Economics of North Carolina
You probably remember Randy Smith, our farmer from Deep Run, North Carolina. As you know, Randy considers himself a tobacco farmer. However, eight years after he began growing tobacco Randy purchased two hoghouses and diversified into the hog raising business. He began raising hogs for a variety of reasons. At first, the hoghouses were an after-thought; they were part of a farm he purchased for its prime agricultural land. With the purchase Randy was able to expand his crop business. However, he didn't want the hoghouses to sit idle. He thus diversified his operations into livestock. Randy still has the two hog barns in operation at present. Each barn has space for 825 hogs.
An additional important factor was the ability to control the hog raising operation. If Randy didn't buy the farm some one else would have. "I didn't like the idea of someone I didn't know raising hogs so close to my home," says Randy. "I knew if I was raising the hogs I would have more control over the odor."
Before he purchased the farm Randy had several other things to consider. He needed to decide how to finance the investment and how to sell the hogs. The financing was easy. "I was fortunate because the owner was willing to finance the farm. I agreed to pay twenty-five percent down and twenty-five percent per year until it was paid off".
Randy also had to consider the trade-off between raising the hogs independently and growing them on contract. Independent growers raise hogs and take them to market themselves. Randy would have preferred raising the hogs in this manner. Unfortunately, the structure of the market is such that selling hogs is difficult for small farmers. The expense and difficulty involved in transporting and marketing the hogs erases the already thin profit margin. Instead, Randy turned to an "integrator" -- a firm like Cargill, Smithfield Farms or Murphy Farms that handles the logistics of getting the hogs to market. He is a contract grower.
"I enjoy the freedom of being a farmer," Randy says. "Contract growing doesn't afford the same level of independence." Contract growers typically raise livestock for a single large integrator. With Randy, the integrator handles the birth and weaning of the hogs, and delivers the hogs to Randy when they weigh about 50 pounds apiece. Hog finishers such as Randy nourish the hogs for five months, and return them to the integrator when they weigh about two hundred and fifty pounds apiece. The integrator provides Randy with the animals, and also with the feed and medicines to give to the animals. The integrator is also responsible for transportating the hogs. The finisher (i.e., Randy) just raises the hogs for five months, and is typically paid between nine and ten dollars per head for doing so. Randy completes the cycle from receipt to shipment to the distributor about two and one half times a year.
The contract between integrator and finisher includes a number of incentives in addition to the base per-head payment. One incentive is the "food conversion bonus." This bonus reflects the ability of a finisher to put weight on pigs without using a great deal of feed. For example, if the hogs average a weight gain of one pound per three pounds of feed the contract specifies a bonus for the finisher. There is also a bonus if the mortality rate among the pigs remains below three percent, and if the cull rate (the percent of puny pigs to total pigs) remains below three percent.
Much of the cost involved in raising hogs comes from disposing of their effluent. The typical system for handling hog waste involves an open lagoon and a spraying system. Effluent is channelled from the hoghouse into the lagoon. The lagoon is a large earthen pond with a raised lip and a liner to prevent wastes from seeping into groundwater. State regulations require that each lagoon have a certain number of inches of "freeboard": effluent cannot rise within that number of inches of the lip of the pond. As the level of the lagoon rises, the farmer disposes of the effluent by spraying it over his cropland. This spraying method works so long as the ground is not already saturated, but becomes impossible to use responsibly when the ground is saturated. (Alternatively, the lagoon can be pumped out into trucks and disposed at waste treatment plants.) Randy used to pump his lagoon four to five times per growing cycle at a cost of about one thousand dollars each time. Recently, however, he purchased his own irrigation pump and spraying reel. He likes the freedom that comes with this: "Now I can lower my lagoon level when I want to, not when the equipment is available." He receives no assistance from the pork distributor for environmental controls.
Randy feels he maintains his hog waste responsibly. "Oh, you can smell the hog houses," Randy says. "But I keep the odor as low as I can afford to. I've never had a neighbor complain." State inspectors make periodic visits to the farm, and take samples from the lagoon every sixty days. The rainy days this summer have made management of the lagoon difficult. Farmers lower the level of the lagoon by spraying the effluent upon their fields, but state regulations prohibit such spraying when the fields are already saturated by rain or prior spraying. The rains this year have kept the fields very wet, and the fields become saturated after just a little spraying. The lagoon level then rises higher than was otherwise expected.
Randy's had no trouble in meeting the "freeboard" limit this year, however, because he had the lagoon "pumped" in March 2005. His lagoon was constructed in 1978, and had over the years accumulated a thick layer of sediment on the bottom. This layer was so thick, in fact, that he worried about meeting his freeboard obligations. He had a professional come in to agitate the lagoon, pump out the semi-solid waste, and spread it over 60 acres on his farm. He planted soybeans on those fields, and he says "It's the prettiest crop you've ever seen". The pumping also lowered the water level in the lagoon by about five feet. Although it cost $7500, he thinks it was a good investment -- he doesn't plan on doing that again in his lifetime.
After eight years in the hog finishing business Randy is ambivalent about the business. On the one hand raising hogs is not as risky as raising crops. They are not nearly as subject to fluctuations in the weather. Also, contract growing relieves the finisher of dealing with fluctuations in prices that are common in agricultural markets. In addition, the payments associated with finishing hogs are more regular than crops. Randy is paid two or three times a year for his hogs. Tobacco cultivation requires large outlays in January and doesn't yield financial returns until August. On the other hand, Randy doesn't like working for someone else. Also, he feels that the returns from raising hogs is not as high as the returns from his crops. This year, the recession has led to a worrying change: his integrator has told him and the other contract growers that their contract is "crop to crop" -- in other words, the only commitment the integrator is making is to the current crop of hogs being finished. There's no guarantee that when these hogs grow out, a new crop will be sent to him.
All things considered, Randy believes he made the right decision when he purchased the hog houses. He doesn't particularly enjoy raising hogs. However, it does have its advantages. When reflecting on his decision Randy returns to one of the original reasons he purchased the hog farms. "If I weren't using those houses someone else would be," he reiterates. "I'd rather be in control of the lagoon myself."Randy has paid attention to news reports of research done under the Smithfield Agreement, but he hasn't worried about the details. "For small producers like me, this [the new technologies] wouldn't have been economical", he says.
The first picture features Randy Smith in the middle, flanked by former FYS participants Drew Fogarty and Pat Oxholm. The second picture is of hogs on Randy's farm, early in the finishing cycle.