Independent or integrated: it has long been the fundamental choice for the pig producer. My own view after seeing both sides of the fence is that independence can too often mean the freedom to fail, whereas integration can offer a basis for the business to survive.

I contend that all the growth areas of the world of pork over the past few years have been ones with integrated systems. The exact form of the system may differ according to the location. It could mean corporate integrators as in the USA and Spain, farmer ownership of slaughterhouses as in Denmark or the existence of the joint ventures, group farming agreements and co-operatives found in a number of other countries. But the up-and-coming pork industries typically feature integration in some shape or other. By contrast, places lacking integrators have tended to see a continual reduction in their pig numbers.

Critics have tried to characterise the world's large integrators as operating horrible factory farms in which the housing for pigs is all slats and crates while the unit is badly run, with poor animal welfare. It is far from the truth, of course. On integrated units I have been fortunate to work in good facilities alongside people who are very skilled in their care of the pigs. The companies are well managed and fully costed, with excellent financial control. They have in-house training programmes for the staff, whole departments dealing with environmental issues and a rigorous regime of internal auditing.

The integrated system is successful for several reasons. The main ones are worth examining here.

1 Integration is bankable. The cyclical nature of the pig price in all markets inevitably means that both producers and processors go through periods when the margin is negative so that lenders are deterred. However, production and processing are opposites in the sense that one will be up financially when the other is down. In an integrated company active in both spheres, the overall business remains profitable so it keeps friendly with the banks and may even be represented on the stockmarket.

2 Integration lowers costs. This is true principally because it is practised in large enterprises that can achieve economies of scale, although the corporate producer is also helped by the fact that it incurs no sales cost in moving product along the various parts of its pork chain. The system is entirely cost-driven until the point of sale of the final processed product.

3 Integration is efficient. My strong impression is that the standards of efficiency are higher than in the independent sector, because the managers within an integrated system can focus on the job of producing pigs at low cost rather than being distracted by the market situation or any other consideration.

4 Integration can more easily supply what the customer wants. This aspect of customising is an important one. Pigs can be produced to order because all parts of the chain are under the same ownership. Of course there is competition between departments but this is healthy and it improves results.

I have referred to the fact that integration can assume various guises, so I should suggest how it might be defined. To my mind all 3 of the vital components must be represented, meaning feed production, pig production and slaughter/processing. Some examples may additionally include the supply of genetics to the pig units. In the standard Russian model, an integration is not complete without also owning farmland where the feed crops are produced. But I am not convinced this is an essential part of the business model, any more than that there is a requirement for the integrator to own a breeding company.


Producing on contract

On the other hand, in most places another factor stands out as integral to the system. Most people call it producing on contract. Around the world, the rise of contract farming has revolutionised agriculture. Its application in the pork chain usually centres on an agreement for the third-party contractor to provide land and facilities while the integrator invests in the pigs. It releases the integrator from the need to tie up capital in farmland and so makes the business more interesting for stockmarket investors looking for high returns.

First and foremost, contract pig production is successful because it works for both of the parties involved. The producer gains stability as income no longer fluctuates with the market. He or she can concentrate on looking after the animals without worrying about cash-flows. For the integrator, the gain is in the high return on capital where the investment is solely in animals and not in depreciating pig farms. Working mainly with small farmers is also beneficial. It eliminates layers of cost that a large company structure would have, but it is even more attractive for its political image. Big corporate farms are not popular anywhere in the world, except perhaps in Russia. Contracting allows corporate money to support local farming and keep the small farmers (the traditional custodians of the countryside) in business.

The safety angle of contracts is another consideration. Processors always need pigs, regardless of the price on the open market. Producers can operate with more confidence when they know the processor has a financial interest in taking their output. This security that the contract provides has the further advantage that banks are happier to lend to a contracted pig business than to one that is independent. In some circumstances the contract itself has become the security allowing the bank to approve a loan of up to 100% on a nursery or finisher building.

The integrated model was born during hard times. Every time a farmgate price crisis occurs, a pork processor or feed manufacturer in that country will have realised just how much they could suffer from losing their supply network or customer base. To protect their own business, they have taken on the stock from farmers and started integrated systems on contract. A period of high farmgate prices and short supplies will have had similar consequences when the processor loses money.

For example, Spain's largest integrated company started out making feed. It was forced to acquire the stock inventory of a customer to cover a debt in a difficult period and grew from there to a structure with around 170 000 sows. Several years ago it closed the circle and purchased a slaughtering business. Various large integrators have grown by buying an ailing company at below normal market value and turning it into a successful business.

Today, I firmly believe it is impossible to compete with the integrators as an independent producer. They have their own feedmills, transport, veterinary services, genetics base and house construction department. What they do not have are marketing groups, mark-ups on purchases or sales costs. The integrated sector is simply a collection of efficient companies, delivering a commodity at the lowest cost ready for processing to add value. Even at today's grain prices, a well-run integrated company can still produce pigmeat competitively in almost any environment. In many European countries the surviving independents are struggling to compete, whatever the cost of their labour and utilities. I would say the contest to find the right business model in pork production has been won and the victor is integration.