Hog-tied in Kentucky?

No, thanks to a co-op helping small-scale hog producers survive in a depressed market

By Bill Brockhouse
USDA Agricultural Economist

        The hog industry is wallowing in a tough market. Hog prices have been severely depressed and many producers have gone belly up. But, for some small-scale Kentucky hog producers, their cooperative has prevented them from sinking. The co-op may help them ride out the current crisis and be poised for new opportunities when the hog market improves.
        According to USDA's Economic Research Service, hog slaughter was up almost 10 percent in 1998 compared to 1997. As a result, hog prices plunged to an average $32-$33 per hundredweight (cwt.), just $5 ahead of the 1972 average of $27 per cwt. By mid-December 1998, hog prices were as low as $10 per cwt. Input costs declined substantially, but not nearly as low as hog prices had dropped. While prices have recovered somewhat this year, they are predicted to only average in the mid-$30 range.
        Small producers, in particular, are feeling the squeeze. But a group of producers began working seven years ago to realize a vision that makes it more likely they'll survive roller-coaster market prices.
        This effort initially began in 1991, when Phil Lyvers and Johnny Medley, small-scale hog producers in Springfield, Ky., talked about pooling loads of hogs for shipment to an area packer as one way to save on costs. Their vision led to the creation of the Central Kentucky Hog Marketing Association (CKHMA), a producer-owned and -controlled hog marketing cooperative. Today, Lyvers and Medley are members of CKHMA's board of directors. Members are saving on shipping costs, benefiting from packer incentives for hog quality, and obtaining other services to improve their operations.

A changing marketplace

        Before CKHMA, producers did not think in terms of quality. They received spot prices on a live-weight basis. They didn't know much about base prices or pay attention to market conditions. Then packers started offering yield and grade programs based on quality. Forward-thinking producers like Lyvers and Medley soon realized the potential for improved returns through genetics, as well as lower transportation costs.
        Consumer preferences also changed. Today, leaner is better. CKHMA helps members steadily improve hog leanness through improved genetics, production management education, and packer feedback. As a result, members' average leanness (as measured by percent backfat) has improved from 48-49 percent in 1992 to about 52.5 percent at present.

Leadership and marketing

        When CKHMA formed in 1992, USDA co-op specialists provided organizational guidance, surveyed producer interest and wrote a business plan. With 25 members, CKHMA marketed about 20,000 hogs that first year. Today, 13 members market about 31,000 hogs. Most of the membership decline was due to farmers going out of business, but those remaining actually enlarged their operations, in spite of low hog prices.
        "CKHMA has helped us stay in production even with historically low hog prices. It has helped members understand that they have to produce quality to get the highest returns," says Lyvers.
        Tom Congleton, a vocational agriculture teacher at Springfield High School, agreed to assist the producers, in effect becoming a part-time manager. He talked to packers, along with board members, to determine who could offer the best deal. He also coordinated members' hog shipments to a central stockyard in Springfield, where they were kept overnight and hosed down before loading. Members originally paid 90 cents per hog for loading and marketing services.
        However, Congleton repeatedly told producers that "just putting together loads of non-similar animals isn't going to cut it. If one or two producers were getting higher returns because they spent a little more time and money on producing higher-quality hogs, other producers would be embarrassed because they knew they could do the same thing if only they'd put in a little more effort. There was no reason not to do it. It didn't make economic sense."
        The five CKHMA directors were the driving force. With Congleton, they held weekly educational meetings where kill sheet data was summarized and freely shared. Peer pressure was instrumental in getting producers to improve quality.
        Members benefited in another way. It was much more time-efficient to let Congleton arrange the marketing and coordinate shipments. Producers could then concentrate on their farm operations.
        The biggest advantage during the worst periods last year was access to packers, Congleton says.
        "The biggest advantage the cooperative offers is the ability to get pigs in the door. For some smaller producers who weren't members, packers were booked out. But the cooperative never had a load of pigs turned down," he explains.
        The cooperative has no "bricks and mortar," since costs such as stockyard and loading fees are variable and hogs aren't actually purchased by the cooperative. Little startup capital was needed. However, the directors agreed to put $30,000 toward a marketing bond required by the Packers and Stockyards Administration. After a year of operation, CKHMA reimbursed directors.

Hog producer Phil Lyvers says other small-scale hog producers should be able to replicate the success his co-op has had in central Kentucky.

More benefits realized

        Another member service includes the purchase of feed ingredients in bulk at lower prices. The cooperative takes orders, buys the feed, and arranges for members to pick it up. To promote uniform feeding practices, members are also required to purchase feed ingredients through the cooperative.
        In 1995, USDA Rural Business-Cooperative Service staff conducted a strategic planning session with the directors. As a result, Congleton was hired instead of continuing on a volunteer basis. To help pay his salary, the members agreed to raise the fee they pay the co-op to 2 percent of the sales value of their hogs. At first, the steeper fee drove some members away and others went out of business due to economic conditions. But ultimately, hog marketings stabilized.
        Al Tank, chief executive officer of the National Pork Producers Council, recognizes CKHMA's success. He spoke at CKHMA's annual meeting in March.
        CKHMA members say the future looks hopeful in spite of low hog prices. USDA projects that farrowings will decline later this year, and prices will continue their slow improvement. Some members are even talking about expansion. The cooperative will continue looking for the best terms possible with packers. Members will continue improving quality. Other producers in the area may join the cooperative and it's possible that another collection point will be opened, Congleton reports.
        CKMHA is always looking for new opportunities on the horizon. With the potential for closure of area packing plants looming, members see a need for exploring alternatives for adding value to pork. Custom processing, targeting niche markets and even ownership in a slaughter facility could eventually become a reality for a cooperative.
        "Small-scale producers need to get the most out of their hog operations," says Lyvers. "There's no reason CKHMA can't be duplicated by small producers anywhere in the country, with a group of producers dedicated to improving quality, lowering transportation costs, and saving time. It may be the only way for small producers to survive."

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