The Iowa Pork Industry 2003: Patterns and Economic Importance by Daniel Otto and John Lawrence* Introduction The pork industry of Iowa represents a major value-added activity in the agricultural economy and a major contributor to the overall Iowa economy. The $2.46 billion of gross receipts from hog marketings in 2002 represent only a portion of the economic activity supported by the industry. Although the hog industry in Iowa has undergone rapid structural changes in recent years, total hog numbers have increased from a decade ago. About 65,000 Iowa residents are involved in various aspects of the industry ranging from input suppliers to producers, to processors and handlers as well as mainstreet businesses that benefit from purchases by people in these industries. Overall an estimated $2.02 billion of personal income and $3.02 billion of gross state product are supported by the hog industry based on 2002 levels of production. This report documents trends in Iowa pork production and examines the current structure of production, input purchasing and processing of the hog industry in the state. The contribution of these activities to the overall economy in terms of employment, income, and value added will also be examined. Hog Numbers Despite major changes in the pork industry, Iowa continues to be a major hog producing state. Inventories have varied cyclically over time but have trended higher throughout the 1990s and early 2000s reaching a high of 15.8 million head in 2003. While inventories are on an upward trend since 1990 (Figure 1), the current inventory is still less than the 16.3 million head Iowa had in 1970 and 1980. Annual cash receipts from the sale of hogs were $2.02 billion in 2002, the last year of available data. This figure was based on a pig crop of over 15.1 million born in Iowa and in-shipments of 14.8 million feeder pigs. Iowa's share of U.S. inventory remained relatively stable since 1990 at approximately 26 percent. Iowa has long been a major pork producing state and ranked first in 2003, ahead of North Carolina. At least a portion of the stability in inventories during the 1990s can be attributed to a general trend toward specialization as specialized hog farms cooperated with specialized grain farmers to finish hogs under contract. The newly diversified farms focused greater resources in cash grain production and utilized the manure for fertilizer on their crops. This trend was accelerated by record high grain prices in 1996 and record low hog prices in 1998. A second trend that has particularly impacted Iowa is the specialization within the pork sector to fewer farrow to finish enterprises and more farrow to wean and wean to finish farms. This trend can be seen in the number of inshipments of pigs from other states, 14.8 million head in 2002, compared to 1.4 million in 1990. While there are fewer farms in Iowa there are dramatically fewer with a breeding herd. Thus, 6.4% of the hogs marketed in 1990 were farrowed out of state compared to 53.2% in 2002. * Extension Economists, Iowa State University, Ames, Iowa.
2 Total hog marketings in Iowa have increased in recent years, but the number of farms raising hogs has decreased. Since 1990, the number of farms with hogs decreased from 35,000 to 10,000 farms (Figure 2). Meanwhile, the average inventory of hogs has increased from 394 to 1530 per farm. Figure 3 compares the structure of Iowa s inventory to that of the U.S. The state has more inventory on farms with less than 2,000 hogs and less inventory on farms with more than 5,000 hogs than does the U.S. The prominence of Iowa' pork industry is no accident. The proximity to large quantities of feed grains has supported a multi-billion dollar livestock feeding industry in Iowa. Since this paper is concerned with the impacts and resources used in pork production, the analysis focuses on the value of hogs produced in Iowa as the critical measure that drives expenditure levels for various hog-related inputs and investments. Economic Importance of the Iowa Pork Industry The $2.43 billion of hog marketings represent the aggregate value of the pork industry at the farm level. In addition to these farm level effects, the backward and forward linkages generate significant additional impacts throughout the Iowa economy. The backward linkages include purchased inputs, supplies and services used by hog producers. The forward linkages include further value-added activities occurring after the farm gate such as meat preparation and processing. Total inputs, including labor, used by the Iowa hog industry are estimated based on aggregated cost of production budgets weighted according to the share of the state s hog production occurring in different types and sizes of production systems. Different budgets were developed for three production systems: farrow-to-finish, breedto-wean, and wean-to-finish. The distribution of these systems is based on the relationship between pig crop and inshipments and outshipments of pigs reported by USDA and represents a state level measure rather than an average across all farms. Farrow-to-finish operations were further categorized by size because hog production is subject to economies of scale where per unit input-use declines as hog operations increase in size. Accordingly, farrow-to-finish systems in Iowa was classified into one of three size classes: small-(150 sow), medium-(300 sow) and large-(1200 sow) sized farrow-to-finish production facilities. The share of Iowa s pork production estimated to be in each class of facility was based on the percent of inventory in three size groups reported in the 2002 USDA December Hogs and Pigs report. The three size categories are: less than 2,000 head, 2,000-5,000 head, and more than 5,000 head. These percentages are reflected in Figure 3. The breed-to-wean and wean-to-finish systems were not divided by size, but the share of each is reported in Table 1 along with aggregate costs and returns. The cost of production and input usage was then calculated for each size farrow-to-finish operation based on a set of cost of production budgets originally developed by Professor Chris Hurt of Purdue University (Hurt). The breed-to-wean and wean-to-finish systems were based on Iowa State University Extension Budgets (FM-1815). The weighted cost and returns of production and statewide totals of feed use, other direct inputs, annual depreciation on capital investments, labor requirements and returns to management and capital are presented in Table 1 and summarized in Figure 4. These aggregates are also depicted schematically in Figure 5.
3 Estimating the labor component involved in hog production represents a special challenge. Government sources such as the USDA Hogs and Pigs report estimate that 10,000 farms are involved in hog production, although many of them operate at a scale too small to be counted as full-time enterprises. Since we are most interested in measuring labor on a comparable per unit basis, a Full Time Equivalent (FTE) of 2,400 hours per year per worker was deemed to be the most appropriate measure of labor. This FTE standard was then applied to the total hog production in each size class in the state and then summed to arrive at a total labor requirement. The rate of labor required per 10,000 hogs raised in farrow-to-finish operations ranged from 5.0 for the small facilities to 3.0 for the medium-scale facilities to 2.88 for the large systems. Although an estimated 10,000 farms are reported to be involved in hog production in 2002, based on the FTE standard of these budgets, an estimated 5462 workers are required to produce the current volume of hogs in Iowa (Table 1). Although the FTE numbers are used in our economic impact reports, it is important to recognize the larger number of Iowa farms involved in some level of pork production. These FTE worker numbers have declined somewhat in recent years because the increase number of feeder pig imports means the Iowa pork industry is shifting away from the more labor intensive farrowing activities and into the less laborintensive finishing portion of the industry. The lower level of the schematic in Figure 5 represents purchased cash inputs used by producers at the farm level. The prices and values in this section are intended to reflect long-run conditions in the industry and are consistent with projections made by The Food and Agricultural Policy Institute (FAPRI). The estimated total value of direct inputs used in Iowa sum to $1.316 billion. Additional costs for depreciation of fixed assets and facilities total an estimated $445.1 million. Labor and management expenses add an additional $192.2 million of costs for a total of $1.95 billion of aggregate input costs used in hog production in Iowa. The residual value between inputs and marketings is estimated to total $221.6 million and can be described as returns to capital. The largest single category of expenditure is feed costs. With 25.21 million head produced annually, 240.9 million bushels of corn valued at $530 million are used in Iowa. Feed supplements and additives represent another $569.6 million of purchased inputs from suppliers in Iowa. The use of this scale of feed supplements helps support soybean prices, the soybean processing industry, local elevators and transportation services based in rural areas. In addition to the backward linkage effects of purchased inputs by pork producers, forward linkages can be traced to the slaughter and processing level for impact on the state's economy. Based on estimates of inter-industry flows used in the state Input-Output model, the cost of live animals represents about 50 percent of the total value of the pork at the slaughtering level and a smaller share at the processor's product. The remaining margin is for other inputs including labor, proprietor s income, and return on investment. The final demand uses of processed hog products are an estimated 626 million pounds going into foreign markets and 7.013 billion pounds into domestic markets. These estimates are based on prorating Iowa' production proportionally to total U.S. end uses.
4 Impacts to the General Economy These estimates for the various dimensions of the Iowa pork industry at the producer and processor level represent the direct component of the industry. Production inputs represent the indirect effects. In addition to the direct economic effects and input purchases resulting from pork production, processing and input supply activities, income earned in these agriculturallyrelated components of the pork industry is spent in the rest of the economy. These expenditures stimulate a wide range of sectors, including consumer-related businesses in urban areas. To identify and estimate these multiplier effects, an Input-Output (I-O) model is configured for the state of Iowa and used in this portion of the study. The I-O model used is based on the IMPLAN system developed initially by the U.S. Forest Service. An I-O model is basically a general accounting system of the transactions taking place between industries, businesses and consumers in an economy. These purchases and sales are adjusted for in-state vs. out-of-state sources and then summed to arrive at estimates of total impacts arising from the direct effects of a policy change or scenario. The basic scenario in this analysis looks at the overall importance and contribution of the pork industry to the Iowa economy based on the 2003 situation and current levels of production in the Iowa pork industry. This perspective is similar to asking what would be the impact of removing the industry from the state. As a result, the full set of linkages of hog production to instate feed grain production and processing are included as part of the total impacts. The results of the I-O analysis are presented in Table 2 with estimates of total output, personal income, value-added, and employment presented at a 10-sector level of detail. The table for this baseline scenario presents estimates of the farm level employment and income effects separate from the rest of agriculture while the hog slaughtering and processing effects are included in the manufacturing sector. The key indicators of economic activity reported include total industry output, total income, value-added, and employment. Total industry output measures total dollars of goods and services produced by an industry, including government and non-government activity. The estimated $2.43 billion of gross output from pork production activity is linked directly into the state s hog slaughtering and processing sectors. The total sales from the pork production and processing sectors support additional input purchases, spending on transportation and other services, as well as the consumer-related purchases worth $11.44 billion of direct and indirect sales throughout the Iowa economy. This output, or gross sales number should be used with caution because the value of the hog is counted twice---at the farm level and as part of the total value of pork products when it is sold from the processor. While much of the impacts are concentrated in the agricultural and input supply sectors, economic linkages beyond the farm gate capture additional activities such as transportation, handling, processing and the personal consumer spending effects. As a result, the effects of the pork industry are distributed throughout the economy, including the services and trade sectors. Total personal income is a composite of wage and salary income and return to proprietors. This more comprehensive measure of income is chosen because most farm income is reported as proprietor income. The estimate of $265.9 million of direct income to pork producers is linked
5 to an additional $1.76 billion of income throughout the Iowa economy, including the porkprocessing sector, for a total impact of $2.026 billion of personal income. Again the service and retailing sectors receive strong stimulus from the initial effect of income earned in the pork sector. Total value added measures the total gain in economic activity to the economy resulting from production of goods or services. Wages, salaries, taxes, and profits are included in the value-added measure. The value-added measure is a good indicator of net economic activity as only the net incremental value is summed at each transaction to avoid double counting. The estimated $357.7 million of value added for pork production is linked to $2.67 billion of additional indirect and induced value-added activity in the state's economy for a total value added of $3.026 billion. Employment is based on a per job unit consistent with the definitions used by the U.S. Commerce Department. The employment levels are likely to be nearly full-time equivalents for the manufacturing and production-oriented jobs. Retail and service sector positions tend to involve many part-time positions. The 5,462 direct jobs in pork producing activities involve farm workers as well as farm proprietors and can be interpreted as full-time equivalent positions. This number is consistent with the budget estimates developed by Professor Hurt for representative hog enterprises and is aggregated to the total number of hours needed to produce 2.88 million litters of hogs per year. However, this FTE number is different than the 10,000 farms with hog operations reported by USDA because some of these farms are involved in other enterprises as well. As indicated in Table 2, these 5,462 direct jobs at the farm level along with the 21,000 at the slaughter and processing level generate a chain of economic activity that supports an additional 38,653 jobs throughout the rest of the economy. The distribution of impacts is similar to the pattern for the other indicators in that effects are present in all sectors. The service sector provided the largest number of secondary jobs followed by Finance, Insurance and Real Estate and Retailing (F.I.R.E.). The higher number of jobs in services combined with the lower levels of income suggests that many of these jobs are less than full time. The impacts to the manufacturing sector in this inclusive scenario include an estimated 21,000 employees in the Iowa hog processing and prepared meats sectors. The direct employment estimates for hog processing in the I-O model are consistent with secondary sources such as County Business Patterns after adjusting for the greater number of hogs slaughtered in Iowa and the fact that hog slaughtering and processing is more labor intensive than beef slaughtering activities. An estimated $483 million of wage and salary income is paid to workers in these sectors. Since hog processing and slaughtering facilities tend to be located near the source of raw materials, this stage of the pork industry has the additional benefit of providing needed jobs in rural labor markets. Emerging Issues Facing Pork Industry The structure of the pork industry is changing as the trend to larger units accelerates. Lawrence and Grimes estimated that over half of U.S hog marketings in 2000 were from 156 firms producing over 50,000 hogs a year. It is expected that a larger share of marketings is controlled by a smaller number of firms today. In addition to consolidation, the pork industry is also experiencing increased integration. The three largest U.S. hog producers are also pork
6 packers and Smithfield is both the nation s largest pork packer and largest hog producer. The dominance of the hog industry by large units raises concern for the future structure of the sector as only the most efficient operations will survive in the increasingly competitive market place. While size is not the sole determinant of efficiency, issues of pecuniary economics such as volume purchasing and sales, etc., become important. Producers of all sizes are asking if they are large enough. The industry needs to not lose sight of the key success item -- that of effective management. Regardless of the size or ownership of the enterprise hog and pork production does create economic activity in the state and community where is located. If the firm is not locally owned the profits may not remain in the community. However, major inputs (feed, labor, utilities, trucking, services, property taxes, etc.) will still be provided locally or within the region (Figure 4). Because hog production units are larger on average and more specialized than in the past, total economic activity be more stable or increase for regions that have production units. Others that are losing share will lose economic activity. The pork industry is transforming from an industry with a commodity orientation to one with a product or attribute orientation, e.g. branded products. The consumer is becoming more discriminating and backing it up with a willingness to pay for products with specific attributes. New products will have to meet the specific requirements for individual markets such as fresh, organic, antibiotic free, processed, Hotel, Restaurant, and Institutions (HRI), retail, and international markets. Paramount among these requirements is consumer confidence that the product they are buying is safe, nutritious, and of high quality. As a result, the different segments of the marketing channel will communicate more closely with one another. This communication, whether formal (via specification contracts) or informal (through market signals) will coordinate to deliver specific characteristics for a given product line and synchronize production flow to more efficiently utilize slaughter and processing capacity. There are several producer driven integrated supply chains in which producers are buying or building packing and processing facilities to secure a larger share of the consumer s dollar. The additional handling and processing associated with these new markets will mean additional value-added jobs in Iowa s agri-industries. The changes in pork industry have been and will continue to be driven by emerging technology, markets, information, and skills of producers. Iowa producers must secure access to technology and information to be successful in the future. They also need to be on the forefront in identification of new markets and be positioned to produce products for these markets. Effective marketing, financial management, risk management, etc. are becoming necessary ingredients to industry survival. The environmental impact of pork production is another emerging issue that is not independent of the economic impact of the industry. Because of differences in climate and cropping patterns, uniform federal environmental standards may have differing regional impacts on hog production. In addition, state and county environmental and zoning regulations can greatly alter the competitive position of the local pork industry. Pork producers will need to have environmentally-sound facilities and management practices and be good neighbors in order to remain sustainable. Cost-benefit analysis to evaluate the trade-offs between restrictions,
7 regulations, or incentives to alter production practices and the competitiveness of individual firms will be important. Efficient pork producers with well-managed operations will continue to be competitive and survive. Successful swine enterprises in the future will need access to markets, technology, and information. Managers must have the ability to develop and implement effective profitable business plans and analyze ongoing information to determine if the operation is on the chosen path. Sustainable systems are needed. These would be systems that are profitable, environmentally friendly, socially acceptable, and produce products demanded by consumers. References Hurt, Chris, Purdue Cooperative Extension Service, Positioning Your Pork Operation for the 21st Century, ID-210, 1995. Lindall, Scott and Doug Olson (1993), Micro IMPLAN Professional 2.0 Database Documentation, Minnesota IMPLAN Group. Lawrence, John D. and Glenn Grimes. Production and Marketing Characteristics of U.S. Pork Producers, 2000. Economics Department Staff Paper No. 343, August 2001. Iowa State University. May, Gary, William Edwards, and John Lawrence. Livestock Enterprise Budgets for Iowa, 2003. Revised January 2003. Iowa State University Extension.
8 Table 1. Cost of Production and Returns Associated With Producing 25.2 Million Hogs per Year in Iowa Price State Total REVENUE* $41.25 $2,174,839,416 COST Corn $2.20 $529,980,345 Soy Meal $165.00 $295,453,076 Other Feed $36.00 $274,112,795 TOTAL FEED $1,099,546,216 Other Direct $216,389,367 TOTAL DIRECT $1,315,935,583 Equipment $220,679,536 Building $150,486,729 Land $2,427,152 Other $71,477,858 Labor (FTE) $130,939,593 Management $61,268,297 TOTAL INDIRECT $637,279,166 TOTAL COST $1,953,214,749 RETURN TO CAPITAL $221,624,667 ESTIMATED AGGREGATED PRODUCTION SYSTEM Farrow-Finish Breed-Wean Wean-Finish 42% 9% 50% INPUT SUMMARY Corn Bushels 240,900,157 Soy Meal Tons 1,790,625 Other Feed Cwt 7,614,244 Labor & Mgt per Hog $/hog $7.62 Total Labor FTE 5,462 * Revenue excludes the value of pigs purchased from out of state.
9 Table 2 Total Economic Effects of the Iowa Pork Industry, 2003 Total Labor Value Sales ($) Income ($) Added ($) Jobs Hog Production 2,424,603,000 265,892,900 357,727,400 5,462 Rest of Agriculture 534,140,040 90,237,404 131,992,888 4,634 Mining 1,309,545 282,195 724,238 3 Construction 99,110,536 59,020,020 64,600,484 1,640 Manufacturing 5,738,105,344 642,300,992 828,043,136 18,539 Tran.Utilities 496,238,272 138,435,696 247,021,120 3,458 Trade 810,844,800 345,508,288 562,161,920 12,790 Fin.Ins.R.Estate 586,701,312 115,030,712 395,387,360 3,741 Services 680,458,304 346,865,504 410,972,576 14,155 Government 61,414,044 20,117,546 25,484,064 431 Households 2,361,550 2,361,550 2,361,550 263 Total 11,435,286,747 2,026,052,807 3,026,476,736 65,115 Source: IMPLAN Model for Iowa
10 Iowa December Hog Inventory and Share of US Inventory 1,000 Hd 18,000 30% 16,000 14,000 25% 12,000 20% 10,000 8,000 15% 6,000 10% 4,000 2,000 Inventory US Share 5% 0 1990 1992 1994 1996 1998 2000 2002 Figure 1 Number of Iowa Farms with Hogs and Average Hog Inventory Farms 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 Farms with Hogs Hogs per Farm 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Figure 2 0% Hogs 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0
11 Percent of Hog Inventory by Farm Size 60% 50% Iowa United States 40% 30% 20% 10% 0% Figure 3 Under 2000 2000 to 5000 Over 5000 Costs and Returns to Iowa Hog Production Return to Capital 10% Facilites 20% Feed 51% Other Direct 10% Figure 4 Labor & Mgt 9%
Pork Sector - Iowa 2002 Production Year Out-of-State Slaughter -0.959 Bil lbs. In-State Slaughter Domestic Food 7.013 Bil lbs. 7.639 Bil lbs. 2.613 Live Value $ Foreign Exports 3.680 Processed Value $ 0.626 Bil lbs. Pig Exports 2.620 Mil. Head Deaths and Breeding Stock Pig Crop Inventory Pig Production 6.681 Bil lbs. Inshipments 1.130 15.070 Changes Value of Prod 2.023 $ Bil. 14.800 Mil. Head Mil. Head -2.040 Value of Inv Chg -0.402 $ Bil. Mil. Head Mil. Head Value Marketed 2.425 $ Bil. Feed Cost (Mil. $) Other Direct Labor and Management Capital Cost Corn 529.980 Cost (Mil $) (Mil $) (Mil $) Soy Meal 295.453 216.389 192.208 445.071 Total 1099.546 Figure 5