United States

Department of

Agriculture

Rural Business

and Cooperative

Development

Service

RBCDS

Research

Report 144

Role of Local

Cooperatives in

Emerging Swine

Industry
Abstract At least 12reasons could propel cooperatives into a greater role in the swine industry; among

them, protecting their market share in feed and offering a cooperative alternative to existing marketing channels. Yet, the industry offers a special challenge during the mid-l 990s because

structural upheaval is completely redefining traditional methods of production and marketing. As

a foundation for future efforts, the Cooperative Services program of USDA’s Rural Business and

Cooperative Development Service and 5 regional cooperatives surveyed 1,314 local cooperatives in 1993. Results indicated local cooperatives urgently wanted greater direction and leadership from their regionals. They also wanted financial backing to offer member swine producers

financing for operations and facilities. Without new facilities, producers cannot capture the benefits from such technological advances as all-in, all-out production, and split-sex feeding. Locals

also indicated cooperatives had a special responsibility to work with small- and medium-size

swine producers to avert circumstances which led to complete integration in the poultry industry.

Key words: cooperatives, pork, hogs, swine, integration

Acknowledgments

The author wishes to thank Wayne Snyder for proposing this research topic, and Charles

Schmidt and Suzanne Miller for their insightful comments on questionnaire design.

The Role of Local Cooperatives in the Emerging Swine Industry

RBCDS Research Report 144

November 1995
Contents Highlights ..................................................................

..ii

Strategic Choices Facing Cooperatives ............................................2

Strategic Market Orientation ................................................2

Potential Directions .......................................................

.

NeedforFinancing .......................................................

.

Technological Pressures on Producers .......................................4

Time Constraints on Cooperatives ..........................................5

Local Cooperative Survey Results ................................................6

Survey Design ........................................................

...6

Characteristics of Respondents ..................................................6

Environment Served by Locals ..............................................7

Locals Respond to Swine Industry ..........................................lO

Role of Regional Cooperatives .............................................13

NeedToActNow .....................................................

..15

Competitive Factors .....................................................16

Should Regionals Become Meat Packers? ....................................17

Feed Program Adjustments ...............................................17

Conclusions ..............................................................

..19

i
Highlights The federated system of organization linking regional and local cooperatives in the Midwest

could provide the basis for an expanded role in the swine industry. Yet, debate over the future

role of cooperatives is complicated by the massive structural change overtaking the industry.

In completely redefining production and marketing as they have traditionally been known, the

swine industry is assuming characteristics of a completely new (or emerging) industry, notably, a

high degree of uncertainty. For example, no single production technology, breed, or marketing

approach has been sufficiently proven to become the industry standard.

Greater involvement in the swine industry will cut across commodity lines, and the financial

stakes, already high, are further increased by uncertainty. Consequently, the typically automatic

assumption that both regionals and affiliated locals share compatible objectives could lead to

severe strategic miscalculations, with ramifications for many types of producers and cooperatives.

For this reason, 5 midwestern regional cooperatives-Countrymark, GROWMARK, Farmland

Industries, Harvest States, and Land O’Lakes-and the Cooperative Services program of

USDA’s Rural Business and Cooperative Development Service (RBCDS), surveyed 1,314 local

cooperatives. All were members of one or more regionals. The survey covered how locals are

adjusting to changes in the swine industry, how they are helping producer-members adjust, and

the services locals would like from regionals in this endeavor. The response rate was 34 percent, representing 670 locals.

Affiliation with regional cooperatives through a federated system typically gives locals access to

technical expertise, manufacturing services, and financial resources, encapsulated by the

unique identity and goals of the regional. Survey results confirmed that locals receive these benefits. Yet, results also indicated locals urgently wanted greater direction and leadership from

their regionals. Absent such leadership, the motivation for the federated relationship evaporates.

Local cooperatives also wanted financial backing to offer their member-swine producers financing for operations and facilities. Without new facilities, producers cannot capture the benefits

from such technological advances as all-in, all-out production and split-sex feeding. Locals also

indicated cooperatives had a special responsibility to work with small- and medium-sized swine

producers to avert circumstances which led to complete integration in the poultry industry.

Because the swine industry changes have thus far had a largely beneficial impact on cooperative feed sales, failure to make such adjustments could undermine the economic position of both

local cooperatives and independent hog producers, and, in the long run, regional cooperatives.
The Role of Local Cooperatives

in the Emerging Swine Industry

Julie A. Hogeland

An economic tidal wave of change is rolling through

all levels of the swine industry-production, slaughtering,

processing, and retailing. This wave is eroding the traditional or historical foundation of the industry, small- and medium-sized independent farmers typically supported by local

Midwest agricultural cooperatives. Pushing that wave are

the competitive forces of changing technology, economies of

size, and consumer preferences. These forces are providing

new incentives and inducing change in ways that have significant effects on the patterns of ownership, methods of production, economic relationships, and social structure of the

hog farming community.

Although the changes driving the swine industry are

largely economic, the struggle over the outcome has taken on

a distinctly political character. Indeed, the struggle has

become one where some perceive themselves as beneficiaries

and others regard themselves as victims.

In this conflict, the economic interests of firms integrating backward into swine production have been pitted

against an array of interests who favor a conventional, independent and dispersed farming structure for a variety of

social, cultural, and economic reasons. These interests and

preferences have often been unreconcilable.

In several States, the struggle has resulted in contentious debate and legislation designed to prohibit various

forms of ownership associated with industrialized business

structures. Thus, the events in the political arena have direct

and significant influence on the environment in which economic decisions concerning the swine industry are being

made.

The parties interested in the swine industry debate are

many and varied. Among them are farmer-owned cooperatives that provide hog production supplies and marketing

services. These cooperatives are examining how best to position themselves in the evolving swine industry in light of

both their interests as agricultural businesses and as vertical

extensions of their farmer/owners. These dual interests of

cooperatives make decisions on strategy even more complex.

Harvard Business School’s Michael Porter defines

emerging industries as “newly formed or re-formed industries that have been created by technological innovations,

shifts in relative cost relationships, emergence of new consumer needs, or other economic and social changes that elevate a new product or service to the level of a potentially

viable business opportunity.“’ To Porter, the problems of an

emerging industry are also present when such environmental changes, coupled with growth in scale, reestablish the

competitive rules for an older, established business.

Arguably, the magnitude of change accompanying the contemporary swine industry’s transition to high-lean genetics

in a search for new and expanded markets qualifies the

industry as one of Porter’s emerging industries. To simply

describe the swine industry as “changing” or “restructuring”

minimizes the fact that the changes occurring in the swine

industry of the mid-1990s will have a profound and likely

irreversible impact on small- and medium-sized hog producers in particular, and, by extension, their local cooperatives.

Cooperatives and producers cannot rely on the production

and marketing methods of even so recent a period as 5 to 10

years ago; they must adapt to new competitive rules if they

want to survive.

Emerging industries and the swine industry of the

mid-1990s share a climate of technological uncertainty and,

consequently, strategic uncertainty. No production or marketing alternative has emerged as the industry standard.

Further, the steepness of the learning curve for different configurations of swine genetics, production techniques, and

pork products raises the cost of entry into the industry, offset

by the hope of significant cost reduction in the future. The

pork production arena is peppered with new, aggressive

companies, affecting the strategic outlook for established

industry participants like cooperatives. Yet Porter also

observes that the overriding strategic issue in emerging

industries is the ability of the firm to shape industry strucI Porter, Michael E. Cmpetitiae Strategy. New York: The Free Press, 1980, p.

215. Most of the characteristics of an emerging industry are derived from

Porter.

1
hue. From this perspective, cooperatives have an opportunity to redefine their own role and the role of swine producermembers.

Consequently, this report uses the characteristics of

emerging industries as a framework for evaluating the

results of a survey of local cooperatives conducted by

Midwest regional cooperatives and the Cooperative Services

program of USDA’S Rural Business and Cooperative

Development Service (RBCDS). The attitudes and opinions

of the local cooperative managers and directors expressed in

the survey provide a basis for assessing the future direction

for cooperatives in the swine industry.

This report does not indicate how the conflicting interests in the evolving swine industry ought to be resolved.

Rather, it illustrates how one component of the swine industry-the local farmer-owned cooperative-views the situation. Although there are differences of opinion even within

this narrowly defined segment, the overall findings should

provide some guidance to cooperatives as they establish

their strategies and plans for future participation in the

swine industry.

uncertainty inherent in emerging industries when no single

production technology, breed, or marketing approach has

been sufficiently proven to become the industry standard.

Nevertheless, many reasons exist why cooperatives

might decide to enter the swine industry- (1) providing

competition in an otherwise noncompetitive market (the

competitive yardstick argument); (2) providing market

access for producers; (3) preserving supply markets; (4)

becoming a “total food company”; (5) complementing core

business through pork production; (6) increasing rural welfare or employment through pork production or marketing;

(7) responding to growth in consumer demand; (8) improving coordination in production and marketing; (9) adding

processing value to commodities produced by members; (10)

stabilizing returns across commodities or products (i.e., pork

cycle complements poultry cycle); (11) adding a cooperatively owned marketing channel to the industry; and (12)

improving demand for commodities directly or indirectly

produced by members.

The interpretation of any of these reasons for entering

the swine industry will require a strategic assessment by

cooperatives.

Strategic Choices Facing Cooperatives

The growth of Midwest hog production integrated by

ownership or contract has led to debate within the cooperative community over whether cooperatives should integrate

backward into ownership of livestock.

While this issue is being addressed at all levels, a particular focus of the debate is the future role of regional cooperatives, whether they should move toward a fully integrated and centralized system, a more tightly coordinated but

still federated system, or a different adaptation of the present

system based on open markets.

In response, some Midwest regional cooperatives have

advocated a more tightly coordinated production-to-packer

system, which prizes the independence of hog producers

while striving to attain the reputed production efficiencies of

integrators.

Depending on their assumptions about the future

course of swine production, this stance has been accompanied by various degrees of contractual or ownership integration; among them: (1) relatively small-scale experimentation

with supply contracts to packers based on hogs raised in

state-of-the-art facilities; (2) providing seedstock to producer-members’ farms and bargaining with packers over the

resulting market hogs; or (3) contracting with producers to

raise hogs owned by the cooperative. These different

approaches are unified by the fundamental requirement of

an integrated marketing system: a steady flow of consistently and high-quality hogs required by packers.

Overall, regional cooperatives have remained on the

periphery compared with large-scale integrators like

Premium Standard Farms and Murphy Foods. The variety of

strategic positions adopted by cooperatives also reflects the

Strategic Market Orientation

Strategic market assessment has three dimensions: (1)

the target market, (2) competitors, and (3) the internal structure of the firm itself.2 The first two represent areas external

to the firm or cooperative. Previous research conducted by

Cooperative Services, notably Cooperatives’ Role in Hog

Contract Production, focused on the competitive situation.3

Here, the focus is on the internal structure of cooperatives.

Through the federated system of ownership prevalent

among Midwest cooperatives, the internal structure of any

one cooperative is intrinsically tied to a network of cooperatives and cannot be analyzed in isolation. Indeed, strategic

options available to any one component of this three-tiered

system have ramifications for the entire system.

In the traditional federated cooperative system, agricultural producers own and patronize local cooperatives. In

turn, local cooperatives jointly own a regional cooperative

that supplies wholesaling, manufacturing, and marketing

services.

Although local cooperatives may invest in and use the

services of more than one regional, they typically assume the

identity and operating style of a particular regional. When

that regional embarks upon a new strategic course, the identity and functions of its affiliated locals are likewise affected.

In defining a strategic market orientation, cooperatives

are challenged to build on their strengths to respond to

z Day, George. “The Capabilities ofMarket Driven Organi~tions,“~ournal of

Marketing, Vol. 58 (October 1994), p. 43.

3 Rhodes, V. James. Cooperatives’ Role in Hog Contract Production. U.S. Dept. of

Agriculture, Agricullural Cooperative Service, ACS Research Report 116,

April 1993.

2
potential opportunities. Within the internal structure of any

firm or cooperative, both tangible and intangible assets combine to form the organization‘s capabilities, or how it conducts activities such as service delivery, filling orders, and

developing new products, Capabilities are so deeply embedded in the organizational culture and practices that competitors have difficulty understanding and imitating them.4

Capabilities which span and define multiple lines of

business are considered core competencies. These resources

can facilitate or constrain how well the cooperative adapts to

changes in the business environment, affecting both cost

effectiveness and the value of organization as perceived by

customers, owner-users, suppliers, and others.

Undoubtedly, the salient core competency of cooperatives is the identity with their farmer-members. This member-owner, member-user characteristic cannot be duplicated

(or necessarily fully understood) by competitors of the cooperative. Their responsiveness to producers, necessitated by

their legal and operational identity as organizations owned

by those who depend on them for production and marketing

services, is an intangible asset that not even cooperatives

fully exploit.

A second core competency is the broad range of commodities and supplies handled within the federated cooperative network. This system-in-place is built on an efficient distribution network, established business relationships, and a

proven ability to provide consistently high-quality goods

and services. These attributes of Midwest agricultural cooperatives uniquely differentiate them from competing feed

manufacturers and others invested in the hog industry and,

as such, become the basis for a competitive strategy within

the industry.

In contrast to the customer orientation of such strategies as Total Quality Management, capabilities-based change

emphasizes the power of a coherent and shared visionfrom

the top down as a basis for developing a market orientation.

Can a top-down approach define a role for cooperatives in the swine industry? For a long time, regionals have

routinely worked with their local cooperative affiliates in

ways that could provide a basis for a more significant role in

the pork sector. These include providing strategic direction

and planning assistance, financing feed mills and other

enterprises, researching new products and market segments,

providing marketing expertise, bargaining power, technical

expertise, bulk purchasing of supplies, capturing scale

economies in feed manufacturing, and for some, a brandedproduct identity extending into the meat case.

These roles and expectations are generally understood

and supported at all levels of the cooperative system. Yet,

aside from a few locals who have taken a highly visible

stance by constructing hog multiplier units for members, little is known about the opinions and preferences of locals

regarding greater involvement in the swine industry. The

tremendous capital requirements to enter pork production

on an efficient scale mean that the resources of hog producers by themselves will be insufficient to establish a web of

pork cooperatives across the Midwest. Crop and other livestock producers must be willing to apply the expertise and

even equity within their local and regional cooperatives to

the swine industry.

Because greater involvement in the swine industry will

cut across commodity lines and the financial stakes are high,

the typically automatic assumption that both regionals and

affiliated locals share compatible objectives could lead to

severe strategic miscalculations with ramifications for many

types of producers and cooperatives.

On the other hand, although emerging industries are

often confronted by the absence of necessary infrastructure,

the established linkages between commodities and services

within the federated cooperative system could ease the transition to swine production and marketing. Nearly a third of

cooperative feed manufacturers store, merchandise, and handle grain, often as their major source of income.5 Marketing

grain through hogs provides a complementary alternative to

other domestic and export marketing opportunities.

Indeed, without hogs as the traditional “mortage

lifters,” many rural communities become unduly dependent

on grain prices established by international commodity markets. And, as the world‘s leading producer of pork, the

United States is ideally positioned to supply the substantial

markets expected to develop within the next decade, particularly in the Pacific Rim.

By any measure, feed is the largest and costliest supply

element in swine production. In 1988, feed represented 80

percent of the total variable cost of producing hogs and in

1992,70 percent of the dollars/cwt. of gain for hogs.6

Moreover, more than 75 percent of swine feeds were commercially manufactured in 1984, a benchmark which reveals

feed as an important value-added product.7

Cooperatives have been important suppliers of feed for

the past 25 years, accounting for 22 percent of all feed produced in the United States in 1984.8 Protecting this market

share is an important rationale for maintaining a cooperative

presence in the swine industry, however it might evolve.

Potential Directions

Although the political debate over integration tends to

cast the alternatives available to cooperatives in terms of

5 Brainich, Eric and E. Eldon Eversull, Feed Manufacturing by Cooperatives, U.S.

Dept. of Agriculhm, Agricultural Research Service, ACS Research Report 89,

April 1990, p. 4.

6 Economic Reseach Service, U.S. Dept. of Agriculture.

’ Ash, Mark, William Lin, and Mae Dean Johnson. The U.S. Feed Manufacturing

Industry, 1984. US. Dept. of Agriculhue, Statistical Bulletin 768, December

1988, p. 9.

’ Day, p. 40. 8 Brainich, p. 1

3
polar opposites-full integration versus independent

farms-in fact, there is a middle course with a range of

options.

To some observers, the massive infrastructure of packing plants and efficient hog farms existing in the mid-1990s

could preclude complete integration, while vertical integration in poultry arose unimpeded from an industry of backyard farms. Integration enabled poultry production to

expand beyond seasonal limits to meet year-round demand.

Pork is already produced on an ongoing basis.

For these reasons, among others, the swine industry

could evolve into a multi-segment hybrid of the dairy and

poultry industries, composed of both independent producers

and contract growers.

This scenario opens up a variety of contracting and

financing arrangements to cooperatives and pork producers.

Options include giving new producers a foothold in the

industry.

Besides gains from swine marketing, such arrangements could offer cooperatives and their members advantages from providing supplies and services such as feeds,

genetics, management advice, recordkeeping, and financial

assistance to either contract growers or independent producers. Such flexibility is a strategy frequently adopted by firms

with limited resources in emerging industries, and is increasingly a primary strategy of firms in a wide variety of agricultural industries.

The success of a middle course will depend on how

effectively cooperatives and their members can prevent or

overcome the conditions which might otherwise lead to complete integration. In both the poultry and swine industries,

the trigger for integration has been the availability of superior (i.e., cost-reducing) technology. In the poultry industry,

decentralized decisionmaking and inadequate access to

financing prevented poultry and egg producers from keeping up technologically with integrators. As integrators

gained control, they instituted safeguards, such as performance standards and accountability among contract growers, to counter lapses like declining standards of husbandry

within the industry.9 At the same time, many traditional

cooperatives were too slow in developing parallel competitive structures for their members.‘O

9 In the contemporary swine industry, Sierd “Sid” Tilma found “too many

instances in the Midwest and .in the industry as a whole. .[of] crowding of

animals; lack of cleanliness, inadequate cleaning between groups, or perhaps

no cleaning at all; unsuitable facilities, especially during the winter months.

.[and]. .high levels of medication being required to keep the animals alive

[where] medication becomes a substitute for management.” See ‘Risk and the

Emerging and Meat Industry,’ Livestock Industry Forum,” Congress ‘86,

Livestock Marketing Association, Kansas City, MO.

I0 Rogers, George B. “Small poulhy producers, cooperatives did not adopt

technologies fast enough,” FeedstuJs, 52 (14) April 7,1980, pp. 28-31.

Need for Financing

Typically, new and untested approaches to production

and marketing make financing a special problem for emerging industries. As the lynchpin for the production and marketing changes occurring in the industry, swine genetics is

an area of special concern.

The market for swine genetics is dominated by corporate seedstock suppliers, both foreign and domestic, who

compete with individual producers operating as purebred

breeders. Each claims unique genetic and performance

attributes for their lines and as a marketing strategy often

use high prices to indicate quality.

But the erratic product quality typical of emerging

industries nonetheless forces swine genetics to be evaluated

on a case-by-case, trial-and-error basis. This increases the

overall cost of genetic improvement for cooperatives and

others. The cost of failure is increased still further when an

entire integrated system is built around a specific genetic

line.

A specific example of the limitations of product and

technological standards within emerging industries is the

recent appearance of a genetic defect causing pale, soft,

watery pork, particularly among high-lean hogs. This defect,

which makes the meat unmarketable, initially was apparent

only after hogs were slaughtered. While DNA testing can

now eliminate the gene within individual herds, the procedure is expensive, $30 to $50 per animal, according to one

source.

Technological Pressures on Producers

As in the poultry industry, technological pressures

have combined with financing limitations to circumscribe

the options for swine producers. Indeed, in response to technological pressures accelerated by integration in the pork

industry, a certain fatalism may have pervaded Midwest

pork-producing communities-an attitude of, “In the long

run, we won’t be able to compete with the big guys, so why

even try to keep up?“”

A 1993 survey of the management practices of Iowa

pork producers revealed that only half had adequate records

to calculate their cost of production, particularly among

those marketing less than 2,000 head annually.12 Without

such records, it is difficult to know whether the hog enterprise is making money and harder still to obtain financing to

expand.

In the early 198Os, the reigning technology for hog production was farrow-to-finish in self-contained confinement

I1 Smith, Rod. “Iowa alliance sews together state’s ‘fabric’ to create climate to

expand pork production,” Feedstuffs, October 24,1994, p. 9.

I* Lawrence, John D., Daniel Otto, Seth D. Meyer, and Steven Folkerts, “A

Profile of the Iowa Pork Industry, Its Producers, and Implications for the

Future.” Iowa State University, Ames, IA. Staff Paper No. 253, June 1994.

4
units. Integration transformed broiler production into a

multi-site process, between the breeder farm for egg production, the hatchery, and the growout farm where chicks reach

market weight. As hog production has become similarly specialized in two- or three-site production (i.e., a feeder pig

production unit, nursery, and finishing floors), the technical

dimension of raising hogs has increased.

Multiple sites lend themselves to all-in, all-out production (AIAO), where hogs of the same age are moved as a

group from one site to another to allow complete cleaning

and disinfection between litters.

AIAO reduces disease potential inherent in the mix of

ages and weights associated with continuous flow management. Like another facility-dependent innovation, split-sex

feeding (feeding barrows and gilts separately), AIAO

reduces variability in marketing weights not attributable to

genetic diversity.

More consistency in slaughter weights enables packers

to automate part of the kill line. For some companies, it has

served as an incentive to integrate hog production.

AIAO has caught on among all sizes of Iowa producers

at the nursery stage, but only about a third of those surveyed

used this practice in the grow-finish phase of production. To

capture the advantages of AIAO or split-sex feeding, the typical Midwest farrow-to-finish facility needs remodeling

through adding walls and pit dividers to make finishing

rooms, adding new ventilation systems, etc.

Despite these technological advances and widespread

perceptions that Iowa’s infrastructure is aging, more than

half of the surveyed producers had no plans to remodel or

build new facilities.

Further evidence of a subtle demoralization is the lack

of encouragement and financing for young producers to

enter pork production. The legacy of the agricultural crisis of

the mid-1980s has been a fundamental reluctance by lenders

to support capital-intensive ventures like pork production.i3

Thus, the pressure on cooperatives to quickly determine a course of action to respond to swine industry changes

is tremendous. The survey of Iowa pork producers revealed

that they were already bypassing smaller rural agribusinesses which could not provide the competitive prices or specialized expertise of larger and more distant suppliers.i4

Although not cited in the Iowa survey, undoubtedly some

local cooperatives will fall into that category.

Other competitive pressures will be added by larger

producers who may also bypass the services offered by

cooperatives in favor of networking arrangements between

two or three partners who specialize in different aspects of

the pork enterprise.

Those who do use their local cooperative may demand

sizeable volume discounts, anticipating the cooperative will

I3 Lawrence, John D. “The U.S. Pork Industxy in Transition,” Iowa State

University, Ames, IA. Staff Paper No. 240, May 1992, p. 4.

1’ Lawrence, “A Profile,” p. 17.

make its margin from other, smaller customers. Although a

greater proportion of volume discounts may be required in

the future, ultimately many cooperatives may not be able to

give away the value embodied in their products and services

simply to retain a few large customers.i5

As the swine industry evolves, cooperatives will discover new roles to define the scope of their activity. One role

may represent a cooperative response to those disfranchised

by structural change in the swine industry. Another may

involve building on the unique cooperative-producer relationship to address the heightened needs of those independent producers less able to cope with the competitive pressures released by integrators.

The dwindling number of hog producers also means

that cooperatives will increasingly confront an industry

polarized between those producers seeking the lowest possible price for a particular transaction, who resist bundling of

products and services, and those who have potential for a

more collaborative relationship, anchored by strong and

extensive economic, service, and technical ties over time.

It is also possible that implementing a particular

course of action in the swine industry may require cooperatives to choose among or make tradeoffs between groups of

producers.

Time Constraints on Cooperatives

Some industry observers have assumed the growth of

integrators in the swine industry will proceed unchecked.

Consequently, they have argued that cooperatives’ window

of opportunity to take a significant position in the swine

industry is narrow, open only for the next 3 to 5 years.

Otherwise, cooperatives risk being locked out.

Such an assessment presumes that current swine production technology will not change. Yet, as the industry

grows and matures, new technologies will inevitably appear

and change the competitive equation. The transition from

single-site farrow-to-finish production to multi-site production within the last decade is a striking example of how

swiftly perceptions regarding the most efficient technology

can change.

Poultry industry experience also offers a cautionary

tale. As it consolidated, many integrators disappeared,

unable to compete. Such turnover is not unusual; many large

corporations eventually retreated from farming investments

made during the 1970s. It seems likely such instability will

also occur in the swine industry, opening the door to entry at

various times and in various ways.

If so, the critical issue for cooperatives is not so much a

limited window of opportunity, but the commitment to the

swine industry. Typically, within emerging industries, the

technologies and products which confer an edge in the opening phase of an industry are not sufficient to carry a firm

through later stages of industry development.

15 Anderson, James C. and James A. Narus, “Partnering as a Focused Market

Strategy,” Cnlifomin Mumgement Review, Spring 1991, p. 105.

5
For cooperatives, the many commodities handled

through the federated system can be an advantage when

starting new enterprises. At the same time, such diversity

can be the source of competing claims on investment funds,

which could cause cooperative commitment to the swine

industry to waver in the future.

Local Cooperative Survey Results

Survey Design

To begin to redress the lack of information about

locals’ preferences, RBCDS Cooperative Services designed a

survey with the assistance of cooperative management in

feed, livestock production, market development, and strategic planning from five regional cooperatives: Countrymark,

Farmland Industries, GROWMARK, Harvest States, and

Land O/Lakes. Each had a large number of member-locals

that could be affected by the changes in the swine industry.

The survey addressed these areas:

(1) perceptions of the speed and intensity of change

within the swine industry;

(2) changes in employment, grain production, packing

plant slaughter, technical services, and financing for hog

producers;

(3) locals’ influence on hog production and the impact

of the swine sector on their survival;

(4) trends in size of operation, marketing, and innovation among hog producers within the trade area of each

local;

(5) how locals were currently helping producer-members adjust to changes in the hog industry and additional

services needed;

(6) benefits and limitations to working with regional

cooperatives in responding to the changes in the swine

industry; and

(7) the impact of the swine industry on locals’ feed

sales and pricing.

After a pretest, each regional cooperative distributed

from 200 to 600 questionnaires to member-locals during

March 1994, targeting managers of locals and feed departments or board directors of those cooperatives potentially

most affected by the restructuring of the swine industry.

Of the 1,314 locals surveyed, usable responses were

received from 670, a 34-percent response rate. Both openended and multiple-choice questions were used (see

Appendix for questionnaire). For all but one of the multiplechoice questions, locals chose as many responses as

described their situation or preferences.

Characteristics of Respondents

Of 601 respondents identifying their background, 24

percent were directors and 76 percent were managers of

local cooperatives. Of these two groups, 12 percent were current or former hog producers. Most respondents were from

States where traditional family farm production overshadowed corporate swine production (Table 1).

Another identifying characteristic was the principal

economic activity of the local cooperative during calendar

year 1993. Twenty-four percent indicated grain marketing;

35 percent, farm supplies; and for 41 percent, both were

equally important in sales volume.

Consequently, the locals surveyed represent a diversified group linked primarily by production and marketing of

corn and soybeans, as reported by 72 percent of respondents.

Any other combination of grains, such as wheat/barley, represented between 6 and 8 percent of respondents.

Feed and farm chemicals/fertilizer were handled or

sold by 27 percent. Other products were petroleum, handled

by 19 percent; seed, 18 percent; hardware, 7 percent; and for

3 percent, miscellaneous products such as bins and buildings, tires, lumber, and animal health products.

For calendar year 1993,17 percent had sales from $1

million to $4.9 million; 41 percent, $5 million to $14.9 million;

and 43 percent, at least $15 million in sales.

Although respondents were not asked to indicate further financial details, prior Cooperative Services’ research on

Table I-Question 31. States represented

in local cooperative survey

Colorado 6 1

Illinois 86 12

Indiana 63 9

Iowa 192 26

Kansas 29 4

Michigan 9 1

Minnesota 96 13

Missouri 17 2

Montana 15 2

Nebraska 42 6

North Dakota 32 4

Ohio 41 6

Oklahoma 12 2

South Dakota 53 7

Texas 3 1

Wisconsin 32 4

Wyoming 2 1

Respondents Percent’

1 Some locals served more than one State. On all tables, percentages are

rounded and may not sum to 100.
grain cooperatives, which frequently handle farm supplies,

provided an idea of the relative financial strength of each

category of respondents. At the close of 1983-84, average

total equity capital available to the smallest associations (up

to $4.9 million of sales) was $727,543. The $5 million to $14.9

million sales group averaged $1,801,248 in total equity, and

those with $15 million and more averaged $4.6 million.16

Another identifying criteria was whether the changes

in the swine industry in the locals’ trade area could threaten

their survival within the next 5 years. Although almost a

third of locals considered themselves vulnerable, the majority were confident they would survive irrespective of the

changes in the swine industry (Table 2). Respondents commented that survival generally depended on the vulnerability of feed sales and the willingness of the local to anticipate

changes in the swine industry and adjust accordingly.

Two questions on the speed and scope of industry

changes showed locals’ sensitivity to the swine industry

I6 Cummins, David E. and Francis Yager. Comparative Financial Profile of

Cooperatives Handling Grain: First Handlers With $2 Million or More in Sales. U.S.

Dept. of Agriculture, Agricultural Cooperative Service, ACS Research Report

63, June 1987, p. 5.

(Table 3). Responses suggest cooperatives believe they have

some room to maneuver in the future because only about a

third of locals believed the hog industry would become

locked up through integration. Respondents were twice as

likely to simply say the swine industry would not be the

same in 5 years than to anticipate complete integration.

Environment Served by Locals

Trends in the General Environment-The leading

indicator of change in the swine industry is an explosion of

technical services for hog producers, observed by 76 percent

of respondents (Table 4). To a lesser degree, locals noticed

Table n--Question 7. Are the changes in the hog

industry in your trade area likely to threaten

the survival of your local cooperative within

the next 5 years?

yes

no

not sure

Percent

14

70

16

Table s-Question 4 and Question 5

From your perspective as a manager or board member of a local

cooperative, how fast is the hog industry changing?

The hog industry is changing very fast.

It won’t be the same in 5 years.

The hog industry is changing moderately.

In 7-10 years it could look quite different.

The more things change, the more they

remain the same. The hog industry is not

changing substantially

Will the hog industry eventually become as integrated as the broiler industry,

and basically eliminate a role for independent hog producers?

Percent

61

36

2

yes, definitely

no

maybe

Percent

27

18
packing plant slaughter and financing for hog production by

area banks had also increased.

In some European countries and Canada, government

involvement has been the catalyst for genetic improvement.

In the market-driven U.S. industry, in contrast, locals perceived packers were forcing a change in the genetics used by

producer-members. Consequently, locals also reported producers were looking for new genetic lines.

Trends in Size of Operation-Among the salient

trends affecting the swine industry are an increase in size of

operations and group marketing or production approaches

typically called “networking,” “partnerships,” or “strategic

alliances.” Such terms reflect the fluid transitional structure

that exists among feed companies, meat packers,

cooperatives, food companies, and hog producers as the

industry advances toward greater integration.

To identify the impact of these trends on local cooperatives, the survey asked respondents to identify changes in

marketing practices and size of operation among hog producers marketing at least 2,000 head/year, and those marketing less.

These criteria were chosen because data from USDA’s

National Agricultural Statistics Service indicates half of the

hogs marketed annually are from farms with an inventory of

1,000 head, corresponding to 2,000-head annual production.

Although larger enterprises, especially those producing

5,000 head, are considered the leading indicator of changes

in the hog industry, 2,000-head enterprises had the advantage of representing a moderate-sized one-person commercial operation using family labor, similar to the core clientele

of many locals. Perhaps more important, annual sales of

2,000 head is fast becoming the boundary between hog farms

that decline and those that grow.” Nevertheless, a fairly

common comment by locals was that there were no operations of this size among their patron base.

Almost 50 percent of locals perceived producers marketing at least 2,000 head/year to be increasing the size of

their operation and almost 20 percent believed they were

seeking new sources of capital to expand (Table 5). Only 5

percent said large producers were scaling back production or

getting out of the hog business.

Because locals chose as many categories as applied to

producers in their area, the predominant trend among large

producers was growth, either realized or intended. In contrast, locals perceived those marketing less than 2,000 head

annually to be not changing (reported by 41 percent) or scaling back OT exiting the industry (27 percent).

Trends in Marketing-Participation in either

contracting, strategic alliances, or group-marketing

I7 Rhodes, V. James. Structural Trends in U.S. Hog Production, University of

Missouri, Columbia MO. Agricultural Economics Report 1990-5, p. 1.

Table 4-Question 9 and Question 29

Q 9. In the last 2 years (1992/93), how has the rural community containing your local cooperative been affected by

changes in the hog industry?

a. The community has jobs gained-i 7% jobs lost-l 8% no change-66%

b. Grain production has been depressed-22% stimulated-l 6% no change-63%

c. Packing plants are killing more-34% less-l 6% no change50%

d. Technical services for hog producers are decreasing-5% expanding-76% no change-l 9%

e. Financing for hog production by area banks has increased-36% decreased-24% no change-41 %

Q 29. How are farmer-producers reacting to developments in swine genetics?

Producers are looking for new genetic lines.

Producers are trying to standardize genetic lines.

Producers are not making noticable changes in genetics.

The packer is forcing a change in genetic of our members.

Percent

39

12

8

40

8
Table s-Questions 10 and 12. Trends in size of operation among hog producers served by local cooperatives

Annual Hog Production

Less Than

2,000 Head

More Than

2,000 Head

Percent

a. Scaling back production or getting out of the hog business. 27 5

b. Increasing the size of their operation. 20 45

c. Not changing substantially. 4 1 27

d. Seeking new sources of capital to expand.

e. Other.

9 19

3 4

associations represents a mutually exclusive decision for hog

producers insofar as any one option precludes the other.

This, plus widespread differences in genetics, nutritional

programs, and management regimes accompanying various

marketing options, can lead to confusion and indecision

among producers. For this reason, the category, “they

[producers] are unsure of how to respond to the changes in the hog

industry,” was added to the question on marketing trends

(Table 6).

Porter remarks, “The overriding aspect of emerging

industries is great uncertainty, coupled with the certainty

that change will occur.“1B Locals perceived large and small

producers alike as equivocating when confronted with the

array of marketing choices generated by an industry in structural turmoil. Thirty percent of locals chose the category

“they are unsure of how to respond” when describing producers marketing at least 2,000 head per year and 37 percent

viewed small producers similarly.

Local cooperatives perceived that among large producers no clear consensus has emerged regarding the best marketing alternative. Contracting, strategic alliances with packers,

group marketing, and maintaining the status quo (no signifcant change), were each selected by at most 20 percent of

locals as they considered the changes made by large producers.

In contrast, small producers clearly stuck with the

familiar. Only 4 percent of locals observed small producers

developing strategic alliances with packers, and about a

tenth of the locals noted contracting or group marketing.

Small producers appear to be paralyzed by indecision:

38 percent of locals observed no significant change among

this group, while only 17 percent said the same about large

producers. Although larger producers may have doubts

about participating in strategic alliances, contracting, or networking, their greater readiness as a group to experiment

with alternative marketing arrangements implies that they

are more likely to gain the knowledge and skills needed to

survive in an emerging industry.

These results raise the question of whether small producers will lose a place in the pork industry because they are

small, unwilling to change, or without resources (technical

and financial) to do otherwise.

Inherent in the movement toward larger sized farms

has been an explosion in technological knowledge encompassing areas such as genetics, building design, nutrition,

and waste management. Increasingly, these technologies are

becoming less and less accessible to managers of smaller

farms, especially those who tend to be less progressive than

others.‘9 Similar circumstances contributed to the spread of

integration within the poultry industry. In their comments,

some survey respondents indicated cooperatives have a special responsibility to avert this outcome:

l “Try to design programs to benefit the small-tomedium producer, not all the time the big producers. The

hog industry will become integrated like broilers if all people

involved ignore the small-to-medium producer in favor of

big producers.”

l “Small producers are not valued by the regional.

They are the ones who built the cooperative system; who

paid for the research; who we have failed to keep up with

changes in the industry. Sometimes I feel the attitude at the

regional is, “‘Sell them feed until they’re gone, then forget

them.“’

l “Many of our swine producers, nearing 100 sows farrow-to- finish, need help with marketing to go to 500 sows.

‘8 Porter, p. 234

I9 Hurt, Chris and Kelly Zering, “The Pork Industry: Restructuring the

Nation’s Pork Industry,” NC State Economist, North Carolina Cooperative

Extension Service, North Carolina State University, Raleigh, NC, September

1993.1994.

9
Table 6-Questions 11 and 13. Marketing trends among hog producers served by local cooperatives

Annual Hog Production

Less Than More Than

2,000 Head 2,000 Head

a.

b.

C.

d.

e.

1.

Developing strategic alliances with area packers.

Either contracting with companies to produce hogs

to specifications or considering such contracting.

Forming associations among themselves to coordinate various

aspects of production or marketing.

They are unsure of how to respond to the changes in the hog industry.

No significant change.

Other.

4

11

8

37

38

2

Percent

16

20

13

30

17

3

Purina and Cargill have programs to carry them on. We need

technical services to get management ready to go to 250-500

sows.”

Innovation Trends-Locals reported the

characteristics of the most innovative hog producers in their

marketing territory as well as whether member hog

producers were adjusting differently than nonmembers in

size of operation and marketing. Ideally, member-producers

would be innovative to the point of having a unique identity

encapsulated by their cooperative, as is true for commodities

such as fruits, vegetables, and nuts.

However, the changes in the swine industry may be

too new for cooperatives to have developed programs to differentiate member-producers from others. Some locals commented that they were just beginning to talk to producers

and other cooperatives about strategic plans.

Only about one-fifth of locals perceived cooperative

members were unique and distinct from nonmember producers (Table 7). Locals said the most innovative producers

in their trade areas were increasing the size of their operation,

instituting all-in all-out production, or seekingfinancing to

expand (Table 8).

Breeding practices were also changing among innovative producers; hand-mating and artificial insemination predominated among those specified by locals. To some degree,

these findings suggest producer-members of cooperatives

may not be keeping pace with industry changes.

Locals Respond to Swine Industry

The slower adjustment by some producer-members of

local cooperatives may reflect the local cooperatives’ somewhat limited role in the swine industry. Asked what role the

local cooperative has in influencing hog production, almost a

quarter of respondents said first, “although the impact of their

local on hog production was small, it could increase in thefuture,”

and second, “their local needed more helpfrom its regional cooperative “ (Table 9).

Considerable variation in the priorities and attributes

of regional cooperatives appeared to account for the different approaches used by locals to help producer-members

adapt to the changes in the swine industryzO (Table 10). No

one service was offered by more than 20 percent of locals.

Overall, responses suggest locals focus on a wide variety of what might be considered basic services augmented

by a small amount of supplementary services. Among the

basic services were on-farm technical advice/information,

production recordkeeping services, educational seminars on

a variety of topics, or business plans. Services less frequently

offered included production contracts, pooled marketing services, single-sourced feeder pigs, and purchases or identification of desirable breeding stock.

When identifying additional services or programs

needed to serve hog producers, locals were constrained to 3

out of a possible 21 choices (Table 11). Again, no one service

or program dominated the responses, suggesting both the

complexity of the desired programs and the corresponding

flexibility demanded of regionals as service providers.

Priorities for locals werefinancing members’ hog facilities

(requested by 11 percent of respondents);financing members’

hog operations (10 percent); and adding member-owned feeder pig

production units (also 10 percent).

20 Such differences were apparent when data was analyzed by regional

affiliation. These differences are not reported here.

10
Table %-QUeStiOn 14 and Question 15

Q 14. In general, are hog producer-members of the local cooperative adjusting to changes in the industry differently

than nonmembers?

Percent

23 yes

77 no

Q 15. If yes, how are they adjusting?

a. Scaling back production or getting out of the hog business.

b. Increasing the size of their operation.

c. Not changing substantially.

d. Seeking new sources of capital to expand.

e. Developing strategic alliances with area packers.

f. Either contracting with companies to produce hogs to specifications or considering such contracting.

g. Forming associations among themselves to coordinate various aspects of production or marketing.

h. Unsure of how to respond to hog industry changes.

i. Other.

Percent

9

23

7

16

6

10

12

9

7

Table s-Question 16. In the general market area of your local cooperative, how are the leading or most

innovative hog producers adjusting to changes in the hog industry?

a.

b.

C.

d.

e.

Not changing substantially.

Increasing the size of their operation.

Seeking new sources of capital to expand.

Developing strategic alliances with packers.

Either contracting with companies to produce hogs or considering such contracting.

Percent

6

2 1

12

7

9

f. Forming associations with other producers to coordinate various aspects of

production or marketing. 8

g. Using all-in, all-out production. 15

h. Using multiple-site production. 10

i. Changing breeding practices. 10

11
Table g-Question 6. What role does your local cooperative have in influencing hog production in your area?

a.

b.

c.

d.

e.

Perceni

The local has a key role in maintaining hog production in our area.

The local has some influence over hog production in our area, but

packers/other feed companies are more influential.

The local has some influence over hog production but the regional cooperative is more influential.

The local plays a role in maintaining hog production in our area, but it needs more help from the regional.

Although the impact of the local on hog production is small now, it could increase in the future.

13

14

5

23

24

f. The local affects hog production only to a small degree and this is not expected to change. 13

g. The local is shifting its focus to serving other categories of producers. 5

h. Other. 3

Table w-Question 17. How is your local cooperative currently helping members adjust to changes

in the hog industry?

a. Providing long-term credit for producers who wish to expand.

b. Offering production contracts.

c. Identifying hog breeds suitable for geographic area.

d. Helping producers develop business plans for their operations.

e. Providing educational seminars where producers can get market outlook,

financial, or technical information.

f. Providing production recordkeeping services.

9. Providing pooled marketing services.

h. Bulk purchasing of genetic seedstock.

Percent

7

3

5

11

13

14

2

1

i. Locating trained swine laborers and herdsmen. 1

j. Providing generic, adaptable building plans. 9

k. Providing on-farm technical advice/information. 20

I. Providing single-sourced feeder pigs. 5

m. Other. 2

n. The local is not presently offering services in this area. 7

12
Table ll-Question 18. What are the three additional services or programs that your local cooperative needs to

adequately service hog producers?

a.

b.

C.

d.

e.

f.

9.

h.

i.

j.

k.

I.

m.

n.

0.

P.

q.

r.

S.

t.

U.

Present services are adequate.

Retail salesperson.

Feed program.

Grind and mix service.

Feed delivery.

Animal health products beyond those already in feed.

Provide financing for hog facilities of members.

Provide financing for hog operations of members.

Record collection and analysis for members’ hog operations.

An on-farm specialist in production.

An on-farm specialist in marketing.

An on-farm specialist in records, budgets, cash flow, profit and loss projections, and other financial topics.

Feeder pig sourcing.

Member-owned feeder pig production unit.

Member-owned finishing unit.

Source genetic breeding stock.

Enter hog contracting business.

Recommend a reputable hog contract company for members to use.

Provide feed to integrators.

Facilitate use of Al in hog breeding on members’ farms.

Other.

Differences between actual and desired services suggest that there is a sequence followed by local cooperatives

as they vary their service mix in response to the needs of the

swine industry. Locals initially emphasize on-farm technical

advice, with the focus gradually becoming more personalized and rigorous through production record-keeping services, educational seminars, and business plans for producer-members.

To reap the benefits of this foundation, the next step is

specialized activities demanding more resources from cooperatives and a greater commitment to the swine industry:

long-term credit, production contracts, single-sourced feeder

pigs. The gap between current and desired services indicates the

technical services presently emphasized by local cooperatives will

not carry them through to thefuture.

Primary constraints on providing desired programs

were company profitability, reluctance to risk equity of the

local to support contracting, and the size of the local’s feed

business (Table 12). The categories, “[we are] not sure that

changes in the hog industry warrant changing our service

Percent

7

4

2

2

1

3

11

10

4

5

4

8

6

10

6

4

4

3

3

2

2

and product mix,” and “leadership support and programs

are not available from our feed supplier,” did not appear to

constrain service expansion.

Consequently, the pivotal issue for cooperatives is not

whether or how to serve the swine industry, but the adequacy of financial resources to keep up with integrators, the

dilemma also faced by the poultry industry in its evolution.

Role of Regional Cooperatives

Several survey questions dealt with the role of regional

cooperatives: how they could help locals increase or maintain business with hog producers, and the benefits and limitations from teamwork with locals. From the responses, the

mandate for regionals is, first, helping young producers get

started in hog production, and second, helping small-or mediumsized producers stay in business (Table 13). These findings corroborate the latent and largely untapped potential of such

producers perceived by locals. Locals also saw a natural

division of labor in this process:

13
Table lo--Question 19. What are the factors which constrain the ability of your local cooperative to provide

the services and programs circled in response to question 18?

Percent

a.

b.

C.

d.

e.

f.

9.

h.

i.

j.

k.

Size of our feed business.

Size of our trade area.

Company profitability.

Attitude of board.

Attitude of management.

Community, social, or political pressures.

Leadership support and programs are not available from our feed supplier.

Reluctance to risk equity of local cooperative to support contracting.

Not sure that changes in the hog industry warrant changing our service and product mix.

Other.

None.

14

8

15

11

5

12

4

15

8

5

4

Table 13-Question 21. What should the regional cooperative do to help your local cooperative increase or

maintain business with hog producers?

a. Offer market access through group marketing programs. 11

b. Offer market access through meatpacking operations. 6

c. Together with the local, offer selected producers production credit.

d. Together with the local, offer producers production management advice or services.

e. Develop programs to help small-or medium- sized producers stay in business.

f. Develop programs to help young producers get started in hog production.

g. Develop programs to help cash grain producers and others diversify into hog production.

h. Help local trained swine laborers and herdsmen.

i. Provide manure management services.

j. Other.

11

14

19

20

9

4

4

1

1 4
l “The regional cooperative will probably be dealing

with the total picture while the local will have to deal with

more individual problems which will occur in a given area.”

l “Different perspective on same problems. Regionals

generally target large producers and our business is made of

many small ones.“

Surprisingly, market access through group marketing

programs or meatpacking operations was not a priority for

local cooperatives, perhaps because few locals marketing

grain and farm supplies also handle hogs. It is also possible

regional cooperatives provide sufficient market access for

their locals through bargaining, existing meatpacking operations, or other conduits.

In the mid-1980s, high concentration levels in the beef

packing industry triggered alarm among producers, making

market access a topic of special concern. At that time, industry observers predicted consolidation in the pork industry

would follow the pattern established by beef.

Nevertheless, preliminary four firm concentration levels in pork slaughter were only 44 percent for 1992 (the most

recent year available) compared with 78 percent for steer and

heifer slaughter. Yet, market access may be a problem in the

future. Commenting on the current state of the pork industry, one observer said, “Market access in many areas is effectively closed (to producers). In 10 years, I doubt if there will

be a spot market for hogs in the Midwest.“2i

Also low in priority was developing programs to help

cash- grain producers diversify into hog production. Locals

perceived a need to concentrate efforts on producers specialized in raising hogs.

2’ Dr. Ron Knutson cited in “Report Card Blues,” Farmer Cooperatives,

December 1994, p. 14.

No single advantage predominated among those that

local cooperatives could gain through greater coordination

with their regional cooperative. Most of the 13 potential

advantages listed in the survey were rated within a few percentage points of each other (Table 14).

Again, the broad distribution of the responses suggest

locals receive many advantages through the federated relationship, with technical assistance, risk-sharing, and financial backup for hog facilities heading the list.

Need To Act Now

The overwhelming concern voiced by local cooperatives was that regional cooperatives were too slow in

responding to swine industry changes. Either locals said

there was no disadvantage to working with their regional,

thereby acknowledging the value of the federated relationship or, more often, they made comments like the following:

l “Can we move fast enough or will we always be trying to catch up?”

l “The regional moves too slow and can’t commit to a

firm direction. There appears to be a real lack of leadership.”

l “The regionals need to be the innovator of programs,

not just copy others’ programs. They are slow off the ball.”

l “Regionals are too slow to respond. By the time they

make a decision, we are 2 years behind the leaders.”

l “We can’t wait and see. We must react to the changes

as they come.”

l “If the regionals could listen to what the locals are

telling them, we could get the regionals to react a little quicker to the changes that are out there. We are always the last to

react and have a ‘me, too’ image.”

l “To get things started now is too late in the hog

industry at this time with price of fat hogs going down.

Market is getting flooded by sow cooperatives already in

place.“

Table I+Question 22. What benefits could your local cooperative gain from greater coordination with the

regional cooperative?

a.

b.

c.

d.

e.

1.

g.

h.

i.

j.

k.

I.

Access to more technical assistance.

Risk sharing.

Legal counsel.

Feed production efficiencies.

Coordinated marketing.

Source of swine breeding stock.

Producer credit.

Market research.

Management assistance.

Nutritional research.

Financial backup to support contracting.

Financial backup to support building facilities for hogs.

Percent

13

11

5

7

7

6

9

6

7

9

8

11

m. Other.

n. No benefit.

1

1

1 5
l “Regional leadership is needed. We have some good

leaders in our regional, but need more of them to get strong

locals involved. The change in the hog industry is not for

everyone, but with the right group of cooperatives, the system could be just as successful as Tyson, Murphy, etc.”

To a lesser degree, but still representing a significant

number of responses, locals wanted regionals to tailor swine

programs to their specific needs. The democratic cooperative

culture of “one-person, one-vote” undoubtedly encourages

such sentiment and is evidenced by the variety of programs

and services offered by locals to hog producers. Yet, paradoxically, such flexibility and scope of service may have contributed to a loss of focus among cooperatives that delays

their response at this critical juncture in the swine industry:

l “It would be hard for the regional to develop a plan

that would work well in all areas, so it may be too much in

the middle of the road.”

l “[A disadvantage is] making sure the regional has

the quality people to do all the things that may be needed

(competence and confidence).”

l “Our regional has limitations getting enough information and material to the large integrators so they can be

supplied with feed and other services.”

l “Regional cooperatives have to set guidelines for six

States-locally we have more options.”

l “The regional reacts too slowly. Too much diversification over the regional’s territory.”

l “Co-op needs to spend equal time with other livestock, not just hogs.”

Locals were concerned that regionals were already

spread too thin to compete effectively in the swine industry.

At issue also was the perception that the federated relationship among cooperatives needed streamlining before it could

absorb another commodity with as many uncertainties and

complexities as pork:

l “We need one manufacturer, one distributor, one

marketer, between the regional and local. Now we have two

in some cases. We need research, marketing, coordination,

and manufacturing, omitting duplication and the cost of the

middleman.”

l “Large farmers are able to buy products by semitruck loads cheaper than we can buy from our regional. We

cannot sell products at cost or less than cost.”

l “Total broad programs and promotions do not meet

the needs of nutrition for today’s producer. The regional is

trying to decouple, but as it decouples it is not lowering feed

prices, thereby keeping the local uncompetitive. This forces

locals to decrease their margins to compete.”

l “Our co-op would need a major change in direction

to service animal agriculture. A huge investment would be

needed in facilities to service hog operations. Can our co-op

finance same? Will hog production increase in our area?“

Locals attributed hesitancy to act to the different agendas pursued by regionals, bureaucratic red tape or top-heavy

structures, shortages of personnel in key areas such as

financing, nutrition, or other swine specialties, and, the

innate conservatism of producer-directors oriented to traditional agriculture.

The dilemma for regionals in responding to these calls

for leadership reflects the uncertainty associated with an

emerging industry: although the locals want the regionals to

act, the extent of the desired action is not necessarily clear.

On the one hand, locals want the regionals to do more than

passively sit on the sidelines while the swine industry

realigns itself.

On the other hand, locals were concerned that they

would be bypassed as regionals went directly to large producers, or the regional would benefit disproportionately

from swine ventures established through the federated relationship.

That the locals look to the regional for leadership is

consistent with the framework of a shared vision which typically informs decisionmaking in a federated cooperative system. The disturbing aspect of this finding is that when

regionals are unwilling or unable to provide the necessary

leadership and resources, the efficacy of the federated relationship breaks down, leaving a vacuum with no way out.

A second, equally important, conclusion is that when

the federated relationship works as intended, it works well.

Close to a third of locals said there was no disadvantage to

working with the regional cooperative. One reason why:

l “Our members came to us 3 years ago for a risk-sharing program. They looked at Murphy’s but liked Farmland’s

program better because it was doing the business locally

with people (the local cooperative) the producer knew and

trusted. This caused a big stir among a small minority of our

members (5 to lo), but it woke our community up to the

changes coming in the hog industry. I think our producers

are 2-3 years ahead of the rest of the area pork producers

because of this.”

Competitive Factors

Typically in emerging industries, little is known about

competitors, their market share and plans for expansion, and

their hold on new markets. The contrast between the familiar

production methods of traditional agriculture and newer

industrialized methods only intensifies such uncertainty.

Under such conditions, it is easy for those in the industry to develop tunnel vision and magnify the significance of

what information they do have. One of the things cooperatives know with some certainty is the operating style and

likely objectives of other cooperatives. Consequently, it is

tempting to define the competition primarily as other cooperatives. Nevertheless, locals were strongly committed to the

linkages offered by federated relationships:

l “For the cooperative system to survive in the hog

industry, we need to see more cooperation between regionals-partnerships in processing units, cost-plus integration

units-the time to act is now, not 3 years from now.”

16
l “There is no half-way solution to these problems. We were split between no change or decreased sales. Most

must unite regional cooperatives to pool resources to com- changes were small, some 10 percent or less, although the

pete long term. My regional alone will not compete with magnitude of change for 27 percent of locals was between

Cargill, Murphy Farms, Tyson, etc.” 11-25 percent. The positive impact of the swine industry on

l “The regional should join with Farmland in the pack- locals’ feed sales underscores the importance of leadership

ing business, using Farmland’s knowledge of it rather than by regional cooperatives to maintain a cooperative presence

each going into it alone.“ in the industry.

Should Regionals Become Meat Packers?

Considerable discussion about the potential for meatpacking by cooperatives was prompted by a 1979 report, The

Future Role of Cooperatives in the Red Meat lndusty.22 Sixteen

years and some experience later, local cooperatives voiced

hesitation and ambivalence about engaging in meatpacking,

citing overcapacity in the meatpacking industry, priorities in

other areas, and insufficient capital or expertise to move into

pork processing (Table 15). Instead, local cooperatives perceived they have a comparative advantage in productionrelated activities, and so do not envision adopting the

European style of cooperation based on producer ownership

of packing plants.

Preferable activities were some combination of updating production facilities, feeder pig sourcing, providing technical

expertise, and packer partnering. For those few locals who put

meatpacking on the cooperative agenda, joining with a

regional already in pork packing was seen as the best and,

indeed, only approach.

Feed Program Adjustments

The changes in the swine industry during the Z-year

period of 1992-93 have been largely beneficial for local cooperatives, measured by feed tonnage sales. Virtually 50 percent of respondents saw sales increase and the remainder

22 Haas, John. The Future Role of Cooperatives in the Red Meats Industry.

U.S. Dept. of Agriculture, Economics, Statistics, and Cooperatives Service,

Marketing Research Report 1089, April 1978.

Locals attributed these changes in their feed sales to

strategic planning, expanding operations, adding staff, or

intensifying competition with other dealers (Table 16).

Surprisingly, within the scope of such competition, only 53

percent of locals differentiated prices according to size of

producer, i.e., providing quantity discounts.

To maintain or increase feed sales to hog producers,

locals wanted to offer feed financing (21 percent) or facility

financing to members (19 percent); and establish a production organization for members to keep pace with integrated

operations (also 19 percent) (Table 17). Offering production

contracts or otherwise supporting contract hog production

was important for 16 percent.

Several local cooperatives were on the threshold of

changes positioning them for timely interventions by their

regional cooperatives:

l “In this area, large commercial hog production has

not yet arrived, yet our feed business has continued to

increase. We know it’s coming, but [it] hasn’t happened yet.”

l “Hog production is on a significant rise in our area.

The newest things are units producing from 5,000 to 7,000

head per year, farrow-to-finish.”

l “The new producer or units are too large and require

more service and capital than the local can provide.”

l “The local cooperative and board need to get behind

the hog producers and help them with the changes that are

coming.”

l “Strategic planning has begun at the cooperative.

However, it needs to be intensified by offering a service

Table l+-Question 24. Farmer cooperatives can be considered an extension of the farm enterprise.What

would be the impact on your local cooperative if the regional cooperative eventually entered pork

processing as an extension of activities related to hog production?

a.

b.

C.

d.

e.

Processing activities by our regional would help area hog producers become more competitive.

Processing activites by our regional would be no different than operations by any other meatpacker.

Not sure what impact pork processing by the regional would have on the local.

Pork processing by our regional would have a negligible impact on area hog producers.

Other activities are more important for our regional to pursue.

Percent

25

17

33

8

17

17
Table is-Question 27. How has your local cooperative compensated for changes in feed sales caused by the

evolution of the hog industry?

Percent

a. The local instituted or supported contracting to maintain market share. 6

b. The local has expanded operations/added additional staff. 19

c. The local has intensified competition with other dealers.

d. The sales territory has shrunk and the local has downsized. 3

e. The local has begun strategic planning to adjust to changes in the hog industry. 24

f. The local hasn’t changed its operation. 12

g. The local is coordinating its activities more closely with other locals or with the regional cooperative. 14

h. Other. 5

Table i-r-Question 20. What service adjustments will your local cooperative need to make in the next

24 months to maintain or increase sales of feed or other products to hog producers?

Percent

a. Offer or support particular approaches to raising hogs by contract. 16

b. Hire a production specialist. 7

c. Hire a vet. 2

d. Hire a marketing specialist. 3

e. Help establish a production organization for producer-members to keep pace with integrated operations. 19

f. Invest in a production facility for producer-members to keep pace with integrated operations. 9

g. Offer facility financing to producer-members. 19

h. Offer feed financing to producer-members. 2 1

i. Other. 5

1 8
package that includes nutrition, production assistance,

group marketing, production and financial records, and veterinary and financial services to our local producers.”

Conclusions

Firms in emerging industries often depend on others in

the industry for success in overcoming problems in key areas

like credibility, image, and consistency. This interdependence has long been characteristic of the cooperative system

insofar as locals and regionals are linked through the federated system of organization.

Affiliation with regionals typically gives locals access

to technical expertise, manufacturing services, and financial

resources, encapsulated by the unique identity and goals of

the regional. Most important of all, regionals provide leadership and direction for locals.

Technology, swine genetics, nutrition, and other

aspects of integrated production have not yet been standardized across the emerging swine industry of the mid-1990s.

New approaches to ration formulation, facility design, and

other key areas are still being tested and perfected, raising

the cost of investment. Within this environment, structural

and strategic alternatives are also being designed and tested.

Although several hundred locals surveyed on their

role within the emerging swine industry described their current involvement as limited, they clearly wanted to expand.

Locals wanted to make a greater commitment to the swine

industry and to producer-members by moving beyond educational and technical services to financing members’ swine

operations and facilities. Without new or renovated facilities,

producers cannot capture the cost advantages from such

technological innovations as all-in, all-out production and

split-sex feeding.

Because the changes in the swine industry have thus

far had a largely beneficial impact on cooperative feed sales,

failure to make such adjustments could undermine the economic position of both local cooperatives and independent

hog producers, and in the long run, regional cooperatives.

In the poultry industry, independent producers were

unable to keep up technologically with integrators because

they lacked the necessary financing or leadership to override

individual limitations. Similar needs exist within the contemporary swine industry, especially among producers raising

less than 2,000 head annually. Cooperatives have the opportunity to fill those needs by building upon the unique

strengths and attributes made possible by federated system

of organization.

Yet, locals expressed concern that the cooperative

response to the swine industry would be too little and too

late. Although this study did not examine why regionals

might hesitate to invest in the swine industry, the instability

characteristic of emerging industries offers one possibility.

Nevertheless, local cooperatives are looking to the

regional for leadership and regionals understand this leadership role. Their participation in the survey underpinning this

study, along with their own internal research and planning,

points to the seriousness with which regionals are approaching this issue.

Ultimately, it is the strength of the cooperative system,

and the recognition of the linkages and interdependencies

between locals and regionals, that will determine the cooperative response to the emerging swine industry, however it

may evolve.

19
The Role of Local Cooperatives in the Emerging Hog Industry

March 1994

Regional Affiliation:

1.

2.

3.

4.

5.

6.

Please circle or check all responses that apply to each question

unless otherwise indicated.

According to dollar volume of sales during calendar year 1993

what is the principle economic activity of your local

cooperative?

::

grain marketing

farm supplies

C. grain marketing & farm supplies

equally important in sales volume

What are the principle grains (if any) handled by your local

cooperative?

::

wheat/barley

wheat/sorghum

::

corn/soybean

wheat/barley/oats

e. other (specify)

What are the primary farm supplies (if any) sold or handled by

your local cooperative?

::

feed

farm chemicals/fertilizer

::

petroleum

hardware

e. seed

f. other (specify)

From your perspective as a manager or board member of a local

cooperative, how fast is the hog industry changing?

the hog industry is changing very fast, it won't

be the same in five years

the hog industry is changing at a moderate pace,

7-10 years from now it could look quite different

the more things change, the more they remain the

same: the hog industry is not changing substantially

Will the hog industry eventually become as integrated as the

broiler industry, basically eliminating a role for independent

hog producers?

yes, definitely

no

maybe

What role does your local cooperative have in influencing hog

production in your area?
a.

b.

C .

d. the local plays a role in maintaining hog

production in our area, but it needs more help

from the regional

e. although the impact

production is small

future

of the local on hog

now, it could increase in the

f. the local affects hog production only to a small

degree and this is not expected to change

the local is shifting its focus to serving

other categories of producers

h. other (please specify)

the local has a key role in maintaining hog

production in our area

the local has some influence over hog

production in our area, but packers/other feed

companies are more influential

the local has some influence over hog production

but the regional cooperative is more influential

7. Are the changes in the hog industry in your trade area likely

to threaten the survival of your local cooperative within the

next five years?

Yes No not sure

Comments?

8.

9.

a.

b.

C .

Please check the category which indicates the dollar volume of

sales of your local cooperative for calendar year 1993.

$1 million - $4.9 million

$5 million - $14.9 million

$15 million or more

In the last two years (1992/93), how has the rural community

containing your local cooperative been affected by changes in

the hog industry?

The community has . . .

gained jobs lost jobs

Grain production has been . . .

depressed stimulated

Packing plants are killing . . .

more less

no change

no change

no change
d. Technical services for hog producers are . . .

decreasing expanding no change

e. Financing for hog production by area banks has . . .

increased decreased no change

10. In the general market area served by your local cooperative,

what is the predominant trend in size of operation among hog

producers who market at least 2,000 head/year?

a. they are scaling back production or getting out of the hog

business

b. increasing the size of their operation

::

not changing substantially

seeking new sources of capital to expand

e. other (please specify)

11. In the general market area served by your local cooperative,

what is the predominant trend in marketing among hog producers

who market at least 2,000 head/year?

E:

they are developing strategic alliances with area packers

either contracting with companies to produce hogs to

specifications or considering such contracting

C . forming associations among themselves to coordinate various

aspects of production or marketing

d. they are unsure of how to respond to the changes in the hog

industry

e. no significant change

f. other (please specify)

12. In the general market area served by your local cooperative,

what is the predominant trend in size of operation among hog

producers who market less than 2,000 head/year?

a. they are scaling back production or getting out of the hog

business

b. increasing the size of their operation

::

not changing substantially

seeking new sources of capital to expand

e. other (please specify)

13. In the general market area served by your local cooperative,

what is the predominant trend in marketing among hog producers

who market less than 2,000 head/year?

::

they are developing strategic alliances with area packers

either contracting with companies to produce hogs to

specifications or considering such contracting

C . forming associations among themselves to coordinate various

aspects of production or marketing

d. no significant change

e. they are unsure of how to respond to the changes in the hog

industry
f. other

14. In general, are hog producers who are members of the local

cooperative adjusting to changes in the industry differently

than nonmembers?

Yes No

15. If YES, in what ways are members unique?

a.

b.

::

e.

f.

h.

i.

they are scaling back production or getting out of the hog

business

increasing the size of their operation

not changing substantially

seeking new sources of capital to expand

developing strategic alliances with area packers

either contracting with companies to produce hogs to

specifications or considering such contracting

forming associations among themselves to coordinate

various aspects of production or marketing

they are unsure of how to respond to the changes in the hog

industry

other (please specify)

16. In the general market area of your local cooperative, how are

the leading or most innovative hog producers adjusting to

changes in the hog industry?

it:

::

e.

f.

::

i.

they are not changing substantially

increasing the size of their operation

seeking new sources of capital to expand

developing strategic alliances with packers

either contracting with companies to produce hogs or

considering such contracting

forming associations with other producers to

coordinate various aspects of production or marketing

they are utilizing all-in, all-out production

they are using multiple site production

they are changing breeding practices (please describe)

i. other (please specify)

17. How is your local cooperative CURRENTLY helping members adjust

to changes in the hog industry?

::

providing long term credit for producers who wish to expand

offering production contracts

::

identifying hog breeds suitable for geographic area

helping producers develop business plans for their operations

e. providing educational seminars where producers can get market

outlook, financial, or technical information

f. providing production record-keeping services

40 providing pooled marketing services
h.

i..

::

1.

ln.

n.

18.

E:

::

9:

::

i.

::

1.

m.

n.

0 .

P*

q*

r.

::

U .

19.

h.

bulk purchasing of genetic seedstock

locating trained swine laborers and herdsmen

providing generic, adaptable building plans

providing on-farm technical advice/information

providing single-sourced feeder pigs

other

at the present time the local is not offering services in this

area

What are the three additional services or programs that your

local cooperative needs to add to adequately service hog

producers?

please circle no more than three items so we

can identify priority services

present services are adequate

retail salesperson

feed program

grind and mix service

feed delivery

animal health products beyond those already in feed

provide financing for hog facilities of members

provide financing for hog operations of members

record collection and analysis for members' hog operations

an on-farm specialist in production

an on-farm specialist in marketing

an on-farm specialist in records, budgets, cash flow, profit &

loss projections, and other financial topics

feeder pig sourcing

feeder pig production unit (owned by members) to produce 40#

pigs

production unit (owned by members) to finish 40# pigs

source genetic breeding stock

enter hog contracting business

recommend a reputable hog contract company for members to use

provide feed to integrators

facilitate use of AI in hog breeding on members' farms

other (specify)

What are the factors which constrain the ability of your

local cooperative to provide the services and programs circled in

response to question 18?

size of our feed business

size of our trade area

company profitability

attitude of board

attitude of management

community, social, or political pressures

leadership support and programs are not available from our

feed supplier

reluctance to risk equity of local cooperative to support

contractina
i.

j.

k.

20.

a.

b.

::

e.

f.

5

i.

21.

::

C .

d.

e.

f.

g*

h.

i.

j.

22.

not sure that changes in the hog industry warrant changing our

service and product mix

other (specify)

none

What service adjustments will your local cooperative need to make

in the next 24 months to maintain or increase sales of feed or

other products to hog producers?

offer or support particular approaches to raising hogs by

contract

hire a production specialist

hire a vet

hire a marketing specialist

help establish a production organization for producer-members

to keep pace with integrated operations

invest in a production facility for producer-members to keep

pace with integrated operations

offer facility financing to producer-members

offer feed financing to producer-members

other

What should the regional cooperative do to help your local

cooperative increase or maintain business with hog producers?

offer market access through group marketing programs

offer market access through meat packing operations

together with the local, offer selected producers production

credit

together with the local, offer producers production

management advice or services

develop programs to help small or medium-sized producers (xxx

head) stay in business SPECIFY # of Head

develop programs to help young producers get started in hog

production

develop programs to help cash grain producers and others

diversify into hog production

help local trained swine laborers and herdsmen

provide manure management services

other (specify)

What benefits could your local cooperative gain from greater

coordination with the regional cooperative?

access to more technical assistance

risk sharing

legal counsel

feed production efficiencies

coordinated marketing

source of swine breeding stock

g* producer credit
h. market research

i. management assistance

::

nutritional research

financial back-up to support contracting

1. financial back-up to support building facilities for hogs

m. other (specify)

m. no benefit

23. As a local cooperative responding to the changes in the hog

industry, what are the disadvantages or limitations (if any) to

working with the regional cooperative?

24. Farmer cooperatives can be considered an extension of the farm

enterprise. What would be the impact on your local cooperative

if the regional cooperative eventually entered pork processing as

an extension of activities related to hog production?

a.

b.

C .

d.

e.

processing activities by our regional would help area

hog producers become more competitive

processing activites by our regional would be no

different than operations by any other meat packer

not sure what impact pork processing by the regional

would have on the local

pork processing by our regional would have a negligible

impact on area hog producers

other activities are more important for our regional

25.

26.

E:

::

e.

to pursue (specify)

How have feed tonnage sales by the local cooperative been

affected by the changes in the hog industry in the last two

years (1992/93)?

feed tonnage sales have increased

feed tonnage sales have decreased

feed tonnage sales have not changed

How much have feed tonnage sales by the local cooperative

changed as a result of changes in the hog industry during

the two year period 1992/93?

10 percent or less

between 11-25 percent

between 26-33 percent

over 33 percent

Feed sales have not changed
27.

a.

b.

::

e.

f.

g*

h.

28.

How has your local cooperative compensated for changes in feed

sales caused by the evolution of the hog industry?

the local instituted or supported contracting to maintain

market share

the local has expanded operations/added additional staff

the local has intensified competition with other dealers

the sales territory has shunk and the local has downsized

the local has begun strategic planning to adjust to changes in

the hog industry

the local hasn't had to make any changes in operation

the local is coordinating its activities more closely with

other locals or with the regional cooperative

other (specify)

In serving hog producers through feed services, does the local

practice differential pricing according to size of producer?

Yes No

Comments?

29.

it:

::

30.

31.

32.

How are farmer-producers reacting to developments in swine

genetics?

producers are looking for new genetic lines

producers are trying to standardize genetic lines

producers are not making noticable changes in genetics

the packer is forcing a change in genetics of our members

I am responding to this questionnaire as a:

Z:

Director

Local Co-op Manager

C . Current or former hog producer

What state(s) are served by your local cooperative?

Any other comments you may have concerning how cooperatives

should respond to the changes in the hog industry would be

appreciated.
U.S. Department of Agriculture

Rural Business and Cooperative Development Service

Ag Box 3255

Washington, D.C. 20250-3255

Rural Business and Cooperative Development Service (RBCDS) provides research,

management, and educational assistance to cooperatives to strengthen the economic

position of farmers and other rural residents. It works directly with cooperative leaders and

Federal and State agencies to improve organization, leadership, and operation of

cooperatives and to give guidance to further development.

The cooperative segment of RBCDS (1) helps farmers and other rural residents develop

cooperatives to obtain supplies and services at lower cost and to get better prices for

products they sell; (2) advises rural residents on developing existing resources through

cooperative action to enhance rural living; (3) helps cooperatives improve services and

operating efficiency; (4) informs members, directors, employees, and the public on how

cooperatives work and benefit their members and their communities; and (5) encourages

international cooperative programs. RBCDS also publishes research and educational

materials and issues Farmer Cooperatives magazine.

The United States Department of Agriculture (USDA) prohibits discrimination in its

programs on the basis of race, color, national origin, sex, religion, age, disability, political

beliefs and marital or familial status. (Not all prohibited bases apply to all programs.)

Persons with disabilities who require alternative means for communication of program

information (Braille, large print, audiotape, etc.) should contact the USDA Office of

Communications at (202) 720-2791.

To file a complaint, write the Secretary of Agriculture, U.S. Department of Agriculture,

Washington, D.C. 20250, or call (202) 720-7327 (voice) or (202) 720-l 127 (TDD). USDA is

an equal employment opportunity employer.