valued by society, and lower prices send signals to slow production of a particular good or service.

Normally, prices should act like votes, signaling approval for correct production and investment decisions, and punishing incorrect choices by lowering payments.

Market Failure There are some classic cases when markets fail to allocate resources correctly. When this happens, other means are imposed. For instance, it is impractical at times to exclude people who don't pay from the use of certain goods and services. Think of roadways, radio waves and city parks, as well as national defense, as examples.

If a tollbooth was placed at every access to every roadway to recover the cost of the roads, the burden imposed on the public in terms of delays and the costs of collecting the money would dramatically raise the cost of roads. This in essence ruins the benefits. Therefore, most roads are simply "public goods" and no fee is normally charged for each use, rather the costs are recovered via taxes.

Technology is helping us be a bit more clever in restricting non-payers from what were previously public goods. For instance, satellite television used to be available to anyone who had a dish to receive it. About 10 or 15 years ago, "scrambling" signals and unscrambling them for payers was perfected.

Some super-highways in Canada can now "detect" your car electronically and bill you for use. This capability can transform public goods to private goods. Private goods markets are usually thought to better allocate resources than governments.

There are other reasons market-determined prices are sometimes impractical. Have you ever wondered how much money a grocery store might be able to make if it charged each customer based on his or her maximum willingness to pay instead of placing a fixed price on each item?

For instance, many affluent consumers would be quite willing to pay $3 for a loaf of bread when the actual price is $1.59. To extract that value (sometimes called the consumer surplus) would be impractical since it would require an auction at the check out stand instead of a scanner.

The store sets a price based on average willingness to pay or average perceived value and the uniformity of pricing saves them a lot of hassle (and cost) at the check out stand.

Think of another problem associated with pricing and how it can blur the function prices are supposed to perform. Consider a 2-lb. boneless pork loin sitting in the grocer's meat case on a Styrofoam base all wrapped up in clear plastic wrap. It has a "bundle" of attributes included, which the consumer cannot separately value and "vote" on in the purchase decision. The choice is simply to buy or not to buy the entire bundle of attributes.

For instance, say I would like my roast with half of the safety inspections, fed only organic feed, raised on a family farm and with twice the intramuscular fat? The pricing mechanism does not let me choose all of these things with precision. Therefore, the consumer is not able to precisely communicate their preferences for each element in a quality bundle since one price has to cover all of that information on average.

Because of this, too much may be invested in some attributes of my roast and not enough in others.

Vertical Integration When market failure reaches a significant level, people are tempted to simply remove it and impose decision-making through some other means.

Vertical integration is one of those means. It removes the blurring that the price mechanism is sometimes incapable of solving and imposes the focus of centralized decision-making over numerous functions in a chain.

Vertical integration is not automatically better than prices in allocating resources. The burden falls on the vertically integrated decision-maker to correctly perform the tremendously complex functions, which markets, when they are working well, seem to rather easily accomplish.

In addition, most publicly traded firms are under constant pressure to demonstrate a significant and increasing return on assets or shareholder equity.

One of the ways you can raise these returns is to produce the same income with fewer assets. This can often be accomplished by out-sourcing those assets that are not big contributors to the total value of the product. Out-sourcing is often accomplished through leasing or by contractual relationship so that the functions are performed without necessitating capital investments in long-term assets.

It's a delicate balance between owning the right assets and out-sourcing other functions.

Ownership brings control over quality and/or other crucial contributors to added value while out-sourcing, which ultimately surrenders some control, tends to lower cost and permit increased scale. At the same time, it frees management focus and capital to focus on adding value.

Information systems offer the possibility of creating the virtually integrated chain. It can accomplish the control sought by integration without the expense and diversion related to buying those businesses.

Price Reporting Upheld

The first court test of a mandatory price reporting law, passed with the intent of helping livestock producers, resulted in a split decision.

U.S. District Court (Aberdeen, SD) Judge Charles Kornmann upheld price-reporting requirements in a law passed in South Dakota this past winter. But, Kornmann threw out sections of the law that require packers to pay the same price for equal-quality livestock.

Kornmann says the price-matching provisions are unconstitutional because they impose South Dakota law on deals made in other states. Kornmann also concluded that much of the language in the price-matching sections of the law would be unworkable in practice.

John Morrell and Co., the Smithfield Foods-owned packer which slaughters 15,000 hogs a day in Sioux Falls, SD, had joined in a suit with the American Meat Institute (AMI, a national group representing packers and processors) contesting the law that went into effect July 1. Prairieland Pork Producers, a marketing group that negotiates contracts for several Hutterite colonies and other producers, joined in as a supporter of Morrell and the AMI.

Saying they were concerned about provisions in the law that allowed producers to sue packers for triple damages if they could prove price discrimination, Morrell began buying hogs on a strict grade-and-yield basis only, with one base bid each day.

Claiming they wanted to avoid potential lawsuit problems, Morrell routed hogs bought under various contracted prices to its Sioux City, IA, plant. Morrell's Dave Poppen says slaughter was off about 13% at their Sioux Falls plant in the three weeks after the law took effect. With the market in turmoil, bids at the Sioux Falls livestock auction were off $1-3/cwt. from other Midwestern auction sites.

Other packers located outside of South Dakota also withdrew or altered bids to South Dakota producers. Pre-arranged forward pricing contracts were dropped in some cases. Premiums negotiated for volume were withheld in other instances.

South Dakota Attorney General Mark Barnett says there was a huge split in opinion on whether the moves in the market as of July 1 were the fault of the packers or the fault of the new law. He says packers may have turned the situation to their benefit.

"We didn't need a discounted market when it was discounted already," says Hurley, SD, producer Steve Schmeichel. He says the political stand-off between packers and South Dakota lawmakers unfortunately left producers caught in the middle.

Schmeichel, happy with the Judge's decision, adds: "We're not against price reporting but we don't need price fixing."

State Senator Frank Kloucek, a farmer from Scotland, SD, sponsored the bill last winter. Kloucek says the price discrimination issue will be taken up again during the next legislative session. He says future laws will be enacted that will clearly apply to South Dakota livestock purchases only.

Other states, including Iowa, Kansas, Minnesota, Missouri and Nebraska passed state laws regarding livestock pricing that are in various stages of being phased in. And, legislation continues pending at the federal level on price reporting.

Federal legislation could end up superceding all of the state laws but may take longer to make itsway through Congress than some had earlier hoped. As a result, many of these same battles fought in South Dakota may be repeated in the states that implement their new laws.

Producers Handle Hog Manure Their Way

Two pork producers have found their own unique ways of dealing with the manure issue.

For 15 years, 400-sow producer Dana Scott has employed a custom applicator to haul all the manure from his Logansport, IN, farrow-to-finish operation. He doesn't own any manure handling equipment.

Scott wants it done right. He insists the hauler evenly cover the entire fields, corners and all. "We tell them that's our fertilizer program so don't miss any spots. All we use is a dab of starter fertilizer each spring before planting. We don't use any commercial fertilizer, not even nitrogen," Scott explains.

The Hoosier says his time is too valuable as a pork producer to be spent hauling manure. And the equipment is too expensive to buy then have it sit idle until it's manure removal time again.

So every three to four months, his custom hauler agitates, pumps out and applies the hog manure to Scott's 900 acres of cropland. All manure is knifed into the soil. Neighbors have never complained of odor since he started using the custom hauling program.

These days, Scott grimaces a bit when he figures custom application costs him a penny a gallon of liquid hog manure, $25,000 a year.

But startup costs for a complete manure removal and application system would run him $40,000-50,000.

Elite Pork Partnership is a three-site, 5,000-sow, farrow-to-finish operation based at Carroll, IA. According to partner Craig Rowles, DVM, one of the first things the owners did in setting up the operation a few years ago was to establish a lease arrangement with surrounding landowners for the hog manure that would be produced. "It essentially says that we have the right to spread manure on their ground for the next 10 years," he explains.

That is vital to the operation because each of the 12 production sites only consists of five acres. The operation doesn't own any cropland.

Rowles says the keys are credibility and communication. He has been a resident of Carroll, IA, since 1982, when he joined the Carroll Veterinary Clinic. He knows many people in the agricultural community - and he has earned their trust. He left his clinic position a couple of years ago to start a hog operation.

"We try very hard to make this lease a win-win situation for both sides and constantly communicate to the crop farmers the timing of those manure applications, rates of application and analysis of application," Rowles says.

Sharing Manure's Wealth

Low commodity prices abound. What can livestock producers and crop farmers do collectively to improve their bottom line?

Offsetting crop fertilizer costs with livestock manure can be a win-win situation for both sides, says Stan Buman, co-owner of Agren Inc. The small Carroll, IA, firm works to bring the two groups together, locating neighbors as close together as possible to keep down costs and speed the application process.

"We are really trying to help out the livestock producer," says Buman, "especially those who have too much manure for their own operation. Or, it may be a case where they've been applying manure for many years and their fertility levels are getting very high and it would probably be beneficial for them not to apply manure to their farms."

Manure Brokering The service Buman's company provides is called manure brokering. Goals are to break farmers' views of livestock manure as a waste product and educate them on proper manure management.

"We are not buying manure. We are not selling manure. We are just trying to get the neighbors (crop farmers) to take the livestock producer's manure and pay for the hauling costs," explains Buman. The crop farmer gains from receiving nutrient inputs at a lower cost, the livestock producer benefits by not having to pay for application of manure on the neighbor's fields and the environment gains from responsible application of manure nutrients, he notes.

In Carroll County, IA, alone, a heavily populated livestock area, annual manure production is estimated to be worth a minimum of $5.3 million, yet 75-80% of this manure is mismanaged, according to Buman.

Agren, which exists to keep agriculture and the environment operating in harmony, believes there is a growing need for proper manure management, fueled by increased livestock production and environmental concerns. For pork producers, the issue often stems simply from expanding pig production without a corresponding addition to cropland, he says.

The Price Of Manure One way to rectify this is to share manure with a neighbor - at a price favorable to both sides. Crop farmers typically pay $60/acre for commercial fertilizer in a corn-soybean rotation, explains Buman. You can expect to pay at least $40/acre to a custom hauler for manure agitation, pumping and application. Based on that price, the crop farmer would save $20/acre ($60 minus $40) on manure application costs every second year. The levels of phosphorus and potassium in the manure are higher than the amounts needed by the crop. These nutrients are stable in the soil and will build fertility levels for future use, he adds.

The livestock producer won't make any money, but if the crop farmer agrees to pay a $40/acre charge for custom hauling, the livestock producer saves that cost, notes Buman. Sometimes the cost is split between the two parties.

Often, well-manured fields don't need a full complement of manure. These fields are often high in levels of phosphorus and potassium. "The livestock producer might be further ahead if a neighbor is willing to pay for manure to just go in and buy commercial nitrogen, something fields need each year," says Buman. At a cost of about $20 for 125 lb. of nitrogen/acre, he/she still could be money ahead.

Test Before Applying Before application, it is most important to have your manure broker do soil fertility and manure tests for application compatibility and maximum value, points out Maggie Jones, Blue Earth Agronomics, Lake Crystal, MN.

It's also very important to have the manure analyzed. In the case of liquid hog manure, samples are collected as the pit is pumped. Test results from the previous year are usually used for this year's analysis, he says. Jones, a crop consultant, stresses the importance of carefully testing soil types for the amounts of manure they can handle and basing application on crop nutrient needs. Records must also be carefully maintained to track crop performance.

Manure Agreement Is a contract really necessary in manure brokering? "I think I could sell any farmer on the idea of getting free manure," observes Michael Schmitt, extension soils scientist, University of Minnesota. "But generally what gets omitted are the negatives of getting free manure for your farm." For instance, when they are going to spread manure it could be raining and the farmer could end up with a big mess, compaction or clods. The problem with getting something "free" is that it is often treated that way. And that has been the case with manure, emphasizes Buman.

"If they put the manure on right, they could probably avoid almost all commercial fertilizer," states Buman.

As testament to the value of manure, Schmitt has summarized several projects over the past 10 years and concluded that manure provides a 7% yield advantage compared to unlimited fertilizer application. But the benefits go beyond the nutrient content of manure, including improving water-holding capacity and microbial activity.

Even though a manure contract should be a win-win situation for both livestock and crop farmers, Schmitt cautions each case must be evaluated individually. "Long-term agreements do provide some benefits agronomically, in that the benefits of manure often are cumulative, meaning the impact on soil structure and infiltration aren't going to happen overnight."

Some states are requiring an easement to be part of your manure management plan, says Kimberly Hanson, Midwest Environmental Management, Ackley, IA. "Basically, the easement is a signed document that is notarized, provides details on whether there is going to be any cost involved for either side, timing of applications, how the manure is going to be applied and any liabilities."

It used to be producers in Iowa would not sign manure contracts because they didn't want to be tied to anything. Low commodity prices have sure changed that mentality, Hanson says.

The Minnesota Association of Farm Managers has developed a manure contract form. For more information, contact Ward Nefstead, Department of Applied Economics, University of Minnesota, (612) 625-7228. See related manure application story on page 23.

Management consultant Leonard Meador, Rossville, IN, says there are a multitude of reasons why a crop farmer or even a pork producer might want to consider hiring a custom manure applicator.

The two biggest reasons would be timeliness and equipment. Producers don't often have the money to buy the best application equipment. Whereas, custom applicators can afford to spend the money and then spread that cost out over a number of acres, says Meador, affiliated with Animal Environment Specialists Inc. Using several large rigs at once, custom applicators are able to make short work of your application needs.

A third reason might be the use of precision application methods. The applicator develops a grid of exactly where and how much manure to apply per acre. "There are a few producers starting to use global positioning to record where manure is put in a field," says Meador.

There are also special circumstances which might call for use of a custom applicator, suggests Meador. One reason is if your equipment is primarily geared to surface application, and there is an area of land that is socially sensitive, you might consider using a custom applicator to inject manure.

A second reason might be for manure removal from lagoons or from large storage containments when they become overrun with solids. A custom applicator has the equipment and expertise to agitate and clean out those solids. This could be part of a yearly lagoon checkup, he offers.

Ben Puck, a commercial manure applicator for 20 years, is encouraged that agriculture is finally seeing that livestock manure contains a lot of valuable crop nutrients.

He says the strength of his Manning, IA, business is the ability to spread consistently and uniformly at low manure rates requested by crop farmers, 3,000-5,000 gal./acre. "We are basically set up for high-value, low-volume manure application," he explains.

For those interested in using a custom applicator, Meador advises formulating a contract based on your manure production budget. That should take into account how much manure you are producing and fields available.

Then negotiate a price-per-gallon charge with a hauler. Take into account the type of equipment he uses and what your goals are for your crops. "Make sure there is no misunderstanding how it is going to be applied, where it is going to be applied or when it is going to be applied," says Meador.

Price ranges for a per-gallon charge are anywhere from 0.6 cents to 1 cents. Expect to pay additional transportation charges for hauling manure, he explains.

Puck says some applicators charge more for injection than surface application, set separate charges for agitation, pumping out and application.

Puck, who serves several western Iowa counties, expects to apply 70 million gallons of liquid hog manure this year. His biggest beef: customers who think that cheapest is always best when it comes to custom haulers.

In his case, he broadcasts manure using 2,250-gal. trucks, disking manure into the soil.

If there are concerns and questions about hiring a custom hauler, Meador advises asking for a client history. You might also want to check with your local natural resources officials to make sure there have been no application violations.

And don't be afraid to ask the hauler what he/she offers that's better than the other custom applicators in the area, he stresses.

Hormel Phasing Out Ledger Accounts

As the hog industry evolves, so do packer contracts. Last month, Hormel Foods released its latest contract, Long-Term Hog Procurement Agreement (LTHPA) #3.

No additional hogs will be contracted under this program. Only an extension of expiring contracts or a conversion of existing contracts will be allowed.

In a letter to producers holding previously issued agreements, Ray Bjornson, Hormel's director of pork operations, described LTHPA #3 as "the contract of the future" that "provides hog producers a fair price while continuing to supply Hormel Foods with quality hogs."

With processing plants in Austin, MN, (daily capacity about 16,000); Fremont, NE, (8,500); and Rochelle, IL, (7,100), Hormel is the nation's sixth lar gest hog processor, processing about 8% of the nation's hogs. Hormel says that half of its hogs were procured under a long-term agreement in 1998. Industry analysts estimate the number could approach 75% in 1999.

LTHPA #3 eliminates the ledger concept Hormel used in its first two contracts. In those contracts, Hormel offered a contract price based on a matrix of corn and soybean prices. When market prices went below the matrix price, Hormel paid the full matrix price but maintained a ledger of the difference between the two. If market prices move above the matrix price, the difference or a portion of the difference is deducted from the ledger.

Length of the contracts vary with contracts commonly offered for a five- to 10-year term, with a five-year extension available under some conditions. Most of the existing Hormel contracts dissolve any remaining ledger at the end of the extension. Despite this dissolvement option, some creditors, accountants and producers were uncomfortable with the ledger accounts. "This contract addresses the concern many groups have expressed over the large negative balances in many producers' ledger accounts," Bjornson states in the letter.

Whereas the previous contracts had paid the full matrix price if the market price was lower, under the new contract, producers will have to split up to $4/cwt. on the downside. For example, if the matrix price is $40/cwt. live and the market price is $10, the producer is paid $36. If the matrix price is $40/cwt. live and the market price is $38, the producer gets $39.

A transition plan under LTHPA #3 allows a four-year phase-in of the $4/cwt. producer contribution by $1/year. And, the new contract provides for the elimination of current ledger balances in five years or less. The ledger continues until either 50% is paid back or five years, whichever comes first. If the producer defaults prior to ledger elimination, Hormel Foods may call producers' negative ledger balance due and payable.

The contract incorporates a 50/50 split of prices above the matrix. Therefore, if the matrix price is $40/cwt. live and the market price is $46, the producer receives $43.

The new matrix uses a 20-week average of Omaha corn and Decatur, IL, meal (44%). Previously, Hormel used an eight-week average. The new matrix price provides coverage of feed costs about equal to the period it takes to finish pigs. The longer period means the matrix price is less subject to feed price volatility.

The new matrix offers a 30 cents/cwt. live bump for each $10 move in meal and a 40 cents/cwt. live bump for every dime move in corn. For example, at $160/ton 44% soymeal (basis Decatur) and $2/bu. corn (basis Omaha), the matrix pays $39.80/cwt. live. With corn the same, and meal at $170, the matrix goes to $40.10. The first matrix moved 40 cents and 50 cents/cwt. live for corresponding moves in meal and corn.

The new live matrix is converted to a carcass matrix based on the actual yield and the actual carcass performance of all long-term contract hogs. This conversion factor will be updated yearly or whenever the carcass buying program changes.

Future carcass buying program changes are also addressed. If premiums go down, the carcass matrix price goes up and vice versa.

"I don't know if these contracts are helping or hurting us," says Max Waldo, DeWitt, NE, producer. "I have a contract myself. It gives me some security that I can operate with a positive cash flow but it also plays into the hands of the packers and the captive supply concept. If we all get contracted, the packers have little incentive to competitively bid," says Waldo.

Detergent May Improve Cleaning

Last month I reviewed how we've slipped on our clean- up routine over the years. Many farms are well above the target of 100,000 viable organisms/sq. cm. (about 1/2 million/sq. in.) that's needed before the disinfectant has a chance to reduce the organism to 1,000/sq. cm. (nearly 600,000/sq. in.) - a level the pig's immune system can handle.

Review Your Strategy What is a more likely scenario on a typical hog farm? Samples of nursery metal and plastic surfaces after hot pressure washing were indicating 2-5 million organisms/sq. cm., 50 times more than the preferred amount.

And this producer thought he was doing a good job. Of course, no stockperson can be 100% thorough on all the jobs he has to do. But a 50-times shortfall is just too much and there are two main reasons why:

1. The biofilm. Most bacteria produce an oily substance called a biofilm to protect themselves. A farm-specific detergent not only loosens the greasy deposit in caked-on fecal matter allowing it to remove more bacteria for the disinfectant to deal with, it also damages the biofilm of those that remain, and many of them will. A detergent gives the disinfectant a head start.

2. Using cheap disinfectants. By a cheap disinfectant I mean the basic chemicals like formaldehyde (formalin), caustic soda, sodium hypochloride and the cresols. These all have drawbacks and you need to be aware of them.

All disinfectants for farm use have approved dilution rates. These are verified and tested under various schemes in different countries. Table 1 lists a few in my own country, Great Britain. The U.S. will have similar dilution rates and you should check them out.

The table shows some are not approved at all and others have to be used at far higher dilution rates (in the case of formalin, 144 times higher) than the appropriate, but expensive, disinfectants we have these days. The product Virkon S, for instance, is not even close to 144 times more expensive than formaldehyde.

So cheapness is relative. Before you can use these basic chemicals responsibly, you should check to see that they are suitable.

Another disadvantage of basic chemical disinfectants is that they are corrosive and caustic, like the cresols and caustic soda. Formalin may be a carcinogen, and in any case is quitedangerous when used to fumigate barns. You must wear an approved fumigation mask.

The coal-tar derivatives like cresol are popular. But in Malaysia, where their industry was almost destroyed by the J.E./Hendra disaster and their stockpeople put at risk, it appears detergent and Lysol advise weren't strong enough. Now they are on specific detergent/disinfectant protocols in rebuilding their industry.

Current Cleaning Advice Check that your cleaning procedure is in line with current advice. Use a farm-specific detergent, not just an industrial/catering product. Agriculture has different problems; rougher, more porous surfaces and a lot of caked-on "polished" body residues.

* Suggest farrowing and nursery manufacturers make at least part of their floors conveniently hingeable or removable to get at the under-slat surface. This is especially true as young pigs are a breath away from 50 million pathogens/sq. in.

* Use a modern disinfectant. While there are a variety of these, the best advice is to follow the protocol of one of the reputable companies.

* Check to ensure the detergent cleaning process and disinfection are being done properly. For example, in the poultry industry the product-volume used has to be accounted for and even the amount of water diluent checked out against a meter.

Part of this checking procedure is to get samples taken after cleaning and disinfection is finished. Your local veterinarian can arrange this.

* Dry out the surfaces. My clients use portable kerosene space heaters to "roast" the inside of the building. Usually 2-3 hours heating is enough. Remember, at least 6,000 organisms/sq. in. will remain, however dedicated you are, and a damp surface allows these escapees to get away some 30 times faster over 24 hours.

* Keep pests out, the Achilles' Heel of most farms. A rat crossing a dried, disinfected surface can at once spread swine dysentery, leptospirosis and ileitis.

* Sanitize the water. Poor quality water leads to reduced performance and increased disease. There are products which can be added both with pigs inside or absent.

* Aerosol disinfection. Spraying a fine mist or fog over pigs can reduce the risk of cross-infection during disease outbreaks. The specific products are safe at the recommended dilution levels and mist droplet size.

The proof is in the pudding. All of my clients are now following the above steps. Some are segregated, 80% are all-in, all-out (AIAO) in whole or in part and 20% still use continuous production grow-finish houses.

Performance is given in Table 2. What is really interesting is that the continuous production systems nearly equal performance of the AIAO/segregated.

Of course, these massive improvements over national average are due to a lot of other factors besides good routine cleaning and disinfection. But that continuous production operators are almost up with the leaders suggests that attention to good hygiene could be as important as segregation and/or AIAO.

Finally, there is the cost of it all. I guess from my studies that good hygiene protocol costs about 4% more - 2.5% on labor and equipment and 1.5% on materials.

But if one discounts two thirds of the 26-33% improvement in output (Table 2) as being due to other factors, this is still nearly a 2.5 REO (Return on Extra Outlay). That's still a good bargain despite all the cost and extra work.

Environmental Compliance

Pork producers, along with poultry, cattle and dairy operators, are increasingly scrutinized and criticized for their environmental impact.

A recent nationwide poll of 1,000 registered voters conducted by Lake, Snell, Perry and Associates indicates that the American public views confined animal-feeding operations (CAFOs) unfavorably. Of those polled, 80% favored the creation of uniform, national standards to limit air and water pollution from CAFOs. Sixty-six percent said they would likely vote for political candidates who would enforce regulations on pollution from CAFOs.

New Environmental Regulations The Clinton administration and Congress, always mindful of political winds, whims and polls, are at work on regulations that will impact hog producers and other CAFO owners. For example, on Feb. 19, 1998, at Baltimore's Inner Harbor, President Bill Clinton and Vice President Al Gore announced the administration's Clean Water Action Plan to finish cleaning up America's rivers, lakes and coastal waters. A key element of the plan is the control of water pollution from animal feeding operations.

In response to the action plan, the U.S. Environmental Protection Agency (EPA) announced its strategy: * Setting new national standards for allowable levels of pollution in runoff from poultry and swine facilities by December 2001 and from cattle and dairy operations by 2002.

* Issuing permits to limit pollution from runoff for the largest CAFOs by 2002 and from all other large feeding operations and priority facilities in impaired watersheds by 2005.

* Focusing enforcement and permitting efforts on those watersheds most vulnerable to pollution from animal feeding operations.

* Expanding the scope of permitting, through administrative actions in the near term and through regulatory changes by 2001, to include for the first time, national efforts to manage pollution associated with the land application of manure.

* Preparing a unified national strategy under EPA and USDA leadership to control pollution from feedlot operations.

State governments have been just as aggressive in controlling CAFOs and that has been especially true with hog facilities.

Arkansas, Kentucky, Maine, Missouri, North Carolina, Virginia and Wisconsin have all enacted or considered moratoriums on granting new permits for swine facility construction. Arkansas, Illinois, Iowa, Kansas and Wyoming are examples of states that require hog producers to prepare detailed manure management plans that address waste disposal, odor control and water quality.

Increasing Litigation The EPA has also increased its enforcement actions, especially regarding criminal prosecutions. In 1997, EPA officials pursued 2,000 leads as to environmental crimes. The agency opened 551 criminal cases and referred 278 to the Department of Justice for prosecution. The result was a record $169 million in criminal fines (compared to $99 million in civil fines) and a total of 195 years of jail time assessed to defendants. The increased rate of criminal charges for environmental violations continues unabated.

Civil citizen suits, as always, remain a constant threat to agricultural operations. Major dairy producers in Washington were recently found in violation of the Clean Water Act in a civil citizen's suit sponsored by a number of environmental organizations.

Finally, there is always the possibility of a pork producer being sued by his or her neighbors for nuisance or a tort action for bodily injury or property damage from environmental pollution. A major hog producer recently lost a $5.2 million nuisance suit.

Environmental Compliance Programs Ensuring compliance with environmental laws is critical to pork producers' survival. Like any other business operation, a hog producer must have an environmental compliance program tailored to the needs of his or her operation. Operations which are not particularly vulnerable to environmental actions may need a relatively simple compliance program. At a minimum, the following guidelines must be followed:

* Articulate an environmental policy and communicate it. There must be a written farm policy as to environmental issues and it must be communicated to all employees. The policy must be supported by management.

* Resource allocation and training. A hog producer must allocate money and personnel to environmental compliance. For example, personnel responsible for environmental compliance must be trained. While this may entail considerable expense, the severe consequences associated with environmental claims leave no alternative but to make a major business commitment in this area.

* Discipline. An effective environmental compliance program includes discipline. Employees who will not follow the program cannot be put into positions where they have responsibility for environmental compliance. In many cases, it is best to terminate an employee who does not appreciate the importance of environmental compliance.

* Design and implement audit or assessment programs. An audit program should measure environmental compliance systematically and provide assurance to farm management that relevant regulatory requirements are being met.

Auditors will typically perform the following duties:

1. Ascertain the maintenance of schedules and records as to all operations with environmental compliance requirements;

2. Inspect facilities and equipment, as well as evaluate personnel performance to assure adherence to institutional standards; and

3. Make written reports to management explaining any deviations from the farm's environmental policy and make recommendations for corrective action.

The integrity of an internal audit requires that those conducting the audit be adequately trained for the purpose, be properly staffed and be supported by top management. Audits should be conducted at least once a year, but preferably every six months, or even quarterly, depending on the operation and its vulnerability to environmental claims.

* Timely follow-up. Follow-up is critical to a good compliance program. Prompt, immediate action must be taken as to difficulties and environmental violations revealed by the audit.

* Documentation. Some documentation is a necessity in an environmental program. Documentation should include a statement of the swine operation's environmental policies and procedures, a description of the training program and persons trained, dates and results of audits and corrective action taken, complaints of third parties and responses to those complaints.

The primary benefit of a corporate compliance program is preventive in character. By instituting an effective compliance program, many environmental mistakes can be avoided, as well as the accompanying legal liability associated with such mistakes. But there are other practical benefits to be derived from a compliance program. Environmental compliance programs can:

1. Improve internal management practices;

2. Improve production processes and efficiency;

3. Train employees in environmental compliance and more efficient production processes;

4. Improve risk management practices;

5. Minimize waste;

6. Provide data regarding cost of regulatory compliance useful for promoting regulatory reform at the local, state and federal level;

7. Improve company public relations and market perceptions; and

8. Mitigate civil or criminal penalties for noncompliance.

EPA's Compliance Incentives The EPA is actively encouraging the development and implementation of compliance programs. On Jan. 12, 1994, the EPA's Office of Criminal Enforcement published a guidance document about the EPA's exercise of investigative discretion. (Memorandum from Earl E. Devaney, Director, EPA Office of Criminal Enforcement, Jan. 12, 1994.)

According to the memo, violations which are discovered and remedied as a result of a company's compliance program will not ordinarily result in a criminal prosecution. Conversely, a criminal prosecution is appropriate if a company fails to implement remedial recommendations made in an audit.

On June 10, 1996, the EPA's Policy on Compliance Incentives for Small Businesses became effective. The policy promotes environmental compliance by small businesses - defined as any person, corporation, partnership or other entity that employs 100 or fewer individuals.

In accordance with the policy, the EPA will refrain from enforcement action seeking civil penalties, or will mitigate civil penalties, if a small business makes a good faith effort to comply with environmental requirements by receiving on-site compliance assistance or promptly disclosing the findings of a voluntarily conducted environmental audit.

A pork producer can meet the compliance assistance requirement through assistance provided by the EPA, a state or other government agency, or government supported entity. The EPA policy broadly defines compliance assistance. A pork producer can meet compliance levels by obtaining basic information on legal requirements or specialized advice on the technology best suited to achieve compliance at a particular swine facility.

Assistance can be delivered to the producer through a variety of ways, such as the Federal Register or other publications, conferences and computer bulletin boards or on-site assistance in response to a specific request for help.

The policy's special penalty mitigation provisions, however, apply only to civil violations identified as part of an on-site compliance assistance visit to a swine facility. In addition, the producer must correct all violations identified during an on-site visit within 90 days. Or, if the violations cannot be corrected within 90 days, the producer must agree to a schedule for remedying the violations as issued by the agency.

Because the EPA, states and other government agencies lack the resources to provide on-site assistance to all small business requesting compliance assistance, voluntary environmental audit programs must be utilized by most pork producers to take advantage of the policy's penalty mitigation provision.

The policy defines an environmental audit as "a systematic, documented, periodic and objective review by regulated entities of facility operations and practices related to meeting environmental requirements." If an audit results in the discovery of a violation, the producer must fully disclose the violation within 10 days (or such shorter period as provided by law) in writing to the EPA or appropriate state or local governmental agency.

To qualify for the policy's penalty mitigation provisions, the pork producer must also meet the following requirements:

* The violation did not cause serious harm to public health, safety or the environment;

* The violation does not present imminent and substantial endangerment to public health or the environment; and

* The violation does not involve criminal conduct.

Financial Assistance Implementing an effective environmental compliance program can be costly. Fortunately, some financial assistance is available. The 1996 Farm Bill created the Environmental Quality Incentives Program (EQIP) to provide technical, financial and educational assistance to address livestock related environmental concerns, especially CAFOs.

Under EQIP, qualifying pork producers can receive federal financial assistance for up to 75% of the cost of certain conservation practices. EQIP currently limits financial assistance to $10,000/person/year and $50,000 over the length of a contract. Pork producers seeking EQIP funds should contact their local or state Natural Resources Conservation Service.

The Clean Water State Revolving Fund (CWSRF) program widely provides financing for water quality improvement projects. The CWSRF was initially used to finance municipal wastewater treatment projects. The EPA, however, has encouraged the use of the CWSRF to implement a broad range of watershed-based activities, including controlling nonpoint water pollution sources.

The CWSRF awards capitalization grants to the states, many of which contribute matching funds. The funds are used to make loans at below market interest rate s for up to 20 years for agricultural, rural and urban runoff control; estuary improvement; wet weather flow control; and alternative treatment technologies.

The loans can be made to individuals, pork producers for example, as well as to public agencies. The loans are administrated by an appropriate state agency, such as a state's department of agriculture or natural resources department.

In recent years, a number of states have used CWSRF money to assist CAFOs.

For example, Minnesota's Department of Agriculture has made loans to rural landowners and agribusiness to implement water quality improvement practices that mitigate or prevent nonpoint source pollution, including loans for animal waste control systems. Missouri's Department of Natural Resources has used CWSRF money to assist farmers in constructing animal waste facilities or to purchase waste-handling equipment. And, Washington's Department of Ecology has distributed funds to prevent, reduce or correct pollution runoff from agricultural sources by implementing Best Management Practices (BMP).

Information about the CWSRF program can be obtained from EPA regional offices. EPA Regional CWSRF coordinators can explain the general status of expanded CWSRF uses in his or her state and provide the name and phone number of the state's CWSRF contact person.

Technical Assistance Numerous resources are available to pork producers in designing and implementing environmental compliance programs. An excellent source of information is the National Farm *A*Syst/Home*A*Syst Office at B142 Steenbock Library, 550 Babcock Drive, Madison, WI 53706-1293; (608) 262-0024. The Farm *A*Syst/Home*A*Syst Program is funded nationally by the USDA Cooperative State Research Education and Extension Service, USDA Natural Resource Conservation Service and the EPA.

Land grant colleges, universities, farm organizations and environmental agricultural waste professionals can also be extremely helpful in constructing compliance programs.

John Copeland is Executive Vice President, Ethics, Food Safety and Environmental Compliance of Tyson Foods Inc.

Postweaning Multi-Systemic Wasting Syndrome Woes

A few years ago, many people felt that new production techniques and disease control strategies were going to put swine veterinarians out of business. Obviously, that has not been the case as we continually see old diseases presented in new ways. And, new diseases are enteringthe picture. One of the relatively new diseases caused by a virus is Postweaning Multi-Systemic Wasting Syndrome (PMWS).

PMWS is caused by a circovirus. There are two different strains of circovirus. The other strain is responsible for "Shaker Pig" symptoms in nursing pigs.

PMWS is usually characterized by wasting, rough hair, pneumonia and sometimes diarrhea. The syndrome primarily affects pigs 8-20 weeks of age. It may affect up to 50% of the group, but usually affects less than 10%. Affected pigs will usually die.

Iowa State University's Veterinary Diagnostic Laboratory diagnosed one case in 1996. The number of cases increased to 111 in 1998 and they are on course to have nearly 200 in 1999.

Diagnosis can be difficult because it is common to find other infections along with PMWS, such as porcine reproductive respiratory syndrome (PRRS), swine influenza virus (SIV), salmonellosis, haemophilus parasuis and streptococcus suis. A thorough diagnostic work-up by a veterinarian is needed to correctly identify circovirus infection. Many times diseases are blamed for management shortfalls, so it is also important to evaluate management issues such as feed and water intake and pig comfort.

Case Study No. 1 This herd has consistently experienced wasting pigs resulting in nursery death loss ranging from 3% to 18%. The farm also experienced high death loss in the early grower stages. The farm is a 450-sow, farrow-to-finish farm on one site. Pigs are raised in all-in, all-out (AIAO) nurseries, by room, with a common hallway. Pigs are then moved to a finishing barn that is a double-curtain-sided barn, also managed AIAO, by rooms.

Multiple postmortems were performed and laboratory work-ups were done in our laboratory as well as in state diagnostic laboratories. Results ranged from mild PRRS infection to Streptococcus suis, meningitis and arthritis.

Multiple antibiotics were used to try to reduce the death loss and incidence of disease but there was little or no response.

Based on research reports from Canada indicating similar symptoms, we submitted tissues to the diagnostic laboratory looking specifically for the circovirus infection. The laboratory identified microscopic changes as well as isolation of a circovirus. Based on these results, we concluded that circovirus was involved in the farm's high death loss.

Now the challenge was to outline a treatment and control protocol to a virus that we know little about. We felt that it was important to follow good pig raising techniques such as strict AIAO pig flow, improving washing and disinfection methods, as well as separating and euthanizing pigs that appear to be chronically affected. We also felt it was important to limit crossfostering to the first 48 hours following birth.

Although it is too early to claim success, we have seen a decline in the death loss of the nursery and early grower. We are not sure how much our management techniques have helped but we feel it is the best approach available for control of the viral spread. We also are hopeful that the sow herd is developing some natural immunity, which is resulting in less sow to piglet transmission.

Case Study No. 2 Our second farm is a 750-sow operation that has three-site production. The nursery is managed AIAO by room as is the finisher. However, the nurseries have a common hallway.

The quality of pigs at weaning was excellent, as was the performance in the finishing barn.

The nursery performance was good for the pigs that survived, but the mortality rate ranged from 2% to 15%. The pigs in the nursery generally started falling behind within the first week. The pigs that were affected in that first week slowly continued to fall back and eventually accounted for 75% of the nursery death loss.

Based on recent press reports about PMWS, the producer was convinced that this must be the problem in his nursery. We were called to the farm to evaluate the death loss and do a diagnostic work-up. We took temperatures of a large number of pigs as well as submitted pigs to a diagnostic laboratory. There were nofevers present, no microscopic lesions supportive of a circovirus infection and there was no virus isolated.

Some management problems were identified and corrected, such as improving air flow, water flow and feed access.

We encouraged the producer to try to increase feed consumption the first 3-4 days, hoping to reduce the number of waste aways.

This farm is slowly responding to some of the management changes and we continue to look for an infectious cause of the problem. We do not feel that circovirus is involved.

Understanding China

China is difficult to describe, impossible to visualize if you've never been there. You must feel it, see it, smell it, become enveloped in it, mix with her people.

Whether a tourist or a businessperson, you must take your time to experience the complex forces that shape and drive the country shrouded in fascination and mystery.

One visit is not enough. Still, I can offer this glimpse of China from my two-week visit.

China has:

* An over 4,000-year history; the longest period of continuous recorded history in the world.

* The third largest land mass in the world, 3.7 million square miles, where they grow food for 20% of the world's people on 7% of the arable land; only Canada and Russia are larger.

* The largest population in the world (about 1.2 billion people); one in five human beings are Chinese, nearly 75% living along the country's eastern seaboard.

* "Mianzi" or "face" in Chinese is the principal measure of a person's reputation and dignity. To "lose face" is to lose honor and dignity.

* A land where the ancient philosophy of Confucius (teaching respect, selflessness, obedience and sense of community) bumps up against capitalism and all the trappings that goes along with it.

* Communism and capitalism coexisting.

* Cell phones ringing everywhere.

* Bamboo scaffolds encircling modern skyscrapers under construction.

* Tiny garden plots and grass huts nestled amongst giant apartment buildings.

* Traditional meals which are enjoyed in large groups; where anything and everything is prepared fresh, presented on a platter placed on a lazy Susan at the center of the table.

* 400 to 500 million hogs raised annually - at least 85% raised in households with 20 pigs or less per year.

* A per capita consumption of pork of about 70 lb./person.

That's China! Or at least as much of it as I could absorb during a two-week trade study tour. Sponsored collectively by National Swine Registry (NSR) and USDA Foreign Agriculture Service (FAS), the tour was supported by funds earmarked for foreign market development. Additional funds were provided by U.S. Livestock Genetics Export Inc. (USLGE), a consortium of purebred livestock organizations that pool funds under the Market Access Program (MAP).

The tour was coordinated by Tony Clayton, NSR International Marketing Director and president of Clayton Agri-Marketing Inc., Jefferson City, MO, and Todd Meyer, DVM, country director with the U.S. Grains Council (USGC), who has lived and worked in China for 10 years. Iowa State University extension specialist Tom Baas and University of Georgia swine geneticist John Mabry also participated and presented seminars on pork quality and breeding and selection programs, respectively.

China's Pork Industry Estimates of China's pig inventories bounce around a lot. The most current Chinese government-sponsored census is for 1996. Just this past February (1999), the data was adjusted down over 20% to 363 million pigs, according to a U.S. Meat Export Analysis and Trade News report.

More current estimates of production and trade, provided by FAS, project annual production near 500 million head (see Table 1). The report verifies the majority of China's hogs are raised in small rural households (see Table 2).

The USGC's Todd Meyer explains it is common for a village to share a community boar. "It is not unusual to see a guy walking a boar down the street to breed a sow," he says. Also, some animal husbandry stations keep a couple of boars for collection and artificial insemination (AI) of native sows. Leaner, more muscular boars are selected to upgrade the growth and carcass characteristics of the domestic lines.

In many areas of China, these backyard pigs supplement a family's income. These "village" hogs are fed roots, table scraps and a little rice bran. With no housing costs, a slight charge for inseminating the sow and a little starter feed, a Chinese farmer can make a few renminbi (RMB, China's currency) selling to a specialty market.

But like other parts of the world, as people upgrade their lifestyles, find job alternatives, they give up the pigs. "They just can't make much money raising pigs anymore," explains Meyer. "One out of three years they will lose money."

Meyer describes the AI methods used by these village pork producers as "fairly primitive." A small, flexible, rubber tube is used to deposit about 20 cc's of extended semen into the sow's reproductive tract. "These animals are extremely prolific so that's how they get by with this fairly primitive AI. They usually get good-sized litters," he adds.

Hog Expansion The Chinese are big pork eaters. There was a time when 90% of the meat they consumed was pork. Today, about 70% of the meat they eat is pork. Like most cultures, the Chinese will diversify their diets when they can. Chicken, in particular, seems to be gaining favor. Beef and more fish will be added, too.

Pork quality becomes a moving target in China. They do not use "Americanized" measures, Clayton observes, adding: "There's a high amount of fat in the Chinese diet; there's a certain amount of fat that they like to cook with, and eat."

If the current estimates of hog numbers are relatively close, it is apparent that China's hog industry is growing. Some estimates indicate an increase of 100 million head in just the last five years, effectively matching total annual production in the U.S. Meyer is a little skeptical of the figure. "No doubt the industry has expanded, but the rate is not clear. (Pork) expansion has been slower, on a percentage basis, than poultry, aquaculture and beef," he adds.

Meyer sees consistent growth in backyard and small commercial producers with several hundred pigs raised per year.

"In terms of growth, they probably don't need much more," says Meyer. "But, they do need to get higher yields - lean meat yields and better performance - to get more out of their inventory."

Feed, Marketing Policies "It is not a unified system - whether you talk about production or the market," Meyer says.

The government's high-priced grain policy creates a key obstacle. Domestically raised corn is not tied to the world market. Instead, it sets a procurement price creating a rigid market that keeps private buyers out. The price of domestic corn was roughly $150/metric ton (m.t.) delivered to the feed mill, while U.S. corn delivered to a major port was $125-130/m.t. in early May. Since, corn prices have crashed and the U.S./China differential narrowed. U.S. corn delivered to China stands at only $100-110/m.t., while domestic corn delivered to the southern provinces is about $130/m.t.

On the hog-marketing end, producers face an open market. "That makes it hard," Meyer points out. "There's no government control over the meat price, but your ingredients are controlled. If they let the price (of corn) go to the world market, you could see a major shift toward commercial production," he adds.

Confusing the view even further, the quality of China's hogs ranges all over the boards. The better quality, leaner hogs from the Guangdong area were selling for 7.6-7.8 RMB/kilogram (40 cents/lb.) in early May. "That's for good hogs in the best market in the country," Meyer explains. Lesser quality hogs drop off pretty fast, many producers noting they were selling for half that.

"We're expecting a certain amount of this industry to commercialize and we (USGC) are trying to provide some of the tools they'll need. It would be good if they would accept that there is going to be a commercialization (of the pork industry) and recognize that we need to make it as efficient as possible - and that means good genetics, good management, good nutrition and good, high health," he adds.

This more commercialized growth is expected to occur in the southern and eastern coastal areas, near ports where corn and improved breeding stock can be brought in and better feed mills exist. Three provinces northwest of Hong Kong - Guangdong, Guangxi and Hunan - are the likely candidates.

China As A Market The so-called "movers and shakers" in the industry accept much of the westernized philosophy of pork production. AI training is being accepted but separate site production, early weaning and more stringent environmental controls will gain favor slowly, partially due to the extremely heavy populations in some areas.

Regardless, if you are selling animal health products or breeding stock, many issues still remain. Doing business in China is more complicated than many areas of the world, reminds Clayton. Still, he offers this perspective: "Multiply anything that has potential times a billion and it's going to be a major market at some point in time."

On the one hand, Clayton sees an "almost unlimited market" for swine genetics and breeding technology. Yet, stringent health requirements and other barriers make trading with the Chinese more difficult than other Asian markets he considers to be high-value markets - such as Japan, Korea and Vietnam.

Clayton sees a China that wants to be competitive in the world market - "to be mentioned in the same breath as the U.S., Canada and European countries." Yet, on the other hand, there exists a government that wants to maintain the status quo, which is suspicious of other countries and the technology they offer. "They want to call it their own name, develop their own programs and keep all of us at arms' length," he assesses.

Clayton has traveled nearly 40 other countries in his work. He reinforces advice often given about doing business in China - it is very important to build personal relationships. "Patience is a virtue - and you have to have it here."

Mabry, too, has traveled worldwide, consulting on swine genetic programs and studying pork markets. "When you consider the huge population over here, the developing economy and the fact that the government wants to expand the consumption of meat, then consider pork has a better image than chicken, I think there's a tremendous potential industry for growth that we probably don't see anywhere else in the world."

Mabry expects Chinese buying habits to be similar to the nearby Japanese. "They want to use technology to expand production and consumption of pork, but they want to be able to control the situation. You don't gain control if you become dependent on the U.S. or anybody else for the direct importation of the product."

And, he agrees the pork quality question remains unanswered. "We've got to re-define pork quality for what the Chinese want - what level of tenderness, what aspects of color and flavor are preferred in their society."

Iowa State's Baas agrees: "They cook pork differently than we do. We're probably not going to change their traditions. The things that are important to them, in terms of quality, may not be exactly the same as we would choose. They are not going to start eating 11/4-in. thick Iowa chops, just the same as we're probably not going to start eating snake or eel and those kinds of things.

"They are producing pigs for a lot of different markets - the Hong Kong market, several provincial and local markets - and each one wants something a little bit different. It's unlike our country where we're producing commodity pork, for the most part," he says.

"We might think they need to reduce the backfat on their pigs, but what they probably really need to do is add more muscle. They're going to tolerate a pig with more fat than we are," he adds.

Baas' closing thoughts, "The thing that struck me the most was the tremendous hunger for technology that we saw everywhere we went. The audiences for our seminars were very attentive, asked very good questions and were very interested in what wewere doing.

"The second thing that struck me is they are people who like to do things the right way. They are very meticulous about how they like to do things; they want to find out as much as they can from us and then do a better job."

Chinese pork producers were very interested in information about American breeding stock during the China Animal Husbandry and Feed Industries Fair in Changsha. Shown here at the National Swine Registry (NSR) booth, Qiao Qingyan (second from right) translates a producer's question for Tony Clayton (far right), NSR International Marketing director.

The throngs of people that descended on the exhibitors after an opening ceremony resembled the mad rush you might see when the doors are flung open for a huge American department store sale the day after Thanksgiving. Information on "western" pork production methods and technology, particularly, was a hot commodity.

The products and technology displayed ran the gamut - from paste-filled tubes claiming to cure everything from sow mastitis to baby pig scours to high-tech equipment, computerized recordkeeping, vaccines and medications.

The three-day trade show, staged in several old museum buildings connected by a series of hallways and a central courtyard, drew an estimated 20,000 people.

Benchmarking Without Baring Your Business Soul

Peer groups can be helpful, insightful and supportive. In fact, a good peer group can improve the business success of all those involved.

One such group, Pork Peer Group 2000, includes 15 producers from Georgia to Nebraska and Texas to Minnesota. The impetus for the group was that they all were clients of the same swine consulting veterinarian.

Peer Group 2000 met dozens of times, discussing hog health concerns, nutrition, buildings, breeding, equipment - pretty much the entire gamut of pork production. They learned from each other's successes and failures, shared their hopes and goals, and in fact, knew just about everything there was to know about each other's hog operations.

Then they decided to put their production and financial numbers into a database to develop some benchmarks. They planned to compare the production and economic performance of their hog operations and learn from each other in this way, too.

Truth is, it just didn't work out as they'd hoped.

"When we met and decided to do this, we were all enthused about it," says Dave Hinman, Jen-Rae Pork Farms, St. Ansgar, IA.

"It seemed like such a practical idea," he adds. "We wanted to establish some benchmarks so we could track progress and compare ourselves with other producers. But when it came down to it, I guess the numbers we'd decided to share were a little too personal. It was really like exposing every private part of the business to the rest of the group." Some characterize this as "getting naked in front of your friends."

Human nature, it seems, makes us cautious about being totally honest and open about business, even with noncritical peers. Not only were the group's numbers incomplete, when compared to production and financial performance information from other sources, Hinman says they just didn't make sense.

Eddie Crum, CEO of ValAdCo, a farmer-owned, 10,000-sow, farrow-to-finish cooperative near Renville, MN, says, "It's hard to find valid numbers we can use as benchmarks. I think the National Pork Producers Council's (NPPC) National Production and Financial Database will give all producers some good numbers to use as benchmarks."

He feels one reason the NPPC effort might be more successful than Hinman's peer group experience is the ability of the participants to remain anonymous.

"No one wants their fellow producers to see them as inadequate, so if the numbers can be traced back to an individual operation, producers may tend to exaggerate them. Like it or not, you could become a member of a liar's club," Crum says.

ValAdCo is part of the pilot group participating in the NPPC database project. While Crum believes a lot of good, useful information can come out of an effective benchmarking program, he wants to be sure the data he's using for benchmarking and goal setting is valid for his operation.

For this reason, ValAdCo is also looking for an impartial, outside source to summarize and analyze its production records and provide summaries of other similarly sized pork businesses for comparison.

One of the first companies often cited as being able to produce accurate and comparable benchmark information for agricultural enterprises was Agrimetrics Associates, Midlothian, VA.

Agrimetrics has been in the benchmarking business since 1965, when it began working with poultry production. They introduced a pork production monitoring program for farrow-to-finish operations in the mid-1980s.

Since accounting systems used a number of different methods to arrive at expense and income figures, Agrimetrics developed its own standardized set of costs and performance statistics so all clients could compare their operations. Agrimetrics professional analysts gather the financial and closeout data from producers (ranging in size from 5,000 breeding females up to 100,000 or more), making sure all the statistics are calculated in the same manner.

"Because our own analysts enter the information in a standardized format, companies don't have to change their recordkeeping systems to participate or profit from the knowledge, plus trends of the past 20 years," says G. Thomas Martin Jr., Agrimetrics president.

The company issues confidential reports showing deviations and rankings only to participating firms. "Each report is followed up with a personal review on location by a senior Agrimetrics staff member. There's no 'open kimono' effect," Martin says. "It's not who they are, but where they rank, that motivates our clients." Martin says confidentiality, comparability and accuracy have been the hallmarks of Agrimetrics' programs for both producers and processors.

While Agrimetrics clientele tends to be the largest producers, Martin says the company will work with producers or groups of producers of any size.

Similar information has been available from other farm advisory companies and also from university extension specialists and state farm management associations. "Most of these services have successfully masked the identity of participating producers, so data has become more reliable over the years. But the problem has always been standardization of data and results," says Alan Lash, AgriSolutions, Brighton, IL.

Lash says a big difference has been how different databases calculate profit and loss. "Some don't include office expenses and interest costs that are attributable to the swine enterprise when they calculate total costs," he says.

He expects the NPPC Production and Financial Standards to be adopted by most of the advisory services now working or seeking to work with pork producers in analyzing production and financial performance. An industry wide changeover would allow producers to compare their business performance with statistics from any other accounting/analysis service, he adds.

Martin, on the other hand, says the changeover to NPPC standards won't be as advantageous to Agrimetrics' clients. In fact, he says, the change would make it more difficult to compare current numbers to those from the past.

Hinman likes the idea of standardization of numbers, whether it is through a third party or through the NPPC database. With their production data filtered through the NPPC standardization process and their anonymity preserved, Hinman and others in his peer group will be able to see how they stack up among themselves and others in the industry without the pain of baring their businesses in front of each other.

Industry-wide adoption of the NPPC standards will allow the peer group to use an outside service to collect, analyze and summarize data from individual members and provide meaningful reports without revealing any producer's identity. These reports could break out the performance of the top five or bottom five of the group, or any other parameters they choose. And, they could compare their group or their individual operations to the NPPC database.

And, Hinman says, that means the peer group can continue to meet and discuss nutrition, health, new practices, management techniques and everything else they've always done, but with the new twist of being able to see how these might affect their bottom line. "That will be good for all of us and for all of the industry," he believes.

As the pork industry is standardizing terms, definitions and numbers, it is also important to agree on a common definition for benchmarking.

One definition suggests it is "the method by which you identify and understand successful practices of other companies and adapt them to your own situation in order to boost your competitive strength."

Another definition says benchmarking is "the process of finding, adapting and implementing outstanding practices. It involves analyzing performance data, the practices that led to the performance, and learning how those practices might fit into your current business system."

A "benchmark" is a measure of performance. It can be the average of all producers or a select group of similar producers. It can be a goal for some producers or a starting point for improvement for others. Some benchmarks will be specific to pork production. Others may be more general in nature.

Efficiencies, such as net return on investment or net income per hour of labor, may be different from one industry to the next and may even vary between different types of farming operations. If you're wondering whether you should be raising hogs, poultry, cattle or crops, comparing benchmark numbers from these different enterprises will help you decide.

NPPC's hope is to be able to collect enough accurate data that industry benchmarks can be established. For example, average pigs weaned/litter may have a different meaning on one farm than another. Pigs/sow/year is a better measurement of output, but not necessarily of profit.

>From the NPPC database, however, producers will be able to select data from farms most closely resembling their own (number of breeding females, feed sources, litters/breeding female/year, culling rates, pounds of pork sold/year, etc.).

Benchmarking has been used for years by poultry producers and probably even longer by manufacturers in non-agricultural industries.

It has been used in nearly every facet of public and private business and even in education and government. To learn more, online, start with the National Pork Producers Council Web site: The July-August 1999 "Ask The Expert" column features Earl Dotson, NPPC vice president of education, environment and research, who's responsible for the database. He'll answer producer questions at www. html.

Single copies of "Production & Financial Standards for the Pork Industry," Second Edition, published by National Hog Farmer, March 1, 1999 are available by writing Jenny Felt, NPPC, P.O. Box 10383, Des Moines, IA 50306 or by e-mail:

A technical reference manual supporting the NPPC Production & Financial Standards is scheduled for publication this summer. Those requests should also be sent to Jenny Felt at the above address.

E-Markets, Ames, IA, is responsible for creating and maintaining the NPPC National Production and Financial Database. Check them out at The announcement that E-Markets is working with NPPC on the database can be found at 02_22_99.htm.

For more on benchmarking and a list of services from Agrimetrics Associates, look them up at Or call them at (804) 744-4500.

The AgriSolutions story can be found at

An Internet search for "benchmarking" + "agriculture" turned several thousand references. An informative article on benchmarking in the dairy business originally printed in Holstein World (written by Jason Karszes, Cornell University extension dairy specialist) can be found at

Many of the agricultural benchmarking Internet references were from Australia, Europe and Canada.

There are a number of non-agricultural benchmarking sites, too, which help give perspective to the widespread use of benchmarking. A couple of interesting sites include The Benchmarking Exchange at www. and The Benchmarking Network located at www. html.