We have crossed the Rubicon in the U.S. pork industry. When Julius Caesar made this strategic move before the birth of Christ, he quoted a poet, “Let the die be cast,” and so it was and is. Even though the daily, weekly, monthly “random shocks” in 2019 and beyond will dominate the news and buffet the industry both positively and negatively, the real news is not there. Here is what you need to know about the future.
Control moves from processing to production
A foundational shift has occurred, and it will control the direction, response and recovery of the U.S. industry from the random shocks on the way. We’ve seen a historical shift of control of the pork chain to production companies and away from processing companies.
“Hide the ball” is slang for the lack of transparency between the virtual pivot point of the pork chain, which is the processing sector versus the production sector. This is where most of the investment within the chain takes place.
In the past, the processing segment hid important information from the production segment because of the extreme competitive pressure that processors faced among themselves. The processor stands at the pivot point because it is the unique place in the chain where a relatively transparent look both up-chain and down-chain can take place with respect to supply and demand. While processors use this unique vantage point to “guide” investment in the production chain through differential pricing (like subsidizing more lean or a range of carcass weights), this process is characterized by a crude pricing matrix. In future years, it will be seen as inefficient in driving precision investment in the array of production attributes demanded.
Processors have the possibility of full knowledge of the attributes of every carcass, although currently they only capitalize on a small amount of that information. That will be changing. Producers know almost nothing about the key attributes of carcasses they produce because current production systems do not economically or technically allow even rudimentary measurements of individual animals during production.
The only critically important knowledge of their output is the information that is passed down to them from processors. Unfortunately, that information is passed down to them well after there is anything that can be done to correct issues related to the animal’s value (i.e., the animal is already harvested).
The tremendous value—both in cost reduction and value enhancement that remains largely beyond reach by the chain—created this move to acquire transparency. This type of integration is not about gaining management control but is all about securing the right information to make a future investment in both production and processing that is rational and optimal. This is the motivation for the substantial recent investments and acquisitions of new packer/processing facilities in the U.S. As producers know, some facilities have been recently completed and others are still underway.
Three megatrends for new expansion
This push has succeeded because of three other megatrends. First, the rising per capita income worldwide is fueling a huge current and future increase in demand for high-quality protein (read “protein” as “meat” at this point). While the clear majority of this demand remains largely undifferentiated after assurances of safety, low cost and wholesomeness, there is a rising “precision demand” that will force a precision (agricultural production and processing) response from all food chains.
Precision demand refers to additions to the above list, such as antibiotic-free or emerging layered demand attributes such as antibiotic-free combined with additional attributes such as natural, organic and locally produced to name a few.
Derived demand for global resources
Supplying this increasingly complex demand will require a correspondingly large increase initially in the derived demand for scarce global resources, as the current “hide the ball” realities prevent the sizeable efficiencies that are available when transparency is realized.
Second, the gains from transparency between production and processing can slow or prevent the rise of increasingly activist local and global policy prescriptions. This might uneconomically block access to key inputs.
And third, the emergence of big data methodologies enables optimization of a vast number of data points that simply overwhelmed traditional modeling and econometric techniques. The incoming frequency of new information and the array of related variables previously choked all available analytical technologies.
While all the above is just in its infancy with respect to full realization, the river has been crossed and there is no going back. The place where investment is the greatest will now have an unobstructed view up- and down-chain, and that will begin to change everything. Are you ready?