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Vertical Co-Ordination in the Danish Hog/Pork Industry P M A P VERTICAL CO-ORDINATION IN THE DANISH HOG/PORK INDUSTRY P Working paper no 61 January 1999 HUS S AR C A H O E O H L T • • O . F S CENTER FOR MARKEDSOVERVÅGNING, -VURDERING OG -BEARBEJDNING TIL FØDEVARESEKTOREN ÅRHUS B S USINE CENTRE FOR MARKET SURVEILLANCE, RESEARCH AND STRATEGY FOR THE FOOD SECTOR . AARHUS . DENMARK VERTICAL CO-ORDINATION IN THE DANISH HOG/PORK INDUSTRY Christina M. Laursen Lone S. Hundahl Jesper Strandskov The Aarhus School of Business Danish contribution to the DECANETHUS PROJECT: A multi-country study of vertical co-ordination in the hog/pork sectors of Denmark, Canada, the Netherlands and the United States PREAMBLE This paper represents the Danish contribution to a multi-country study of vertical co-ordination in the hog/pork sector, the DECANETHUS Project. The Agri Chain Competence Foundation, a research group funded by the Dutch government, originated this project as a part of a comprehensive research program designed to better understand vertical co-ordination and supply chain management across all sub-sectors of the global agri-food sector. Four countries are involved: Denmark, Canada, the Netherlands and the United States. Researchers from these countries formed a working group with the purpose of defining a framework for analysis to be applied across all of the countries. Each country has produced a report consistent with the agreed framework. The Agri Chain Competence Foundation will publish a DECANETHUS project report, which attempts to draw broad conclusions about vertical co-ordination based on the experience outlined in each of the country reports and jointly authored by the country participants. The working group members of the DECANETHUS Project are Denmark Christina Moustesgaard Laursen and Lone Sehested Hundahl The MAPP Centre The Aarhus School of Business Haslegaardsvej 10 DK-8210 Aarhus V Denmark Telephone: +45 89 48 64 87 FAX: +45 86 15 01 77 E-mail: [email protected], [email protected] Web site: www.mapp.hha.dk Canada Raman Srivastava and John Bamford Economic and Policy Analysis Directorate Policy Branch, Agriculture and Agri-Food Canada 6th Floor Sir John Carling Building 930 Carling Avenue Ottawa, Ontario K1A 0C5 Canada Telephone: (613) 759-7384 Raman, (613) 759-7407 John FAX: (613) 759-7034 E-mail: [email protected], [email protected] Web site: www.agr.ca/policy/epad The Netherlands Gerrit-Willem Ziggers Department of Management Studies Wageningen Agricultural University The Netherlandseweg 1, NL-6706 KN Wageningen The Netherlands Telephone: (317) 484738 FAX: (317) 484763 E-mail: [email protected] The United States Lee Schrader Department of Agricultural Economics 1145 Krannert Building West Lafayette, IN 47907-1145 USA Telephone: (765) 494-4302 FAX: (765) 494-9176 E-mail: [email protected] EXECUTIVE SUMMARY 1. This study1 of co-ordination of the hog/pork industry in Denmark is part of a project including the industries in Denmark, Canada, the Netherlands and the United States. The Danish hog/pork industry is export driven, and Denmark is one of the world’s largest pork exporters with over 75% of its output going to some 100 countries. 2. The Danish hog/pork system is a vertically integrated system with inte- gration from the primary producer to the processing companies. The strength of the Danish industry can mainly be attributed to its co-operative nature, that it is centrally organised, and controlled and owned by the industry itself, namely the pig producers. 3. During the last five years, the Danish pork industry has changed, slaughter- ing is now concentrated in the four largest firms accounting for 95% of capacity. Processing (beyond primal cuts) is also concentrated and is integrated with slaughtering operations. The four slaughtering firms are all farmer-owned co- operatives. 4. To ensure greater stability in the market and to make it easier for farmers and abattoirs in their management activity, prices are set by a committee each week and are based on market conditions on export markets. Using a pre- determined processing margin the price to be paid to pig farmers is then set; consequently each producer receives the same price for a given specification. This saves on transportation costs as there is no price incentive for producers to send live pigs over long distances and it eliminates marketing costs such as the need for markets, middlemen or a network of buyers employed by the abattoir. 5. Bonuses will vary from co-operative to co-operative depending on its cost structure and selling activity. A poor performance by one co-operative with a consequent lower bonus will result in producers switching to another co- operative, for large producers the bonus payment represents a significant source of income. It is this factor that ensures the competitiveness of the individual pig abattoir co-operative. 6. The development in the Danish pork industry is characterised by changes in demand, consumption and demographics towards more attention to soft product quality traits such as animal welfare, “ethical products” and product origin. The habits of today’s consumer are changing towards convenience products and foreign eating habits, which among other things has led to an increasing catering industry. Especially in the areas productivity and technology there has been an increasing focus on specialisation in production and other production aspects such as monitoring technology and biotechnology. Over the years, pork production has become more knowledge intensive, which creates a demand for a skilled and flexible workforce. There is also a pressure on the industry to adopt the latest technology to remain cost and product competitive. 1 Partly financed by the MAPP Centre and partly by the DECANETHUS project. 7. In order to meet this pressure attention must be paid to increased product development, larger market flexibility and improved responsiveness. Optimi- sation of the full chain rather than focus on costs at each stage is also required to meet the pressure. At the same time the system management, among other things, has to be focused on meeting the consumer need for information and increasing the quality of farm management. 1. Introduction 1 2. Industry business environment 1 2.1 Important institutions and associations 1 2.1.1 The Agricultural Council of Denmark 1 2.1.2 Danske Slagterier 1 2.1.3 The Pig Levy Fund 2 2.1.4 Farmers’ Association 2 2.1.5 Danish Agricultural Advisory Centre 3 2.1.6 The National Committee for Pig Breeding, Health and Production 3 2.1.7 LEC 3 2.2 Major related and supporting industries 3 2.2.1 Feed manufacturing 3 2.2.2 Health services 4 2.2.3 Financial services (capital) 5 2.2.4 Marketing services 6 2.2.5 Research and development 6 2.2.6 Construction and facilities manufacturing 7 2.2.7 Human resources and training 8 2.3 Policy and regulatory environment – Business climate 9 2.3.1 Market regulation 9 2.3.2 Health and safety regulations and issues 10 2.3.3 Environmental regulations and issues 10 2.3.4 Industry support policies and programs 11 3. The pork market 12 3.1 World market 12 3.1.1 Consumption 12 3.1.2 Production 14 3.1.3 Trade 15 3.2 The European market 16 3.2.1 Consumption 16 3.2.2 Production 16 3.2.3 Trade 17 3.3 Domestic market 18 4. The pork supply chain 22 4.1 Structure 22 4.1.1 Genetics 22 4.1.2 Farrowing – Finishing 23 4.1.3 Slaughtering – Processing 26 4.1.4 Wholesale – Retail – Catering 28 4.1.5 Consumers 29 4.2 Vertical co-ordination 30 4.2.1 Feed/Genetics – Production 31 4.2.2 Production – Slaughtering 32 4.2.3 Slaughtering – Processing 32 4.2.4 Slaughtering/processing – Distribution/wholesale 33 4.2.5 Slaughtering etc. – Retail/catering 34 5. Performance of the pork supply chain 35 5.1 Production and price 35 5.2 Cost of primary production 36 5.3 Cost of further production 37 6. Pressures for change 38 6.1 Changes 38 6.1.1 Demand, consumption and demographics 38 6.1.2 Productivity and technology 40 6.1.3 Government regulations and policies 41 6.1.4 Resources – Environment, capital and labour 42 6.2 Impact on business climate 42 6.2.1 Chain differentiation (product differentiation) 43 6.2.2 Chain optimisation (system efficiency) 43 6.2.3 Chain care (system management) 44 7. The industry’s capability of responding 44 7.1 Evaluation of the chain 45 7.2 Implications for vertical co-ordination 45 8. Conclusions and implications 46 8.1 Barriers to overcome 47 8.2 Recommendations for further research 48 9. References 49 10. Appendix 50 1. INTRODUCTION Denmark is one of the world’s largest exporters of pork. Pork is Denmark’s most important export product at around 8% of the total value making pork an important part of the Danish economy. Family holdings and “owner occupiers” are commonplace in Danish farming. Pig production is no exception, and Den- mark has some 20,000 producers. Seen in a historical perspective as well a present day one, the co-operative system plays a significant role in Danish agri- culture. Around 95% of Danish pigs are slaughtered, processed and marketed by co-operatives, owned and managed by the pig producers. Much of the further processing and other affiliated industries are also run on co-operative prin- ciples. Apart from market regulation under the EU CAP (which is less pervasive for pork than for many other commodities), government involvement in the industry mainly takes the form of research, education, and inspection as well as enabling legislation for industry associations to collect production levies and regulate themselves.
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