This report documents trends of pork production, prices and marketings in Iowa and examines the current structure of production, input purchasing and processing of the Iowa hog industry. The contribution of these activities to the general Iowa economy are reported in terms of employment, income, and value added.

Hog Numbers
While there has been major changes in the pork industry, Iowa continues to be the largest pork producing state in the US. The total number of hogs marketed in Iowa has declined in recent years, but is still above its level of a decade ago. Moreover, there has been some cyclical variation in Iowa’s hog inventories. December inventories have ranged from 16.3 million in 1981 to 13.6 million head in 1986 and returned to 15.0 million in 1993. Annual cash receipts have ranged from $934 million in 1971 to nearly $3 billion in 1990. In 1998, Iowa marketed 25.2 million hogs for cash receipts of $2.41 billion (Figure 1 & Figure 2). Iowa's share of the US market hog inventory has remained relatively stable ranging from a high of 28.0 percent in 1981 to a low of slightly less than 23 percent in 1996 to date to about 25 percent in 1998. Iowa’s share of the US breeding herd has exhibited a declining trend. After fluctuating between 23 and 26 percent during the 1970s, 1980s, and early 1990s Iowa's share of the US breeding herd fell to less than 20 percent in 1998. A portion of the decreasing share on hog inventories during the 1970s and early 1980s can be attributed to stronger grain prices and a shift of operations to specializing in cash grain production rather than feeding the grain on the farm. The more recent decline in breeding herd inventories can be traced to the lowest hog prices in over 20 years.

Iowa is a major importer of market hogs for slaughter and feeder pigs for finishing. Slaughter capacity exceeds the level of market hog productivity. These market hogs are shipped in for slaughter. This is shown clearly when the change in sow inventory and market pig inventory is tracked. Between 1995 and 1998 Iowa's share of the breeding herd declined from 19.7% to 18.9%. The share of the market hogs increased from 23.4% to 25.3% (Figure 3). Some of this may be explained by increased productivity but much would be market hog importation. While these conditions exist Iowa producers will enjoy favorable market hog prices relative to areas with slaughter capacity shortages.

The prominence of Iowa's pork industry is no accident. The proximity to large quantities of feed grains has supported a multi-billion dollar livestock feeding industry in Iowa. Total livestock and poultry marketings in Iowa were $5.1 billion in 1998 with cash receipts for hogs accounting for 50 percent of the total. 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. However, it is useful to reflect that the overall impact of the livestock industry is a multiple of the hog industry.

While total hog marketings in Iowa have remained relatively stable in recent years, the number of farmers raising hogs has decreased. Since 1970, the number of farms with hogs has declined by over 70 percent from 91,000 to 17,500 farms in 1998 (Figure 4). This decline in the number of farms with hogs is comparable to the national trend. As a general trend the number of hog farms is halved about every decade. Meanwhile, the inventory of hogs per farm in Iowa has increased from 177 to 874 per farm. This compares to an average of 543 hogs per farm in the US. An examination of the composition of hog farms in Iowa illustrates the reason for this upward trend as the number of operations with inventories over 500 hogs has remained somewhat constant while the numbers of smaller operations has declined dramatically. Moreover, the number of operations with 1,000 or more herd has increased (Figure 5a & Figure 5b). This pattern of increased concentration of pork production, or movement toward larger scale of operation, is consistent with the industry pattern occurring at the national level (Figure 5a & Figure 5b).

While the number of large operations is increasing the percent of the market share is increasing even faster. For example, in the US the percent of the operations with 1,000 or more hogs represented 11.9 percent of the big farms in 1998 (Figure 6b). They had 77.5 percent of the hogs (Figure 6a). This had increased from 5.3 percent of the farms as recent as 1993. In that year they marketed 50.5 percent of the pigs. For Iowa the trends are similar. During 1998 24 percent of the farms had 1,000 or more hogs. They had 74 percent of the market hogs. This was 10.6 percent of the farms and 44.5 percent of the pigs in 1993. An interesting note is that in North Carolina in 1998, 35.1 percent of the farms had 1,000 herd or more of hogs. They comprised 97 percent of the hogs. At the other end of the spectrum North Carolina had 57 percent of their farms with hogs less than 100 herd. This compared to 16.6 percent of the Iowa farms with hogs. North Carolina has a hog industry with a bimodal distribution. They tend to be quite large or very small. For Iowa 59.4 percent of the operations had from 100 to 999 herd while in North Carolina only 7.9 percent of the operations had from 100 to 999 herd.

Hog production and profits continue to be cyclical, and Iowa's production is closely matched with national trends (Figure 7). Although still cyclical in nature, the pork industry has been steadily growing since 1986. In fact, 1992, 1994, and 1998 were each record years for pork production. The cyclical changes in national production results in a similar cycle in barrow and gilt prices, but with prices moving in the opposite direction (Figure 8). Although profits for Iowa’s farrow-to-finish operations have also been cyclical, they have also been generally profitable over the past 10 years (Figure 9). However, recent losses (1998-1999) have been devastating to the industry. Profit has ranged from an annual average of $34.29 per pig in 1987 to a loss of $26.88 per pig in 1998. For the 1991-98 time period profits averaged $1.18 per pig. This compared to profits of $9.60 per pig during the 1985-94 time period. The year 1998 and into 1999 has wiped out a number of profitable years. When calculated on a monthly comparison, per pig profits ranged from $33.97 to a loss of $63.68 per pig during the 1991-98 time period. Hogs were profitable during 57 percent of the months while they were in a loss situation 43 percent of the time.

Economic Importance of the Iowa Pork Industry
The $2.413 billion of hog marketings represent the aggregate value of the pork industry at the farm level. In addition to these the 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 farmgate 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-sized production systems.

Different budgets were developed for different-sized systems because hog production is subject to economies of scale where per-unit input use declines as hog operations increase in size. Accordingly, hog production 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 1997 Census of Agriculture distribution of inventory. According to this source, 50.5 percent of hogs were produced on small farms with inventories of less than 2,000; 23.6 percent were produced on medium sized farms with inventories between 2,000 and 5,000 head; and 25.9 percent were produced on large farms with inventories of more than 5,000 head. The quantity of feeder pigs shipped in from out-of-state are adjusted for the sow and farrowing portion that takes place outside of Iowa in our accounting.

The cost of production and input usage was then calculated for each size operation based on a set of cost of production budgets originally developed by Professor Chris Hurt of Purdue University (Hurt). The weighted cost of production per litter 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. These aggregates are also depicted schematically in Figure 10.

Estimating the labor component involved in hog production represents a special challenge. Government sources such as the 1997 Census of Agriculture and Agricultural Statistics estimate that 17,500 farmers are involved in hog production, although many of them operate at a scale too small to be counted as full-time enterprises. On the other side, many of the larger facilities employ additional workers in their operation. Since we are most interested in measuring labor on a comparable per unit basis, a Full Time Equivalent (FTE) of 2,200 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 ranged from 5.0 for the small facilities to 3.0 for the medium-scale facilities to 2.88 for the large systems. Basing the hog production employment FTE estimate of 2,200 hours per year yields an estimate of 17,600 workers in the sector. While this number is close to the Census report for farms producing hogs, many of the small farms require less than a FTE for their hog enterprise and many of the larger facilities hire additional workers.

The lower level of the schematic in Figure 10 represents purchased cash inputs used by producers at the farm level. The estimated total value of direct feed inputs used in Iowa sum to $1.271 billion. Additional costs for depreciation of fixed assets and facilities total an estimated $459 million. Labor and marketing expenses add an additional $350.68 million of costs. Including all categories, a total of $2.37 billion of aggregate input purchases are used in hog production in Iowa. The residual value between inputs and marketings can be described as returns to unpaid labor and management.

The largest single category of expenditure is feed costs. With the equivalent of 2,897,000 litters being fed out annually, 304.2 million bushels of corn valued at $547.5 million are used in Iowa. Feed supplements and additives represent another $651.8 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. Data from the American Meat Institute (AMI) indicate that, on average, the cost of live animals represents about 71 percent of the total value of the pork processor's product. The remaining margin is for other inputs including labor, proprietor’s income, and return on investment. Based on this estimate of margins, the value of the Iowa pork industry at the processor level is an estimated $4.4 billion. The final demand uses of processed hog products are an estimated 300.8 million pounds going into foreign markets and 6.925 billion pounds into domestic markets. These estimates are based on prorating Iowa’s production proportionally to total U.S. end uses.

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 agriculturally- related 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 analysis for this report looks at the overall importance and contribution of the pork industry to the Iowa economy based on the 1998 situation and current levels of production in the Iowa pork industry. The full set of linkages of hog production to in-state 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 the direct and secondary economic effects presented for ten general sectors in the Iowa economy. 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 $2.413 billion of gross output from pork production activity is linked directly into the state's hog slaughtering and processing sectors with gross output values of $4.4 billion. The total sales in the pork production and processing sectors supports an additional $4.39 billion of economic output for a total of $11.8 billion of direct and indirect economic activity throughout the Iowa economy. This 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 farmgate 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 $296.86 million of direct income to pork producers is linked to an additional $1636.7 million of income throughout the Iowa economy, including the pork processing sector, for a total impact of $1.933 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 $575.771 million of value added for pork production is linked to $2.236 billion of additional indirect and induced value-added activity in the state's economy for a total value added of $2.812 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 17,790 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 2.897 million litters of hogs per year. As indicated in Table 2, these 17,790 direct jobs at the farm level along with the 15,000 at the slaughter and processing level generate a chain of economic activity that supports an additional 54,300 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 15,000 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 $380 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. This was never more evident than the recent acquisition of Murphys and Tysons by Smithfield. If the acquisitions are carried out Smithfield, will have about 15 percent of the market hogs. The dominance of the hog industry by large units raises concern for the future structure of the industry as only the most efficient operations will survive in the increasingly competitive industry. 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.

The economic impact on communities can be affected, as well. While many inputs (feed, labor, utilities, trucking, etc.) will still be provided locally or within the region, less will be needed per unit of output. However, in some cases profits may not remain in the community. They may be channeled to the central office. Because hog production units will be larger on average than today, total economic activity may remain stable or increase for regions that have production units. Others that are losing share would lose economic activity.

The pork industry is slowly transforming from an industry with a commodity orientation to one with a product or attribute orientation. 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. The additional handling and processing associated with these new markets will mean additional value-added jobs in Iowa’s agri-industries. To accomplish much of the niche markets, product source identification will be needed.

The pork industry is also quickly evolving to a systems approach to production driven by technology, information, and knowledgeable producers. Once the market place identifies the genetic characteristics of a hog to fill a particular market niche, the genetics will determine the needed nutrition, herd health status, and facilities to produce the hog. Using this systems approach to pork production, producers in states outside the traditional hog belt have been able to become competitive with the top 35-50 percent of traditional family farm 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. Survival in the production is rapidly expanding beyond the production phase. Issues of 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, 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 which 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 1991/1985 Database Documentation, Minnesota IMPLAN Group.

Otto, Daniel, John Lawrence, and David Swenson. "Local Economic Impacts of Hog Production," 1996 Pork Industry Economic Review, NPPC, March 1996.

US Department of Commerce, 1997. Census of Agriculture, Washington, DC.

*This Report was supported in part by funds available from the pork checkoff through the Iowa Pork Producers Association.

**Extension Economist and Economics Professor, Iowa State University, Ames, Iowa.