Integration southern-style

Meat group in southern Brazil expands and integrates pork

Cléria Diesel works in the farrowing house at Suinosul Farm in Santa Rosa, Rio Grande do Sul, Brazil. Suinosul Farm is now a producer of 22kg piglets from 750 F1 sows for the Alibem meat group.
Cléria Diesel works in the farrowing house at Suinosul Farm in Santa Rosa, Rio Grande do Sul, Brazil. Suinosul Farm is now a producer of 22kg piglets from 750 F1 sows for the Alibem meat group.

Meat group Sadia, based in the southern Brazilian state of Santa Catarina although now with plants in many other states as well, has been a pioneer in partnership arrangements over recent decades. These began with poultry producers in the early 1970's, but by the end of the decade had spread to pig production. The move was accelerated because pork producers had become decapitalised and their numbers decimated by the consequences of an outbreak of African swine fever which caused heavy losses for a long period.

Since that time, many different partnership or integration arrangements have been tried by the big meat operators, with each model increasing the companies´ control over the producer. Initially, piglet production was based on a 'purchase-and-sale' contract between sow herd and integrator, in which the producer supplied all inputs and had a guaranteed market for his output.

The next stage was when the companies offered to buy out the producer´s herd, and supply new breeding stock to replace it, to ensure that the piglets conformed to the genetics they desired. This was attractive to the herd owner, as he pocketed the money from the sale, but it tied him even closer to the meat company because he no longer owned the animals on the unit or the piglets produced.

All inputs supplied

Currently Sadia is promoting a partnership model called comodato. In simple terms it means that the producer partner is responsible for supplying installations, labour, water and electricity while also taking care of maintenance and repairs. Sadia supplies and owns all the external inputs for producing the pigs. This covers not only the feed and drugs, but also the genetics in the form of gilts and semen.

One enterprise in the southern state of Rio Grande do Sul has a total of 1500 sows. The owner (we can call him Oscar) has a comodato agreement with Sadia to produce 28kg piglets.

Oscar, who was previously an independent farrow-to-finish producer, is satisfied with the income he receives. It is based on a percentage of a calculated value of the piglets produced. During the first year of the arrangement, he was paid 16.5% of that assessed value. This amount was enough to pay his immediate production costs (labour and electricity) from the return on the first 730 piglets per month, when on average he sent the group a total of 2900 pigs monthly.

By the current calculation used by Sadia, a 28kg piglet is worth approximately R$142.00 (Brazilian Reals), equivalent to about US$79. Oscar receives 16.5% of this amount, about US$13. On this basis, the monthly margin secured by Oscar's unit over direct costs is around US$28 200. He comments, it is literally money lodged in his bank account and not just wishful thinking about the increased stock value of the herd or feed stocks.

Obviously this profit' includes return on capital invested. Borrowing money to start a new unit would bring interest charges and capital repayments, and in this case the net margin left for the producer would be very small. But that does not apply to Oscar´s unit, nor to the great majority of producers who have gone into partnership arrangements, as their farms already existed and they do not have bank loans to pay. After the first year of the contract between integrator and producer, a calculation is introduced which takes into account feed conversion and productivity. In Oscar's case, a reasonable level of productivity allows him to earn 10-20% more per piglet.

Asked what he considered to be the main benefits of joining an integration through a comodato partnership, his first response was: "I shall probably live 10 years longer!" He does not have to worry about buying maize, soya, drugs or any other input everything is delivered to his door. Oscar comments that he does not even need to know what the prices of maize or soya cake are, it is not his problem any more.

Total control

To Sadia (and other integrations following this route), the big advantage is that they have total control over what genetics are used, what the pigs eat and what drugs they receive, as all these inputs come from the integrator. They even have a semen wagon which makes twice-weekly deliveries to the farms. This is a definite plus for any exporter in view of the growing need for traceability. Sadia and its contemporaries can use the known origin of products to help them break into new markets and maintain existing ones. Consumer activists also express their support for integrated production, saying they want to see an end to unscrupulous pig producers who use banned drugs or defy the rules on drug withdrawal by administering them in the final part of the finishing period.

Integration-type partnerships in one form or another represent the business model which will dominate pig production in Brazil from now on. It is an unstoppable trend. It obviously requires huge inputs of capital from the integrators, such as Sadia, who buy out all the pigs in a farm they take over, more or less at market prices. But they are very big companies, with annual sales of billions of dollars including a large part from abroad, and they have access to loan capital on favourable terms.

Obviously, partnership agreements bring new constraints and risks for the producer. He is totally subject to the decisions taken by the meat company, in terms of what he must do and the returns he receives. A failure to follow the guidelines would result in the contract being terminated leaving him with an empty farm. The only competition in place to regulate the market at this time is that between the meat companies who compete to sign up existing farm owners.

On the other hand, if the producer does not receive a reasonable return, he will stop producing, which will cause a problem for the meat company which needs those pigs. Once existing farms are all integrated and the market demand requires more production, it could be that the return to the producer will have to increase to attract new investment which incurs interest and loan repayments to the bank. Oscar admits he does have one regret that he did not change over sooner from running his old farrow-to-finish system independently to being a parceiro' or partner. He can recall all too easily how much money he lost over the last few years in weathering the storms of the hog cycle as an independent producer before taking the plunge.PIGI

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