The Domino Effect of Commodity Instability on Pork Production

Smithfield Foods produces almost 19 million hogs per year as part of their business model which sells over 8 billion pounds of processed meat. As climate change impacts the costs of many of their production inputs, are they positioned to survive?

Smithfield Foods is the largest pork producer in the world with over $14 billion in annual sales [1].  In 2016 alone, they produced 18.9 million hogs and sold 8.6 billion pounds of packaged meat [1].  As climate change continues to impact several of their main supply chain production inputs (notably corn, soybeans, and water), will they be able to remain a profitable subsidiary of WH Group Limited?

Why do they care?

Smithfield creates value primarily by turning grain, water, and various other inputs into pork products which are sold all over the world.

Climate change can have a significant impact on commodity prices throughout the world as weather patterns change and growing seasons become less predictable [2].  The United States Department of Agriculture (USDA) estimates that corn yields in the United States will drop by 8.1% by 2020, and continue to drop every decade thereafter [2].  In addition to corn yields dropping, soybean yields will also decline at roughly the same rate [2].  This significant decline in domestic production will have a dramatic effect on corn and soybean prices in the United States, driving up Smithfield’s costs of production.

For example, in 2016 Smithfield spent $1.7 billion on U.S. grain [3].  In addition, livestock producers such as Smithfield may face increased pressure to reduce greenhouse gas emissions as their own contributions to climate change increase and come under public scrutiny [Figure 1].

Water also plays a significant role in livestock production (as much as 8 gallons/animal/day) [4].  As water becomes scarcer, then Smithfield may find themselves actively competing for water resources, which is in an integral part of their supply chain.

What are they doing to address it?

Smithfield has begun several initiatives aimed at both directly reducing their supply chain costs and reducing their own impact on climate change over both the short and mid-term time periods.

  1. Short term: Between 2011 and 2016, Smithfield increased their purchases of grain elevators and feed mills in order to vertically integrate their own supply chain [5]. By purchasing and running their own feed mills and grain elevators, they can purchase grain directly from farmers [5].  This consolidation has led to Smithfield now buying 65% of its grain directly from farmers (up from 10% in 2010), which significantly cuts down on their supply chain costs [5].
  2. Short term: Reduce water intensity despite a higher overall demand for total gallons of water required for production [6].
  3. Short term: By establishing closer relationships directly with farmers (by owning more of the supply chain), Smithfield has been able to influence several farmers crop rotations and
  4. Mid-term: The company launched a new initiative in 2016 to reduce their absolute greenhouse gas emissions by 25% by 2025 through more efficient use of energy, water, solid waste management, and grain procurement [6].

Not only did Smithfield launch the initiative to reduce their greenhouse gas emissions, but they also exceeded several of their sub-goals within the initiative such as reducing energy consumption [7].

 

What else should they be doing to address it?

While Smithfield has taken several measures to reduce the impact of climate change on their supply chain operations, there are other opportunities for them to improve.

  1. Smithfield should expand their involvement with local farmers to help those growers become more efficient and employ more sustainable practices.
  2. Smithfield should expand their involvement in the renewable energy sector by investing more in wind and solar production.
  3. Smithfield is in the protein industry, not just the hog industry, and they should look to expand their products into areas that are more sustainable in the future (plant based meats, etc.).
  4. While they are doing some work to encourage farmers to grow alternatives to corn and soybeans, which is a pig’s primary diet now, they should expand that program more rapidly which would have an even greater impact on farmland sustainability [4].

The Future

A significant portion of greenhouse gas emissions are a direct result of either livestock production or feed production to support livestock; does the government have a role in addressing and/or limiting this trend?

Smithfield uses an extensive amount of water for both animal nourishment and waste removal; what role does the government play in making sure water is being used efficiently across the entire United States?

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References

[1] Smithfield Foods, “Smithfield at a Glance”, https://www.smithfieldfoods.com/integrated-report/2016/smithfield-at-a-glance, access November 2017.

[2] Elizabeth Marshall and Marcel Aillery, USDA, “Climate Change, Water Scarcity, and Adaptation”, November 25, 2015,  https://www.ers.usda.gov/amber-waves/2015/november/climate-change-water-scarcity-and-adaptation/, accessed November 2017.

[3] Smithfield Foods, “Agricultural Supply Chain”,  https://www.smithfieldfoods.com/integrated-report/2016/environment/agricultural-supply-chain, accessed November 2017.

[Figure 1] Environmental Protection Agency, “Global Mitigation of Non-CO2 Greenhouse Gases: Livestock”,  https://www.epa.gov/global-mitigation-non-co2-greenhouse-gases/global-mitigation-non-co2-greenhouse-gases-livestock, accessed November 2017.

[4] University of Minnesota Extension, “Formulating Farm Specific Swine Diets”, https://www.extension.umn.edu/agriculture/swine/formulating-farm-specific-swine-diets/index.html, accessed November 2017.

[5] Michael Hirtzer, Reuters, “Pork Giant Smithfield Skips Middlemen in Grain Supply Chain”, December 20, 2016, http://www.reuters.com/article/us-smithfield-foods-grains-analysis/pork-giant-smithfield-skips-middlemen-in-grain-supply-chain-idUSKBN14J0FA, accessed November 2017.

[6] Smithfield Foods, “Sustainability Goals and Targets”, https://www.smithfieldfoods.com/integrated-report/2016/governance-management/sustainability-goals-targets, accessed November 2017.

[7] Smithfield Foods, “Performance Summary”, https://www.smithfieldfoods.com/integrated-report/2016/environment/performance-summary, accessed November 2017.

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2 thoughts on “The Domino Effect of Commodity Instability on Pork Production

  1. Thanks for sharing your insights on this topic! You have done some comprehensive research. It caught my interest and I read about it. Firstly, I believe it’s the responsibility of all the organizations esp the big ones to join hands with government and set up good examples to protect climate to inspire others to follow. However, government rules can change practices (such as the ban of sow gestation crates in Europe and some USA states). US can seek inspiration from other nations:
    1. Chinese government emphasis is on modernization and industrialization of the pork sector while enforcing strict implementation of environmental policies to address the country’s land and water pollution issues.
    2. Australian government has provided funds to Pork Cooperative Research Centre to find ways to support the industry sustainably. Government drought assistance to Australian farmers must reflect the bigger picture of climate change to allow for sustainable agricultural production, and equally as important, eligibility criteria and assistance measures must be updated to reflect modern day farming practices and business structures. (http://australianpork.com.au/wp-content/uploads/2013/10/National-Environmental-Sustainability-Strategy-for-the-Pork-Industry.pdf)

  2. This is a very interesting post that really highlights how climate change can destroy the raw material supply for a company. I think Smithfield made a great decision in purchasing their own grain elevators and feed mills to help protect themselves against the predicted fall in crop yields due to climate change. By purchasing a much larger portion of their crops directly from farmers, they have a much greater opportunity to influence the farmers in their efficiency and sustainability efforts. It is implied that independent feed mill and grain elevator companies would cater their efforts to many more customers than hog-producing companies like Smithfield. Therefore, Smithfield could not have relied on the separate feed mill and grain elevator companies to promote hog production while impacting farmer behavior. Now, they have direct access to farmers with this purchasing power.

    Smithfield can use this new purchasing power to convince the farmers to tailor their sustainability efforts towards increasing hog production. For example, Smithfield can work with the farmers to produce strains of crops that provide denser nutrients and help hogs grow faster. This would increase the rate by which Smithfield can turn grain into pork.

    Another benefit of Smithfield purchasing their own supply chain is that they are now diversifying their business. If they run into a year of decreased pork demand or low hog yield, they can still rely on the feed mills and grain elevators to turn a profit. This added business of grain production also will help Smithfield if they are required to reduce their pork production to satisfy future government mandates of methane reduction. I recommend that they invest heavily in these feed mills and grain elevators to learn the intricacies and perhaps even train their sales force to sell developed grain to de-risk their reliance on pork.

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