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CHANGES IN COST STRUCTURE OF SWINE PRODUCERS IN
THE UNITED STATES AFTER IMPLEMTATION OF A BAN ON
SUBTHERAPEUTIC ANTIBIOTIC GROWTH PROMOTANTS

presented by

MICHAEL GORDON HOGBERG

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CHANGES IN COST STRUCTURE OF SWINE PRODUCERS IN THE UNITED
STATES AFTER IMPLEMENTATION OF A BAN ON SUBTHERAPEUTIC
ANTIBIOTIC GROWTH PROMOTANTS

By

Michael Gordon Hogberg

A THESIS

Submitted to
Michigan State University
in partial fulfillment of the requirements
for the degree of

MASTER OF SCIENCE

Department of Agricultural Economics

2005

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ABSTRACT
CHANGES IN COST STRUCTURE OF SWINE PRODUCERS IN THE UNITED
STATES AFTER IMPLEMENTATION OF A BAN ON SUBTHERAPEUTIC
ANTIBIOTICS
By
Michael Gordon Hogberg

Recently there has been much controversy and speculation drawn to the potential
impact of a ban on the use of subtherapeutic antibiotics on the livestock industry. Much
previous research has determined the impact on producers as a homogeneous group. In
reality, swine producers are a heterogeneous group, and a ban on antibiotic growth
promotants could affect producers of different sizes, cost structures, and management
styles in various ways. One of the hypothesis of the study was that high-cost producers
gaining efficiency as the economies of scale are shifted away from the low-cost
producers. This study used average cost data to model how a ban on subtherapeutic
antibiotics would affect high, middle, and low-cost producers. This was done using a set
of equations that linked production data to the cost structure.

This study finds the change in costs do not seem to be great enough for high-cost
producers to compete with the low-cost producers. It is apparent that the ban would limit
or reduce economies of scale in the swine industry. The change in the economies of scale
are sufficient to change cost minimizing (productivity maximizing) from previously low
cost to middle-cost producers for the wean to finish phase. If prices are held constant, a
ban on AGP would make many producers unprofitable, most likely leading to an exit
from the industry. This research suggests that high-cost producers and breed to wean

farms are most likely to exit the industry with a ban on Antibiotic Growth Promotants.

ACKNOWLEDGMENTS

I would like to thank the numerous people that have helped me throughout my
graduate studies to maintain my focus drive. First, and foremost, I would like to start out
with acknowledging my Lord and Savior who without him, none of this would have been
possible and has helped though the good and the bad.

Next, I would to acknowledge my defense committee, whose guidance has shown
the way of conducting and writing a professional paper. I would like to thank my
research advisor Dr. James Oehmke for the countless hours he put in helping me with
format and research questions. I would also like to thank Dr. David Schweikhardt for his
guidance and encouragement throughout my graduate school program. Dr. Kellie Raper
has been there to give advice through everything, from analysis problems to recipes. And
the last of my committee members, I would like to thank Dr. Ron Bates, who has always
encouraged me and kept my physiological side on the right tract.

I would like to thank my parents, Maynard and Anne, who without them, I would
definitely not have been the man that I am today. Their constant encouragement and faith
in me helps in the darkest of times. In addition, I would like to thank one of my best
friends, my sister Emily, who I has often provided a listening ear as well as advice have
always been encouraging.

Finally I would like to thank all of my friends who have stood by me and offered
their words of support and encouragement, in addition to listening to the complaining and
dealing with my frustrations. I feel lucky and blessed to be surrounded by so many good,

caring people.

TABLE OF CONTENTS

LIST OF TABLES ..................................................................................................... v
LIST OF FIGURES ................................................................................................... vii
CHAPTER ONE
INTRODUCTION ..................................................................................................... 1
1.1 Background ..................................................................................................... 1
1.1.1 Summary of Swann Committee Report ................................................ 4
1.2 Problem Statement .......................................................................................... 6
1.3 Justification for the Study of the Change in the Cost Structure ...................... 7
1.4 Objectives of the Study ................................................................................... 8
1.4.1 Specific Objectives ............................................................................... 9
1.5 Methodology ................................................................................................... 9
1.5.1 Identifying Effects of Subtherapeutic Antibiotics ................................ 9
1.5.2 United Feeds Data ................................................................................. 10
1.5.3 Analysis of Change ............................................................................... 11
1.6 Organization of Thesis .................................................................................... 11
CHAPTER TWO
SUBTHERAPEUTIC ANTIBIOTICS IN EURPEAN UNION ................................ 13
2.1 Antibiotic Use ................................................................................................ 13
2.1.1 Past Through Present ............................................................................ 13
2.1.2 Banning AGPS in Denmark and Sweden .............................................. 15
2.1.3 What aided the Transfer to no-AGP Production ................................... 16
2.1.3.1 Market Structure .......................................................................... 16
2.1.3.2 Management Practices ................................................................. 20
2.1.4 The Effects of the Ban on Sweden and Denmark ................................. 22
2.2 Friction Concerning Trade with the US ......................................................... 26
2.3 Using Denmark as a Case Study .................................................................... 27
CHAPTER THREE
PORK PRODUCTION IN THE UNITED STATES ................................................. 31
3.1 Characteristics of the US Swine Industry ...................................................... 31
3.1.1 Overview of Swine Production ............................................................. 31
3.1.2 Use of Antibiotics in American Swine Production ............................... 33
3.1.2.1 The Changing Market Structure and Conduct ............................. 36
3.1.2.2 Market Structure Changes ............................................................ 36
3.1.2.3 Market Conduct Changes ............................................................. 45

3.2 Antibiotics Role in Production and the
Current Market Structure and Conduct ......................................................... 47

CHAPTER FOUR

CHANGES TO THE COST AND MARKET STRUCTURE .................................. 51

4.1 Changes in the Cost Structure ........................................................................ 51

4.1.1 Changes in the Cost Structure Partial Ban ............................................ 57

4.2 Changes in the Cost Structure for a Complete Ban ....................................... 59

4.2.1 A Complete Ban of AGP on Farrow to Finish Producers ..................... 61

4.2.2 A Complete Ban of AGP on Breed to Wean Producers ....................... 65

4.2.3 A Complete Ban on AGP on Wean to Finish Producers ...................... 67
CHAPTER FIVE

SUMMARY AND CONCLUSIONS ........................................................................ 71

5.1 Summary ........................................................................................................ 71

5.2 Policy Recommendations ............................................................................... 77

5.2.1 Policy Learned From Europe ................................................................ 77

5.2.2 Policy Recommendations from this Study ............................................ 78

5.3 Limitations to Study and Future Research ..................................................... 8O

APPENDICES ........................................................................................................... 82

REFERENCE LIST ................................................................................................... 86

LIST OF TABLES

Table 2.1 Productivity impacts in Denmark and Sweden from AGP Ban ................ 23

Table 3.1 All Families of Antibiotics that can be used
in Animal Production in the United States ............................................... 36

Table 3.2 The Effect that Subtherapeutic Antibiotics have on
Production Factors in Gestating and Lactating Sows ............................... 48

Table 3.3 Comparison of Fed Antibiotics Versus Not Fed
Antibiotics (control) in Starter Pig Diets .................................................. 49

Table 3.4 Comparison of Fed Antibiotics Versus Not Fed
Antibiotics (control) in Grower-Finisher Diets ........................................ 50

Table 4.1 Percentage and Nominal Change to the Production
Performance from using AGPS to AGP free ............................................. 57

Table 4.2 Pre and Post Ban Production Costs for All Production
After a Partial Ban on Antibiotic Use in Swine ........................................ 58

Table 4.3 Profits for All Production after a Partial Ban
on Subtherapeutic Antibiotic Use in the Swine Industry .......................... 59

Table 4.4 Pre and Post Ban Production Costs Compared for All Production
for a Full Ban on Subtherapeutic Antibiotic
use in the Swine Industry .......................................................................... 60

Table 4.5 Difference in Above Feed Cost to Feed Cost Ratio
for All Production in the Swine Industry .................................................. 60

Table 4.6 Total Profit Levels per Farm Pre and Post Ban
for All Styles of Production ..................................................................... 61

Table 4.7 Changes in Costs per Hundred Weight for Farrow to
Finish Producers and the Sensitivity Analysis .......................................... 63

Table 4.8 Changes in Costs per Pig for Breed to Wean
Producers and the Sensitivity Analysis ..................................................... 66

Table 4.9 Changes in Costs per Hundred Weight for Wean to
Finish Producers and the Sensitivity Analysis ........................................ 69

Table 5.1 Pre and Post Ban Production Costs Compared for
All Production for a Full Ban on Subtherapeutic Antibiotic
Use in the Swine Industry ........................................................................... 72

Table 5.2 Pre and Post Ban Production Costs for All
Production after a Partial Ban on Subtherapeutic

Antibiotic Use in the Swine Industry ........................................................ 74

Table 5.3 Total Profits for Top, Middle, and Low Production Producers
Pre and Post a Complete Ban on AGP ...................................................... 76

Appendix A The Original United Feeds Data Set
for Farrow to Finish Producers ............................................................. 83

Appendix B The Original United Feeds Data Set
for Wean to Finish Producers .............................................................. 84

Appendix C The Original United Feeds Data Set
for Breed to Wean Producers ............................................................... 85

vi

List of Figures

Figure 1.1 Linkage Between the Use of Antibiotics in

Animal Agriculture and Human Health .................................................. 3
Figure 2.1 Use of Antibiotics as Growth Promotants in Denmark ........................... 16
Figure 2.2 Use of AGP and Therapeutic Antibiotics in Denmark ............................ 25

Figure 3.1 Sales of Non-medicinal Antibiotics
versus the Price of Antibiotics per Ton ................................................... 34

Figure 3.2 Graph of Average Farm Size over Time
and the Use of Antibiotics as Growth Promotants .................................. 35

Figure 3.3 Concentration Ratio of Packers in the Swine Industry
and Number of Head Marketed per Farm on Average .......................... 39

Figure 3.4 Number of Hogs Marketed per Year in Comparison
to the Number of Producers .................................................................... 39

Figure 3.5 Percentage of Hogs Sold to Packers using Non-public Sales .................. 41

Figure 3.6 Market Demand Over the Year
Based on Average Consumption per Capita ........................................... 43

vii

CHAPTER ONE

INTRODUCTION

1.1 Background

Recently there has been much speculation regarding the potential impact on the
livestock industry from imposing a ban on the use of subtherapeutic antibiotics in animal
production. Since the Swarm Committee released its report to the English Parliament in
1969, subtherapeutic antibiotic use has been an issue of global importance. The response
to the Swarm Committee report has been as diversified as the number of countries that
have taken up the matter. Reponses have ranged from Denmark and Sweden banning the
use of subtherapeutic antibiotics in livestock to the United States, which has not yet taken
legislative action (Barlam, 2001).

The use of subtherapeutic antibiotics in livestock started over 50 years ago when
it was discovered that the waste made when fermenting chlortetracycline enhanced the
growth of livestock (United Kingdom, 1969). The growth and intensification of
agriculture at that time was aided by the addition of antibiotics in the feed. The
antibiotics not only helped increase animal growth, but also controlled diseases, mainly
respiratory and enteric diseases. Such diseases are common when intensifying animal
production.

The Swann Committee report caused growing concern over the health risks
associated with feeding subtherapeutic antibiotics to animals. Such animals are at a
higher risk of developing bacteria that are resistant to the antibiotics and of passing those
bacteria on to humans (Mathew etal., 1998). Since the same antibiotics used to treat

animals are often used to treat humans, this could cause health concerns in the future as

commonly used antibiotic treatments become less effective. The European Union will
cease use of all subtherapeutic antibiotics in the livestock industry by the year 2006
(Barlam, 2001). Denmark (2000) and Sweden (1986) have already completed the ban
and England is slowly phasing out the use of subtherapeutic antibiotics. Antibiotic use
continues to be a concern of many countries around the globe, especially in the United
States, which has yet to perform any action on the subject other than gaining information
on approximate costs of implementation.

Recent research linking mutated strains of antibiotic resistant bacteria to feeding
and use in livestock production (Aarestrup, 1999; Davies and Roberts, 1999; Shryock,
1999) have sparked the United States government to examine the problem more
thoroughly. Modern food production presents favorable conditions for bacteria to
develop a resistance to antibiotics. Animals are presented with low dosages of antibiotics
over long periods of time, giving the bacteria time to mutate and develop resistance to
those antibiotics. The resistant strains may then be passed on to consumers through
contamination at the packing plant and improper cooking. While resistance to common
antibiotics is still relatively rare, there are reported incidences of such (Wegener et al.,
1999). There is still some confusion of the amount of risk that is imposed to humans
concerning antibiotic resistance. However, making linkages may become easier in the
future with increasing traceability of food animals. George Khachatourians (1998)
discussed the linkage between the evolution of antibiotic-resistant bacteria and the
increasing resistance to a number of drugs. In one of his examples, salmonella showing a

multi-drug resistance increased from 39% to 97% in a ten-year period.

Antibiotic resistant bacteria from animal agriculture that infects humans can come
from a number of different places. Figure 1.1 shows possible routes that the bacteria can
take from production to consumption, ultimately leading to human health risk. There are
three different ways humans can be exposed including vegetable consumption, meat
consumption, and pets. This health concern has led to the recent interest, especially in
the United States, in the effects of disallowing the use of preventative antibiotics in

agriculture.

Figure 1.1 Linkage between the use of antibiotics in animal agriculture and
human health.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Antibiotics Production .
in animal of animal Pets Community
feeds feeds A

Meat
. . Products
Feces/ Irrigation of
manure/ vegetable
sewage crops
Selection of ‘ i7
Antibiotic-resistant Surface .
bacteria in animals water Humans Hospitals
I

 

 

Source: Khachatourians, 1998.

The choice of the government ultimately turns out to be a political economy
problem. There are financial benefits to the producers and consumers of utilizing more
cost effective ways of producing pork products and passing some of the savings on to the

consumer. However, this lower cost production increases the social risks because of the

greater health risk. Policy makers need to decide where they stand on the issue. Some
governments, as the European Union, have taken the stance of zero risk for their citizens
and banned AGP use. Others, as the United States, have favored the financial return of

producers, and do not currently ban subtherapeutic antibiotics.

1.1.1. Summary of the Swann Committee Report

The Swarm Committee was set up in 1968 by the British Parliament to examine
the growing concern over the use of antibiotics in animal agriculture and the risk
involved to humans. The Swarm report, submitted in November of 1969, utilized the
expertise of many university researchers and specialists. It included 12 sections ranging
across the use and value of antibiotics in animal production, possible dangers, transfers,
and recommendations to the houses on what action should be pursued. One of the main
problems that they encountered was in defining the antibiotics classification. It was easy
to identify the theoretical difference between therapeutic and subtherapeutic use of
antibiotics, but identifying the difference in terms of practical use was more problematic.
As they stated in the report, “Since it is impossible to determine the level at which these
antibiotics have only a purely growth promotional effect and the level at which they take
on a preventative role as well, the definition of such use depends on what is in the mind
of the user” (United Kingdom, 1969, 11). This would have consequence in determining
policy implications.

Originally, the committee looked at the pros and cons of antibiotic use in man and
animals. They found great benefit to individual farmers as well as animals in using these

antibiotics. One example is “This recently published estimate of benefit from present

usage amounted to about £1,000,000; if growth promoting agents were used to the full,
the potential benefit was estimated to be over £3,000,000 annually.” (United Kingdom.
Minister of Agriculture, Fisheries, and Food 1969, 15). The committee then pointed out
health risks for the general public from using antibiotics in animals. These included
antibiotic residues passed on, resistance of bacteria to antibiotics and spread of disease
from animal to man, either through contact or consumption (United Kingdom. Minister of
Agriculture, Fisheries, and Food 1969, 17). So the social welfare of the citizens was
higher than the impact on producers, thus adding to the argument for banning the use of
antibiotics. Identifying dangers from continued use of antibiotics was the joint
committee’s primary goal. Once they had established the pros and cons of using
antibiotics, they moved on to suggesting some courses of action.
Some of the major courses of action that the Swarm Committee recommends are

as follows:

0 Permission to supply and use antibiotics without prescription should be

limited to antibiotics which:
i. are of economic value in livestock production
ii. have little or no application as therapeutic agents in man or animal
iii. will not impair the efficacy of a therapeutic antibiotic
o The use of certain antibiotics (including tetracycline’s, and penicillin)
should be prescription only
0 Feed antibiotics should not be fed to breeding stock
0 A committee should be created that would be in charge and regulate all

use of antibiotics, both human and animal.

This report was a catalyst for other countries to examine antibiotic use, resulting in many

countries adapting at least some of the committee’s recommendations.

1.2 Problem Statement

While government officials in the United States debate which course of action to
take, industry officials and researchers are working to assess what the impact of
subtherapeutic antibiotics removal would be on the various livestock industries. Of
particular interest are the swine and poultry industries as they are the most reliant on the
use of antibiotics to control growth and disease, due in part to their concentrated
horizontal market structure. The United States swine industry uses antibiotics for growth
promotion and disease prevention in 80.1 percent of swine feed rations (N AHMS, 2000).
Additionally, pigs may receive preventative medication in their water, by injection, or
orally. Much research has been done to date on the cost of subtherapeutic antibiotics
removal in the swine industry as well as its impact on prices at consumer level. But
along with production costs, there may also be a change in the market structure.

The question of whether to use Subtherapeutic Antibiotic Growth Promotants
within a country is truly subject to benefit-cost analysis. Some governments choose a no
risk policy for their citizens, like that of European countries. And other countries, like
that of the United States, prefer to support their farmer amidst inconclusive science on the
effects of AGP on humans.

Lawmakers are often faced with the following question: Do the advantages to the
producer outweigh the consequences to the consumer? For the issue of an AGP ban,

governments first have to calculate the impact on costs to the swine industry and

producers. This would include cost of unemployment for those farmers that would have
to exit the industry, added costs, and loss of productivity. Next they have to determine
the Social Cost (impact) of leaving Antibiotic Growth Promotants in production. Some
social costs would be changes in health care costs, food costs, and drug research and
development among others. Then the two costs are compared and a decision is made
based on which stakeholder has the higher costs. Often the social welfare problems are
influenced by the government’s protection policies and favor for either industry or the
citizens. For a country like the United States, the decisions by lawmakers are more based
on conclusive scientific research; thus, passing health care type of legislation is often a
difficult process without scientific certainty. Whereas, countries like those of the
European Union take more of a zero-risk stance when it comes to protecting their
citizens. If there is any scientific proof that something can be harmful to citizens, then
legislatures do not hesitate to change the law to ensure safety of their citizens. The
outcome of social welfare problems is determined by where the protection lies and the

value governments place on their citizens.

1.3 Justification for the Study of the Change in the Cost Structure

Antibiotics have had a great role in production of swine over the past 50 years.
They have contributed to the growth and ability of the United States producer to meet the
demand both nationally as well as globally for pork products. Antibiotics have increased
the growth and production efficiency of the animals as well as decreasing production risk
stemming from slow growth rates and higher disease-related mortality rates. Because of

this, the industry has been able to increase the efficiency of production by gaining

economies of scale in both production and slaughter facilities. These economies of scale
along with more vertical relationships have decreased transportation costs, input costs,
and risk. Antibiotics are not the sole cause of this increase in economics of scale;
however, subtherapeutic antibiotic use has a big role in maintaining economies of scale.
The first step in assessing the changes to cost from a ban on subtherapeutic
antibiotics is to assess the impact at the farm level. Previous studies (Brorsen, et a1. 2001 ,
Hayes, et a1. 2001, and Miller, et a1. 2003) have presumed an ‘average producer’,
implying homogeneity across producers or farms. Realistically, however, producers may
be heterogeneous with regards to different management styles and size of operations.
Producers that have well managed farms may be affected differently from those
producers with relatively poorer managed farms. Also, some producers may utilize
different technological advantages compared to some producers. Some examples are risk
of disease, dependency on antibiotics, cost of labor, etc. that vary with the different
management styles. Many researchers have looked at the cost either to the industry at a
whole or the cost per head or to the average producer, but none of them allowed for a
change in the market structure. Changes to the market structure can be dependent on the

changes that are incurred with the changes in costs.

1.4 Objectives of the Study

The general objective of this study is better to understand the impact of a
subtherapeutic antibiotics ban on the swine industry. This includes analyzing the benefits
of subtherapeutic antibiotics and the effects of removal. The basic question is how such a

ban would affect the costs structures of various types of swine producers.

1.4.1 Specific Objectives

The specific objectives of this study are:

a) To provide an overview of impacts of the European ban on subtherapeutic
antibiotics

b) To look at the United States swine market structure and determine what effect
antibiotics have on the current structure, conduct and performance

c) To identify what effect removal of antibiotics will have on United States swine
producers of varying size and management styles.

(I) To identify policies that could help smooth the transition for producers as they

eliminate the use of subtherapeutic antibiotics.

1.5 Methodology

1.5.1 Identifying Effects of Subtherapeutic Antibiotics

The effect of subtherapeutic antibiotics on the swine industry of the United States
involves three characteristic needs: production values, management styles, and the type
of animal housing that is used. In order to understand how the removal of growth
promoting subtherapeutic antibiotics would affect the industry, the first step is to identify
how antibiotics affect these three characteristics needs. All three of these characteristics
affect the market structure of the industry. How market structure would be influenced by
the removal of subtherapeutic antibiotics is yet to be seen; however, it is crucial in

determining the overall costs of the ban.

Because the ban could have different implications for different management
styles, the impact was examined for 3 different cost structures. For example, in response
to a ban producers can influence growth rates, conception rates, and mortality just by
taking proper precautions or following proper standard operating procedures. The
individual producer’s response is likely to depend on the cost structure that producer
faces. For the purposes of this study the cost structure is a measurement of the farms

management capacity. Farms with lower costs are assumed to be better managed.

1.5.2 United Feeds Data

Cost data was collected by United Feeds Inc., a Midwestern feed company in
Indiana. It includes farms that they service and surveyed, and will be used in this thesis
to determine how the ban will affect top performing, average performing, and low
performing management. The performance was based on cost levels. The production
data provided by United Feeds gives ample opportunity to look into the potential
responses that management has in growing hogs within different types of operations.
There are three different types of production operation for which data are provide: farrow
to finish, wean to finish, and breed to wean. There are 133 farrow to finish, 37 wean to
finish, and 18 breed to wean producers that participated in the survey and were reported.
A full list of the summary data is provided in the Appendices starting on page 82. The
summary provides average cost data and production data specific to that style of
operation and averages for all farms, top third and bottom third performing farms. From
these numbers, the average for the middle third can be extrapolated for an average

management style. To define the top and bottom producers, average costs per head were

10

calculated and the low cost producers were considered the top producers. According to
the data, the top (bottom) producers for wean to finish and farrow to finish farms are also
the larger (smaller) farms in number of head sold per year. In the breed to wean, the

lowest cost farms are the smaller firms.

1.5.3 Analysis of Change

To determine the impact that antibiotics have on management, changes from a
ban on cost levels will have to be identified. To identify these changes, determining how
the production traits affect the total cost structure has to first be identified. Then
determining how the use of AGP affects these production traits and applying them to the
data helps to gain insight into how removal of subtherapeutic antibiotics affects US
producers cost structures. These results will project how the United States producers will
change given that their production style can be determined by the cost structure of the
producer.

For this thesis, a total of 24 simulations were run and the cost and profit levels of
each were recorded. Two simulations were run with all the variables changing to their
“post-ban” level for a partial ban and a full ban. Then holding all other variables constant
at the experimental value, a sensitivity analysis was run on the 11 variables (high and low

values for each) to determine which variables have the highest influence on the profit.

1.6 Organization of Thesis
This thesis is organized into five chapters. Following the introductory chapter,

chapter two is an overview of what has happened in Europe in regards to the ban on

11

antibiotics. Because researchers commonly believe that what has happened in Denmark
gives insight into what is going to happen in the United States (Hayes et al., 2003;
Waddell, 2003), sections 2.1.2 and 2.3 deal with the history of the Denmark situation and
how it compares to the United States situation. Also discussed are the effects of the ban
on two countries that have finished using subtherapeutic antibiotics, Sweden and
Denmark, as well as what aided in the transition to no subtherapeutic antibiotics. In
section 2.2, trade between the United States and European Union is analyzed to
determine the effect that the antibiotic issue may have on trade between these two major
trade partners.

The third chapter deals exclusively with the United States hog sector. It starts out
with section 3.1 looking at the characteristics of the swine industry including the recent
history of antibiotic use as well as the development of the current market structure. This
is followed in section 3.2 by a discussion of how the antibiotics and in particular how
subtherapeutic antibiotics have influenced the current market structure.

Section 4.1 develops an economic model to understand changes in the cost
structures that will result from full or partial bans of subtherapeutic antibiotic use.
Section 4.2 deals with changes that will happen in market structure due to the changes in
the cost structure for a full ban, including a discussion of the results of the change in the
cost structure on the market structure of the industry.

Chapter five is a summary of the results as well as some policy implications and

limitations to the study, and recommendations for future studies.

12

CHAPTER TWO

SUBTHERAPEUTIC ANTIBIOTICS IN EUROPEAN UNION

2.1 Antibiotic Use

2.1.1 Past through the Present

Both European Swine producers and their American counterparts started using
subtherapeutic antibiotics in the mid 1950’s. This management practice was adopted to
help control disease. However, producers quickly found that there were other unexpected
benefits. In addition to incurring less disease problems, the time from weaning to market
weight of 230 pounds was decreased, feed efficiency improved, and the mortality rate
was lower for the herd when antibiotics were included in the feed. (Miller et. a1, 2003)
The antibiotics that were most commonly used were given the name Antibiotic Growth
Promotants (AGP). AGP are generic antibiotics used to treat many common diseases.
When they were first introduced, they were fairly expensive and not very widely used.
However, by the mid 1960’s, the price of AGP was a tenth of that in the 1950’s. Hence,
they grew in popularity as they became affordable to more farmers. Before when there
was an extremely high price, the benefit did not exceed the cost. But in the 1950’s, this
changed as antibiotic costs decreased dramatically, causing the benefit of using them to
exceed the cost. A combination of lower costs, increasing knowledge about the optimal
amount of antibiotics to be fed, and improved understanding of how AGP affect
production helped propel the use of subtherapeutic antibiotics into farm production. This

trend continued until 1969 with the release of the Swarm Committee Report.

13

Following the Swarm report, the public in Europe and to a lesser extent in the
United States became concerned about the health effects of AGP use in livestock
production, and eventually about the environmental effects as well. There is concern that
antibiotic resistant bacteria could potentially get into the environment, specifically
ground water. Humans and other animals and plants would then consume the antibiotic
resistant bacteria. Another concern was that with antibiotics, farms could get large and
concentrated. In a country like Denmark, land is limited. So an increase in farm size was
a concern because it may lead to soil and groundwater pollution; the fecal run-off from
the farms could get into the streams. (Barlam et. al, 2001) This heightened concern in the
public as well as with the producers who were concerned with their sustainability in the
future.

With all this negative publicity and farmers and the public agreeing,
subtherapeutic antibiotics were beginning slowly to be phased out of use in livestock
production. This started in 1986 when Sweden became the first country to stop using
AGP under pressure from the Swedish Farmers Union and consumers. In addition, at this
time (1988) Sweden enacted animal welfare legislation requiring a change in
management practices and housing requirements. (Hayes et. a1, 2003) These
management practice changes likely aided in the transfer of a ban of AGP use. This will
be discussed in section 2.1.3. Other countries have been phasing out the use of AGP
following Sweden’s lead. This has been met with mixed results. Demark banned
selected antibiotics in the 19703, started to phase out the use of all subtherapeutic
antibiotics in 1995, and has completed the phase-out period. (Barlam, et. a1, 2001)

Denmark started by banning AGP used within the finishing segment of production, and

14

eventually moved to a complete ban of antibiotics within the entire production system by
January 1, 2000. Denmark is the example that most researchers are using to determine
the effects of the cost of a ban on the United States pork industry (references). However,

the next section draws lessons from both Sweden and Denmark

2.1.2 Banning AGPS in Denmark and Sweden

Denmark banned penicillins and tetracyclines in the 1970’s in reaction to the
Swarm Committee Report. In 1998, the Danish government enacted a voluntary ban on
the use of all AGP in the grower and finishing phase of production. The government
added a national tax on all AGP in order to stop and effectively phase out the use of these
antibiotics at this level. This tax was levied to the producers that chose to use the
antibiotics (Hayes, 2003). These producers eventually were able to change to no AGP in
livestock diets. Then in late 1998, the plan was extended to all phases of production.
The use of antibiotics as growth promotants is shown in figure 2.1. When the legislation
was passed in 1998, there was a dramatic drop in the use of AGP. By January 1, 2000,

Denmark completed the ban; there has been no use of AGP in the country since.

15

Figure 2.1 Use of Antibiotics as Growth Promotants in Denmark

120
._____\ r—o— Growth Promotants
100

so \

60 \

.0 \

20 \

o . . \\ A

‘Yi r V I '

1996 1997 1998 1999 2000 2001

Year

 

 

 

 

Source: DANMAP, 2000

2.1.3 What Aided the Transfer to no-AGP Production

There are some characteristics of the industry in Denmark and Sweden that aided
producers in eliminating Antibiotic Growth Promotants. Market structure of the two
countries has aided in the rapid removal of antibiotic growth promotants in the diets. The
greatest advantage was from the way that the government mandated changes to

management practices.

2.1.3.1 Market Structure

The market behavior of Denmark and Sweden is similar to that of the United
States in that there is great consolidation between market segments. The main difference
is that markets in the United States are mainly privately held corporations, where Sweden
and Denmark are mainly cooperatives. Swedish Meats is a farmer owned cooperative,
representing 50,000 farmers, which accounts for two-thirds of the hog slaughter in

Sweden. The Danish Bacon and Meat Council comprise ninety-five percent of the total

16

swine producers in the country. Denmark exports 80 to 85 percent of the pork produced
in the country (Barlam etal., 2001). The countries are similar in that the vast majority of
producers belong to a cooperative, and are under contract to supply their whole
production to their cooperative markets. Since the early 1990’s, each country’s industry
has followed this trend and is moving toward greater and greater vertical coordination.
There is also a movement toward greater horizontal integration as larger farms are buying
smaller firms. This has continued despite the elimination of antibiotic growth
promotants. Joining these cooperatives is voluntary for the producers, but market
conditions make it almost necessary for producers to join in a collaborative effort. In
these countries, market structures may have helped ease the transition into the elimination
of antibiotic growth promotants, as discussed below.

In Sweden, the Swedish Federation of Farmers is the umbrella organization that
supports and represents almost all of Swedish agriculture. Much of the pork production
in the country is controlled by cooperatives. These cooperatives in turn have formed
associations and businesses to market their products. This means that the cooperatives
own or are in control of much of the pork industry from farm to the plate. As mentioned
previously, membership is voluntary; however, most producers join to decrease risk
created by economic situation of the industry, such as market access. Swedish Meats is
the largest food group in Sweden. The difference between Swedish Meats and US. firms
is that Swedish Meats is owned by four regional farmers’ cooperatives, whereas mainly
large corporations vertically control the US. system. This means that the farmers really
govern the overall business practices of the organization in Sweden. This unilateral

organization aided in the switch to the ban on AGP (Hayes, 2003). In Sweden, the

17

farmers as well as the public led the fight to ban the use of Antibiotic Growth Promotants
in livestock production (Barlam et al., 2001). The perceived benefits were that it would
increase the worldwide market viability of Swedish pork products and be healthier for the
environment and humans. By having the farmers be proponents of the ban, this allowed
for a smoother transition without having producers protesting the move. One of the
major cultural differences between the European producers and US. producers is that
often the large groups of the livestock production sectors in Europe try to stay ahead of
the government and enact voluntary bans before they become law. This eases the
transition for the producers due to setting timelines themselves, and gives the large food
group cooperatives a bargaining position for their sales. In Sweden, a strong vertically
organized market structure, that is producer owned, saw the change and was able to make
adj ustrnents before a mandated change occurred, and this eased the impact on the
producers to change on their own timeline (Barlam et al., 2001).

Denmark produces 400% of their national demand, so the pork industry is largely
dependent on exports (Barlam et al., 2001). To assure a place in the market, the
government chose to ban the use of subtherapeutic antibiotics to gain share in the
international pork market. The internal market structure of the pork industry is similar to
Sweden in that large marketing groups or cooperatives control much of the countries’
pork production. Thirty percent of the farmers produce 80 percent of the supply of hogs.
The larger farms have multiple Sites for production due to the intense environmental
regulations placed on them. The farmers that belong to cooperatives are required to
provide their entire production to the cooperative, and conversely, the cooperative is

required to buy the whole supply from the farmer(Bar1am etal., 2001). These

18

cooperatives are democratically governed, meaning one farmer counts for one vote. The
farmers act as board members and stakeholders in addition to suppliers of the
cooperative. While this releases the participating farmer from having to do the marketing
of his product, farmers that are not part of these cooperatives are often forced to find a
place to market their products outside the country. This is due to the fact that between
1970 and 2000, the number of slaughterhouses decreased from 70 to three (Barlam et al.,
2001). These three slaughterhouses are run by The Danish Bacon and Meat Council.
The Danish Bacon and Meat council is made up primarily of smaller
cooperatives, which represent 95 percent of the farmers in the country. The other five
percent primarily have to market their hogs to German Processors (Barlam et al., 2001).
As in Sweden, cooperative membership is voluntary, but almost economically essential.
These cooperatives mainly compete against themselves in marketing of their products. ‘
However, they work together to set standards, deal with issues facing the industry, and
trade associations. Most of the market channel is made up of different mini-cooperatives
that make up one or two segments that work with other mini-cooperatives to capture
supplies to reduce risk and ensure a steady supply stream. Also, as in Sweden,
Denmark’s antibiotics are controlled and sold by a government agency, the Danish
Integrated Antimicrobial Resistance Monitoring and Research Programme (DANMAP),
which does not have direct oversight from the Danish Government (Smith, 2003).
Denmark has a tightly coordinated and integrated market system in their pork industry,
which has aided in the transition through a ban on antibiotic growth promotants by
controlling management practices and increasing the information structure throughout the

industry.

19

Through the tight market coordination system that Denmark and Sweden have in
place, they were able slowly to adjust to impeding governmental legislation before it was
mandated. In many cases the laws were put into place because the cooperatives lobbied
for them, allowing producers to set their own timelines. In the case of Sweden, both
producers and public were worried about health and environmental concerns, while
Denmark wanted to create a niche in the international pork market and establish
sustainability. In both countries it was easier to pass and implement a ban because of the
overwhelming support and encouragement of the producer cooperatives (Barlam et al.,
2001). Both countries seem to be heading in the same direction in terms of greater

vertical coordination and market integration.

2.1.3.2 Management Practices

Management practices are important in lessening the impact removal of
subtherapeutic antibiotics could have on swine production, since management practices
can often promote better herd health. Using subtherapeutic antibiotics can make up for
poor management practices, causing management to have a smaller overall effect on the
herd health and growth rates. Management practices have not only been a concern for the
health of the animals, but public concern and outcry have also had an effect on how herds
are managed as well as what is considered proper welfare for the animals. This has led
both the producers and the governments to enact strict guidelines and laws to ensure that
producers are following the proper management plans that the consumer has set forth
(Barlam, 2001). Both Sweden and Denmark have government controlled management

plans that aid in removing antibiotic growth promotants from pork production (Barlam et

20

al., 2001). These government mandated management practices, which lower the chance
of spreading disease, force producers to implement practices, which cause better swine
health and improve animal husbandry. These animal husbandry practices gave the
producer a more cost effective transition into the ban, and lessened the monetary burden
of the ban.

Many of the management practices that are required by law were put in place to
improve the welfare of the animals. These management styles also have the advantage of
decreasing the susceptibility of the animals to diseases, for example legislated practices
concerning animal space allocation and the type of housing that can be used for each
species. In the case of swine, the European Union currently requires an average of two
square meters per head for breeding sows and gilts. (National Committee for Pig
Production, 2004) Denmark and Sweden require that sows farrow in open stalls, which
worsens the laid on death rate, but decreases sow injuries. In Denmark, the government
had the advantage of observing the Swedish transition to no AGP’S. Industry Leaders
and scientists realized that Sweden had to change management practices when they took
subtherapeutic antibiotics out of the system (Hayes, 2003). This led to more welfare
regulations, which controlled the animal density, farm size, and use of slatted floors. In
controlling the animal density and the size of farms, it is normally easier to control
disease as there is a smaller chance of cross contamination both by pigs and humans.

Another management change in Denmark was that the producers had to delay
weaning until 4 weeks of lactation. This allows piglets’ digestive tract to develop so that
they can better digest a soybean meal diet (Harper et al., 2001). Producers have increased

the number of days of nursing to an average of twenty-eight. This means that they

21

sacrifice litters per year to increase the viability of the freshly weaned pigs. In addition,
they also leave the piglets in the farrowing area until they are ready to be moved into
growing pens. This limits the stress that the baby pigs experience at weaning. These two
practices help decrease the stress, thus decreasing the negative impact on the young pig’s
immune system (Ensminger, 2001).

Since the introduction of the ban, these two management changes have aided in a
decrease in morbidity and an increase in producer profits (Hayes, 2003). In changing
management styles and animal welfare requirements, Denmark was able to ease the

transition through their ban and experienced less problems and costs than did Sweden.

2.1.4 Effects of the Ban on Sweden and Denmark

The AGP ban in Sweden and Denmark had consequences that were known ahead
of implementation as well as others that were unknown by producers and policy makers
until full implementation. Removal of antibiotics from hog diets in finishing operations
did not have major consequences However, when nursery pigs were deprived of
antibiotics at the subtherapeutic level, producers incurred higher health problems and
greater costs (Hayes etal., 2003). Some of the bans’ impacts on productivity in Sweden
and Denmark are listed in Table 2.1. It was said that when Denmark imposed the partial
ban, they received eighty percent of the benefits with twenty percent of the costs from the
use of growth promoting antibiotics. However, when instating the complete ban, that fell

to twenty percent of the benefits at eighty percent the cost. (Hayes et a1, 2003) This

22

suggests there is a greater health benefit to using subtherapeutic antibiotics at the nursery

phase.

Table 2.] Productivity impacts in Denmark and Sweden from AGP Ban.

 

 

Sweden Denmark
Age at Weaning + 1 week a
Days From Weaning to reach 25 kg + 5 Days a
Feed Efficiency from 50 to 250 lbs -1.5% -1.5%
Piglet Mortality + 1.5% a
Fattening-finishing Mortality + 0.04% + 0.04%
Piglets per Sow -4.82% -4.82%
Veterinary and Therapeutic Costs (per pig) + $ 0.25
net of costs for feed grade antibiotics + $ 0.25
Lawsonia Vaccine $ 0.75

 

' These costs totaled $1.25 per animal in Denmark and were not broken down into specific
productivity impacts
Source: Hayes, D, H. Jensen. and L. Backstrom, 2003

As shown in Table 2.1, when the ban was enacted in Sweden, the swine industry
experienced an increase in post-weaning diarrhea. Also, post weaning mortality
increased by 1.5% (Hayes, 2003). This can be attributed to stress caused by weaning as
well as the relatively high susceptibility of piglets to disease. Post-weaning diarrhea is
one of the main causes of post-weaning death in nurseries (NAHMS, 2000). As is
evident by Table 2.1, another immediate effect of the ban in Sweden is that the number of
days necessary for the pigs to stay in the nurseries was increased by five to six days. This
was most likely caused by the increase in illness and post-weaning diarrhea, which cause
decreased appetites, slower grth rates, and poorer feed to gain ratios (Casewell, 2003).
In order to combat this, zinc oxide can be used along with other treatments. Zinc oxide,
along with other trace minerals, has been proven to have a positive impact on the health

of the animal. (Lawrence and Hahn, 2001) Due to the concern over higher dosages

23

affecting the environment zinc oxide became prescription in 1998 in Sweden. However,
changes in animal management, hygiene, and feed have helped decrease post-weaning
mortality and other health problems (Barlam et al., 2001). But even with the change in
management, post-weaning death is still 0.5% higher than it was before the ban (Waddell,
2003).

Denmark experienced many of the same results with their version of the ban.
There was one major difference when Denmark acted on their ban: they did not incur the
early costs like those of Sweden’s ban. Animal welfare laws were put in place before
they started the ban, whereas Sweden wrote the laws at the same time as their ban. In
both countries the laws governed management, housing, and feeding styles that producers
were allowed to use. In Denmark the laws helped the farmer ease in to the ban as they
provided for less stress on the animals and decreased the Spread of disease between pigs.
However, Denmark incurred its own problems in discontinuing the use of AGP. Even
though they were able to learn from the Swedish experience, they still had problems with
post-weaning diarrhea. The diarrhea led to an increase in mortality and slower growth at
the same time for the post-weaning piglets (Hayes, 2003). However, the trouble and cost
was not to the same extent that was occurred in Sweden. The Danish producers only
experienced a 0.7% increase in post-weaning mortality and an increase in days to 30 kg
of 2.4 days (Hayes, 2003). An unforeseen effect of the ban was the large increase in the
number of cases of Lawsonia intracellularis infections, more commonly known as failure-
to-thrive disease (Hayes, 2003). The producers that have problems with Lawsonia now

need to vaccinate the young piglets to control the disease.

24

Denmark has a unique position in that they have a government agency that is in
charge of distribution of antibiotics within the country. With this system, they are also
able to document when, Where, and why the antibiotics were used (Barlam et al., 2001).
The data collected showed that after the ban in antibiotics took place, therapeutic
antibiotic use increased as can be seen in figure 2.2. This would be expected due to the
rise in disease that would have otherwise been controlled with subtherapeutic antibiotics.
As can be seen, the use of therapeutic antibiotics has risen continuously since the ban
took place. One of the major concerns of the increase in therapeutic antibiotics is again
the growing resistance of bacteria to the antibiotics. The resistance to therapeutic
antibiotics is of greater concern than the growth promoting antibiotics because
therapeutic antibiotics are often the same drugs as what are used in human treatments
(Hayes, 2003, Waddell, 2003). The bacteria then grow resistance to these antibiotics,

which is a greater risk to human health than the subtherapeutic antibiotics.

Figure 2.2 Use of AGP and Therapeutic Antibiotics in Denmark

 

1 20
1 00
80
60
40

20_M_______ _ ~\ __
o . . Kr . e . k. +

1 996 1 997 1 998 1 999 2000 2001 2002 2003

Year

 

H l +Growth Promotants +Medication

 

   

 

 

 

-« -——— 4

Metric Tons

 

 

 

 

Source: DANMAP 2003

25

2.2 Friction concerning Trade with the US

Europe and the United States have had long-standing disagreements on
agricultural exports and imports. Both governing bodies demonstrate a protective policy
with their agriculture products on the international market (Emerson, 2001). The two
trading partners have had a tumultuous past, especially within the agriculture sector. In
1998, The Transatlantic Economic Partnership (TEP) was created from the preceding
New Transatlantic Marketplace. This partnership was developed between the United
States and European Union as a limited agreement for working out key issues,
particularly in agriculture, audiovisual services, and culture (Bach, 1999). Recent issues
have arisen with the emergence of biotechnology and food safety and the different
political stances for the two partners in the TEP (Burney, 2000).

The disagreement regarding food safety between the United States and European
Union is over one hundred years old. In the 1880’s, the European governments of the
time chose to ban U.S. meat products due to concerns about the slaughter methods being
unsafe and unhealthy. (Leonard, 1999) It was not until Upton Sinclair’s novel “The
Jungle” came out in 1905 that the United States government chose to react.

There are still issues with biotechnology in plants, the use of hormones in beef,
and now with the use of subtherapeutic antibiotics in food animals. These issues have at
times shut down trade between the Transatlantic Treaty partners (Leonard, 1999). Other
issues that have arisen deal with welfare standards of livestock and environmental
concerns. The United States has responded to these regulations as being trade barriers
because they do not have a scientific basis. This leads to large trade barriers that are hard

to dissolve, and cause less international trade and a less effective global marketplace

26

(Bach, 1999). A good example of this is the ban that the European Union has on
hormone-injected beef. The European Union banned US beef imports because of
American producers’ use of growth hormones in production, due to health concerns that
hormone injected beef can have residual effects. The US refuses to accept this as a
reason for a ban because there is no scientific evidence to support the theory. Examples
such as this have led the US and EU to the edge of an all out trade war (Taylor, 2002).

A ban on animals that are fed antibiotic grth promotants has yet to be included
because the whole European Union has not yet completed their ban. However, they are
hoping to complete the ban by 2006 (Food Safety Authority, 2002). This means that

animals fed subtherapeutic antibiotics could soon be banned from the EU.

2.3 Using Denmark as a Case Study

Many researchers believe that Denmark may be the best model to determine the
effects if the United States bans the use of subtherapeutic growth promoting antibiotics.
Denmark was the first country with a similar type of market structure actively to phase
out the use of AGP. Though many similarities exist between Denmark and the United
States, there are far more differences that suggest that the Danish model is not going to
provide accurate or applicable answers to the question: What is going to happen to the
swine industry in the United States if subtherapeutic antibiotics are banned from use?
Much of the previous research tried to answer the question of how much it would cost
United States producers to quit using Antibiotic Growth Promotants. Many of these
studies used the Danish model to determine costs. The results from the Danish ban have

provided us with some valuable information, but cannot be applied directly to the US

27

swine industry due to major differences that would change the cost structure of the
industry. Some of the more common differences are oversight agencies, contracting
between the vertical components of the industry, the management practices already used
within the country, and the thought process of producers.

One of the biggest problems that the United States has run into is their form of
government and the checks and balances that are in place. In 1970, the Food and Drug
Administration tried to follow the rest of the world and ban subtherapeutic use of
penicillin and tetracyclines in food animals because of the results of the Swann
Committee report. In response, Congress threatened to cut back the FDA’s funding if
they followed through with the ban. (Barlam et al., 2001) In Denmark and Sweden, the
parliament does not get involved with how the Ministry of Agriculture is run or any
issues that pertain to policies implemented. The United States government could cause
more of a challenge to implementing a ban on AGP depending on how different agencies
or branches of the government react. Additionally, the FDA is responsible for the
approval of the drugs, not regulating or licensing the use of the drugs. In Sweden and
Denmark, their Ministries of Agriculture are in charge of everything from the approval to
the regulation and licensing of the drugs. This makes it easier to monitor consumption
and means of administration to assure adherence to the ban. The United States has no
current way of tracking this information.

Another big roadblock that the United States has to face, unlike Sweden and
Denmark, is that producers perceive that a ban will negatively affect their profits. In

many cases, the Danish farmers did whatever the government told them to do, while in

28

the United States, farmers may believe that their profitability would be reduced from
using less antibiotics and lobby congress to resist such an action (Barlam et al., 2001).

This is also true from the standpoint of the consumers. American consumers, on
average, do not know where their food comes from and are rather uneducated about food
issues. They feel that the government will take care of any food problems that may arise.
In Denmark and most of Europe, the consumers are extremely aware of what is
happening in the food industry. One of the aspects that helped the ban on antibiotic
growth promotants in Denmark to work was a large market of consumers that demanded
the antibiotic free product and were willing to pay extra to receive it (Hayes, 2003). The
United States consumer wants a safe, cheap food supply. It is unclear whether the US
consumer views antibiotic free pork as safer (are there any studies on this), and if so, how
much they would be willing to pay for pork produced without AGP. The profit that is
driven within small margins in the United States is a major difference between the costs
to American producers and their Danish counterparts.

The different characteristics of the vertical integration in the two countries are
another major factor that would cause a difference in the cost to the industry from the
ban, or the ability to stay in business. In the US system there is an imbalance of power
between the slaughterhouses and the producers, causing the farmer to be less willing to
place a long-term investment in improving or making their management system capable
of implementing a subtherapeutic antibiotic free environment. This could be due to
farmers being uncertain about their future and thus unwilling to take the risk with not
knowing if they will be able to pay off the loan or gain the benefits over time to pay for

it. However, in the Danish system, the industry associations control the slaughter. Since

29

the producers are controllers of the associations, they basically control the slaughter,
which leaves less uncertainty in the future (Smith, 2003). In turn, the producer is more
willing to taking risks in making long-term investments.

One of the more substantial differences between the US. producer and their
European counterpart are the animal husbandry practices. Things like strict adherence to
the all-in-all-out system, increasing the days to weaning, and lowering the stress levels
that the animals experience promote higher herd health. In the US, adherence to the all-
in-all-out is not always followed. Sometimes, slower growing pigs are moved in with
younger pigs to conserve room and open pens for new groups. This exposes the younger
pigs to different diseases and cross contamination. In the current system, pigs in the
United States are weaned one to two weeks before pigs in Denmark. A lesson that is
evident when comparing the Denmark ban to the Swedish ban on subtherapeutic
antibiotics is changing animal husbandry practices and farm management to benefit the
growth will facilitate in the transition (Barlam et al., 2001). Much of the current research
looks at the impact of a ban on United States producers, treating the US hog industry as a
single entity (Hayes, 2001, Hayes, 2003, and Waddell, 2003), when in reality the ban
would affect different levels of producers in different ways. One of the contributing
factors is the style of production system that they use. Some producers are more

dependent on antibiotics than others, causing a difference in the effect of the ban.

3O

CHAPTER THREE

PORK PRODUCTION IN THE UNITED STATES

3.1 Characteristics of the US Swine Industry

The United States Swine industry has changed dramatically in terms of
technology, horizontal structure, and vertical structure over the past couple of decades—
faster than in any previous period of time. There are many factors influencing the rate of
change and the structure that has emerged. Because the consumer influences many
aspects of the industry, consumer preferences are the driving factor for changes.
Technology changes and new information can be attributed to trying efficiently to
produce what the consumer wants. However, producers sometimes have a hard time
adapting to the change. There are many reasons for this: for example, resistance to
change could cause a producer not to accept these new technologies, while the cost
associated with implementing the technologies or changes could be another impediment
to adoption. The following sections provide an overview of some of the more dramatic

changes in the US. Swine Industry during the recent years.

3.1.1 An Overview of Swine Production

The swine industry, like most agricultural industries, constantly tries to adapt to
changing consumer preferences. There are other factors that also affect behavior of
swine producers, such as packer preferences, changes in rural development, and
governmental regulations. For instance, packers have changed the producer’s
management style by slowly increasing the market weight they are willing to accept from

230 pounds in the late 1980’s to the current size of near 270 pounds. This has forced the

31

producer to spend more money and keep the animals longer in order to reach their ideal
market weight. Another change that has taken place is the ever-increasing rural
migration (Meredith, 2003). According to the US Census data, more and more people are
moving out of the city to live in the country]. This has caused tension between the new
population of rural people and farmers. Lawsuits have been on the rise as farmers are
getting sued for infringing on the ability of these people to live comfortably. This has led
to government regulations and laws to protect the farmer from “nuisance” lawsuits and
provide guidelines to follow; examples being the Right to Farm Act, GAMMP’s, and
CAFO standards (Michigan Department of Agriculture, 2005; Michigan Department of
Environmental Quality, 2005). However, even with these outside influences, a
producer’s management style and the overall market structure are still driven by one main
force: the consumers’ preferences.

Consumers have great influence over the price of market hogs, management
styles, and the market structure. For example, in the middle of the 20th century, an ideal
market pig would be short and have over 3 inches of conditioning on the carcass for
added marbling and by-products (i.e. lard and soap). This changed toward the end of the
twentieth century as consumers became more conscious about their health and wanted a
leaner product. That leads to the current animal, which has under an inch of
subcutaneous fat. Producers accomplished this by feeding the pigs higher protein diets
with less use of fats as an energy source. Consumers also want to pay the least amount
possible, which has lead to great consolidation within the swine industry, along with

growth in the vertical integration and coordination to keep costs down. Producers’ desire

 

' In 1950, 23.3% of Americans lived in the suburbs. In 1990 this number had grown to 46.1% according to
the US Census Bureau

32

to minimize costs and maximize their profits has also contributed to the consolidation
within the swine industry. These two factors are the main components behind changes in

the swine industry.

3.1.2. Use of Antibiotics in American Swine Production

Following the release of the Swann Committee report in 1969, the FDA tried to
join the rest of the world and ban Penicillin and Tetracycline use as a subtherapeutic
antibiotic in animal production. Congress had other plans though and threatened to cut
the FDA funding if they went through with the ban. Antibiotic use continues to grow
today in the United States.

In 1963, US. swine producers were using approximately one million kg of
antibiotics in animal feeds per year. By 1980, this number increased to over 3 million kg,
and reached 8 million kg by 1990 (Cromwell, 2002). One of the major contributors to
the increase in antibiotic use was the 1,000 percent decrease in the price of antibiotics
over the 30-year span (Cromwell, 2002). Figure 3.1 shows the cost for antibiotics
compared to the sales of medicinal and non-medicinal antibiotics over a 42 year period.
Sales of non-medicinal antibiotics are the amount of antibiotics bought mainly for growth
promotion reasons. The cost of tetracycline decreased the least with an average cost of
approximately 35 to 40 dollars per kg, where most antibiotics are between 20 and 30
dollars per kg (Cromwell, 2002). The decrease in the cost of antibiotics, along with the
growing knowledge of their impact on growth and ultimately profitability, promoted the

increasing use by farmers.

33

Figure 3.1 Sales of Non-medicinal Antibiotics versus the Price of Antibiotics per Ton

 

 

 

 

[— — — -Tota| Non-Medicinal ------ Price]
12 250
10 200
8 150 f
6 0
100 --
4 E
2 50
o o
O') 1- 0') IO N O) ‘- 6’) L0 N 0) v- m In N O) ‘- 00 IO N O) ‘-
3 In In to In K) to (D (D (O to N N N Ix N co co co co co 0)
O) O) O) O) O) O) O) O) O) O) O) O) O) O) O) O) O) O) O) O) O)
‘- 1- 1- 1- ‘— ‘— F 1- ‘- 1- 1- 1- ‘- ‘- 1- V- ‘- ‘— ‘- v- ‘- 1-
Year

Cromwell, 2005

As producers used more antibiotics in their feed, they discovered that the pigs
could be kept in closer contact without getting sick. This caused farm sizes to grow in
numbers marketed and an increase in the consolidation and vertical integration of the
swine market shown in Figure 3.2. With the increase in consolidation and vertical
integration, subtherapeutic antibiotic use was on the rise to maintain growth rates and
decrease morbidity. With the growing number of pigs in each room and the rooms being
bigger, producers would add antibiotics to prevent major outbreaks of disease and to gain
a more uniform growth performance with the animals (Brorsen et al., 2001). According
to figure 3.2, as farms grew in size, the use of antibiotics increased. The reason for this
is hypothesized that the antibiotics allowed the employees to spend less time managing
the health of the herd, which decreased the cost for the producers as it was not necessary
to hire labor with high skill levels or train as extensively the entry level workers.

Workers did not need to spend as much time looking for the onset of disease and were

34

allowed to focus their time elsewhere. The original use of antibiotics led to changes in

management practices that created a further dependence on AGP.

Figure 3.2 Graph of Average Farm Size over Time and the Use of Antibiotics as Growth
Promotants.

 

 

l Antibiotics ------ Average Farm Size 1

 

12 400.0
r"\ . - 350.0
— 300.0
\ — 250.0
200.0
~ 150.0
~ 100.0
-~ 500
, . . . 0.0

Q: Q
Q: o
'3 '8

 

 

 

 

 

 

 

Number of Hogs Sold

 

 

 

«o 41, «b «o «<5 99 .9, ch» <2?
'3’ '3’ '3’ \°-’ '3 '9 '9 '3’ '3

Year
Source: Cromwell, 2005 and USDA
Red Meat Yearbook, 2005

Cromwell (1991) states that the greatest effect of antibiotics on growth rate and
feed efficiency is on the younger pigs, and that effect declines as pigs get older.
According to the NAHMS report released in 2000, producers used 19% more growth
promotants antibiotics in the nursery than in the grower-finishing phase (82.7% of
nursery pigs fed antibiotics compared to 63.7% of Grower Finisher). This makes it
evident that producers feel that there is more advantage to add growth antibiotics in the
nursery diets than in growing and finishing diets. Research supports the farmer’s

behavior due to nursery pigs being more susceptible to disease from a weaker immune

system (USDA, 2002 and Miller et al., 2003).

35

Because the FDA has not banned the use of tetracycline, it is among the most
frequently used antibiotics in United States swine feeds. In nursery diets, it is the most
often used growth promotant, in contrast to grower-finisher diets, where it is most often
used in disease prevention and treatment. The continued use of tetracycline leads to a
greater chance of antibiotic resistant bacteria, which will make the antibiotic less
effective in both livestock and human treatments. Table 3.1 shows a list of the antibiotics
and chemotherapeutics that the Food and Drug Administration allows to be mixed in
swine feeds. Of these antibiotics and chemicals, Tetracycline and penicillin are most
used in treating human cases of diseases and were cited by the Swann Committee report
as the biggest loss if bacteria become resistant. However, prohibiting the use of
tetracycline would cause producers to have to use another antibiotic or change their

management style.

Table 3.1 All Families of Antibiotics that can be used in Animal Production in the United

 

 

States
Antibiotics Chemotherapeutics
Apramycin Arsanilic Acid
Bacitracin methylene disalicylate Carbadox
Bacitracin zinc Roxarsone
Banberrnycins Sulfamethazine
Chlortetracycline Sulfathiazole
Lincomycin
Neomycin
Oxytetracycline
Penicillin
Tiamulin
Tylosin
Virginiamycin

 

Source: Cromwell, 2002

36

3.1.2.1 The Changing Market Structure and Conduct

At the onset of antibiotic use in the 1950’s there was not much structural change
taking place. Most production happened on small independent farms that were often
diversified in their production. The number of farms has been dwindling and production
has become more specialized (Huffman and Evanson, 1993). Over time the amount of
diversification on the farm has decreased and specialized farms emerged. In livestock,
this became more apparent with the growth in the use of antibiotics. Producers were
able to reach greater efficiency using antibiotics because animals grew faster and growth
efficiency was not lost to disease. With the ability to grow more animals per year,
producers were moving toward confinement farms and greater vertical coordination.

From the 1980’s to today, there has been ever changing market structure and conduct.

3.1.2.2 Market Structure Changes

The market structure is defined as those features that are economically significant
to the behavior of firms in the industry (Caves, 1992). From the increasing concentration
of firms to the end product to the international competition for products, the United States
market structure has gone through a massive change.

Buyer and seller concentration has increased greatly since the 1980’s. Figure 3.5
shows the concentration ratio of the packers versus the average size of farms in the
United States. There are a smaller number of farmers selling to fewer packers. F arms are
becoming large confinement operations, which are able to produce market pigs at a larger
scale of operation. This is evident in figure 3.4, which shows that although the number of

farms has been decreasing steadily over the years, the amount of pork being produced has

37

increased. This means that producers are increasing the number of head they market.
While quantity supplied has increased over the years, the number of sales outlets for
these farms has actually decreased. Many of the smaller packers are getting bought out
by the larger companies or have to close for not being able to gain the economies of scale
their larger competitors reach (Morrison Paul, 2000), which is causing an increase in the
concentration of the market as shown in figure 3.3. Even the large packers are acquiring
other large packers. This was evident when Tyson bought IBP Incorporated (CNN
Money, 2000). Although Tyson was not in the pork packing market before the
acquisition, by the time that the purchase was completed, Tyson was at the top of beef
packing, second in hogs, and first in broiler slaughter. Their status in pork and beef
packing was purely the result of the purchase (CNN Money, 2000). The packing industry
is further consolidating because of a tremendous advantage in using economies of scale
while maintaining harvest capacity similar to production capacity (MacDonald, 2000).
Due to their increased unit price of slaughter, the smaller packers are thus at a

disadvantage to the large packing groups.

38

Figure 3.3 Concentration Ratio of Packers in the Swine Industry and Number of Head
Marketed per Farm on Average.

 

 

 

Packer CR4 ....... Average Size of Farm

 

 

 

 

 

 

 

 

 

 

 

 

 

2000.0
' ~ 1500.0

' - 1000.0

‘1 500.0

 

0.0

 

 

 

Years
Source: National Agriculture Statistics Service, 2005

Figure 3.4 Number of Hogs Marketed per Year in Comparison to the Number of

 

 

   

 

 

 

 

 

Producers
'3, 105000 Hogs Marketed 0. 300000
g 1: 100000 2* 250000
.. 3 _ __ ;'___ “H: __ ”j” 200000
° 3 95°00 " 150000
g § 90000 .7" \ 100000
5 35000 ‘ ' Producers —:_ 50000
80000 1 1 r 1 1 1 l l l r I O

 

o '1, o ‘b o q. u
'30.: '99 '99" ’99 '99 (19° (190 (190

Year

Source: National Agriculture Statistics Service, 2005

39

Number of
producers

Number of Head

An increase in the concentration of an industry typically brings barriers to entry
for any firm wishing to enter into the market. This applies to firms wishing to enter the
swine industry. There are many things that have contributed to this decrease in
accessibility into the market. For one example, there has been an increase in the reliance
of contracts for sales instead of using spot markets (McBride and Key, 2003). Figure 3.5
illustrates the increasing use of contracts and other non-public forms of marketing
between producers and packers. These can either be forward contracts, direct sale to
packers, or other types of direct marketing (Sexton and Lavoie, 2001). Non-public
markets are used by producers and packers wanting to decrease their risk, and contracts
are able to decrease this risk by ensuring supply for packers as well as providing a known
price and market date for producers (Poray, et al., 2003). Because of these contracts and
producers’ ability to fill the needs of the packers, the larger slaughter operations have
been moving away from using stockyards and other forms of spot markets for supply
needs and increasing the use of contracts. In addition to shrinking marketing options,
interested entrants in the market face a high start-up cost. Any prospective producer that
wants to contract has to market enough pigs to meet the contracting company’s
specifications (Poray et al., 2003). As the number of inputs needed to satisfy these
marketing agreements increase, the investment needed has increased. However, there is
one entry barrier that has decreased in the past few decades. Due to increased vertical
coordination, entrants now do not necessarily have to purchase the livestock or feed
(McBride and Key, 2003). They can become contract feeders. A larger company
provides the animals and feed, and then pays the producer for the management of the

animals, normally on a per head basis with production incentives. This presents the

40

producer with an option that requires less initial capital, but raises the question of

whether the farmer is now an owner or an employee.

Figure 3.5 Percentage of Hogs Sold to Packers using Non-public Sales

 

100.0

90.0

80.0

70.0

60.0

50.0
NMVOONQGOFNMV'IDCDNQODOFN
wcoaooooowcooommmmmmmmmmooo
mmmmmmmmmmmmmmmmmmooo
FFFPFFFFFFFFPFFFFFNNN

Year

Source: GIPSA. Packers and Stockyards, 2002

Sunk costs are another characteristic that has changed over the past decades.
Previously, producers could use low-investrnent-cost housing that could be used for other
purposes. This has changed over the past decades, with modern operations requiring
investment in confinement buildings, which do not have another use other than storage or
a swine production building swine housing, resulting in higher sunk costs for the
producer. This asset fixity keeps producers in the business longer than would otherwise
be economically feasible (Johnson, 1972).

The amount of product differentiation is another defining characteristic of the
market structure of the pork industry. As with almost all agricultural products,
diversification in the swine products has been occurring at a rapid pace (Martinez, 2000).
Instead of one homogeneous product that has gone through production to the consumer,
the consumer is now getting a greater choice within their pork products. Whereas a

couple of decades ago, consumers only had the choice of what cut they wanted, they now

41

have the choice of value added products (i.e. microwave meals, Ready-to-Eat products,
and marinated tenderloins) and there has even been brand labeling like that in the beef
industry. This allows the consumer to have a broader choice and added convenience
while allowing the industry to gain a greater share of the consumer’s food budget.
Producers are also using verified and branded products such as Berkshire Gold®,
antibiotic free pork, and other programs to add value to the finished product and increase
profit margins. Berkshire Gold® is a branded breed program to give consumers a more
consistent, tender product. This program was set up by the American Berkshire
Association to utilize the benefits that the Berkshire breed has with consumers taste
preferences. There are two different programs, one for animals that are purebred and
others that are at least 50% Berkshire. This is to distinguish the products on the
international market as Japan only allows purebred Berkshire meat to be labeled as
premium. Antibiotic free pork is currently a niche market where producers are able to
provide consumers that are willing to pay more money to know that the producer did not
use antibiotics in the production. Margins increase due to the fact that packers are more
willing to pay for these higher quality products because their market value is higher to
consumers. When the producer offers a different product to the consumer, he or she is
also able to gain a greater share of the market value.

Another aspect of the market structure is the ever changing market demand. In
agricultural products markets, demand is fairly stable in nature as can be seen in figure
3.6. One of the major drivers of demand for agriculture products is the health
information that has been disseminated to the public. If the public is provided with

information that a certain food is unhealthy, they are able easily to replace it with a

42

substitute. Many close substitutes are another reason for the fluctuating market demand
in agriculture products. For example, swine demand has increased lately due to the BSE

scare in beef, which hit the United States and Canada in 2001 (USDA, 2004).

Figure 3.6 Market Demand for Pork Products Based on Average Annual Consumption

 

 

 

 

 

 

 

 

 

 

 

 

 

per Capita.

"cf, 65.0 Y m -

’6.

E 60.0 ‘ #

3

2 55.0 A —

8

s 50.0 . —~ — —— __, - . mm

'5

3 45.0 V — ———~————

5

g 4000 l l l l I T I ljfi I I l l l T I l l l l I l l l Vi f l 7 l T l I

Q "D Q) 9 (I; <6) 9) '\ bi ’\ Q n.)

\‘9 \‘S\ '3? if? ’99) '9?) '9?) '99 '39 '99 09° (19°

Year
Source: USDA. ERS. Red Meat Yearbook. 2004

Import competition is the final aspect of changing market structure that has been
identified. The United States producers are feeling pressure from other parts of the world
as the market grows. Some of the greatest international competition is from the United
States’ neighboring countries. Canada is starting to produce greater numbers of hogs.
Canada is shipping their hogs to the United States slaughter facilities to gain a higher
price (7.4 million head in 2003; an increase of 30 percent from 2002) (USDA-FAS,

2004). This has pushed the United States producers to sell their hogs at a lower price. In

43

2004, the United States pork producers filed a grievance with the United States
International Trade Commission that Canadian Pork Producers were dumping their
product in America (International Trade Administration, 2005). Dumping occurs when
another governing body sells a product to a country for less then the market price in the
exporting country (World Trade Organization, 2006). The United States International
Trade Commission came to the conclusion that producers were not yet at a disadvantage
with Canadian hogs being “dumped” in the United States industry (International Trade
Administration, 2005). The commission did state, however, that there was dumping
happening, but there was not enough evidence to accuse Canada’s dumping of affecting
the prices received by American Producers (International Trade Administration, 2005).
This shows that there is a growing concern for producers regarding the influx of foreign
commodities on the United States packing industry.

Over the past decades, the United States pork producers have experienced
dramatic changes in the market structure. Swine production has become highly
technologically dependent to reach its current efficiency. With the potential removal of
subtherapeutic antibiotics in the system, this has the potential to change the current
market structure, but the extent of these effects is yet to be determined. Through the
examples above, the market changes that have occurred in the past 20 years could have a
profound impact on the ease of transition for producers to terminate the use of

subtherapeutic antibiotics.

44

3.1.2.3 Market Conduct Changes

Market conduct is another important market property to look at when determining
how an industry will react to a given change. Looking at how companies use policies to
aid their product in the market and responses by industry rivals helps to analyze how
companies would respond to outside impacts. Market conduct is made up of three key
points in business policy: setting prices, setting product quality and other non-price
policies, and seeking strategic advantage and deterring entry.

The first strategy of business policy is the setting of prices. Farmers of the past
never had the chance to set their prices. The most influence farmers had in the past was
determining when they took the animals to market, and so could gamble that the price
would increase if they delayed. The market was competitive and producers sold at spot
markets, thus the price they received was dependant on the supply of hogs that day and
the demand from packers. Producers had little control over the price that they received at
the market. Then, as farms became bigger, producers started finding ways to set the price
in order to diversify some of their risk. Contracts with packers started to become a more
popular way of marketing in addition to providing a higher proportion of the consumer’s
dollar to the farmer. Each farmer that uses a contract based marketing system is
diversifying more of his risk than his predecessors. Producers now are closer to being
able to set their own prices and diversify risk as they can negotiate future prices with the
packers. In the late 1990’s a problem arose because they could not observe what other
producers are receiving from packers. This problem of poor information was somewhat
alleviated by the passing of the mandatory price reporting act in 1999. This act stated

that all base prices had to be reported to the USDA so that producers can find the prices

45

other producers received for their animals. Producers are gaining more and more control
over the price setting for live market hogs, and are gaining more information about their
competitors.

Another aspect of business policy that goes into market conduct is control over
quality and other non-price related policies. The main driver of quality, like in most
agriculture products, is the consumer. Hog producers have improved product safety by
establishing guidelines that all producers can follow to ensure proper quality and to keep
flaws in the meat to a minimum. Pork Quality Assurance (PQA) helps to teach the
producer about withdrawal times, proper injection sites, and proper handling. This is to
reduce bruising of the carcass and decrease the antibiotic residue in the final product. It
also decreases trim loss at the packing plant by keeping the injection sites away from the
more expensive cuts of meat. There has also been an increase in the number of
operations that are owned by or market with packers and created a brand name product to
sell to consumers. These brands stand out from the normal commodity pork and allow
the consumer to have more choice in the brands that they are choosing from. There may
not be a significant difference between brands, but the number of brand choices is
increasing.

The final business policy area to look at is using strategic advantage and deterring
entry into the industry. Producers have typically produced a commodity product, which
neither uses a strategic advantage nor deters entry. Beef producers have adapted to
different conditions and given themselves a strategic advantage by creating
diversification within the industry. They have created branded beef products, which

target different niche markets and allow the producers to gain more profits. Pork

46

producers have not created branded products to the extent of beef producers. Yet, there
are a few exceptions: and one is Berkshire Gold®. The biggest way that producers have
been able to deter entry into the industry, as discussed in section 3.1.2.2, is the use of
contracts. Substantial capital investments and a shrinking free market to sell to are
deterrence’s for new producers (McBride and Key, 2003). Producers use strategic
alliances more than creating niche markets to gain a strategic advantage over other

producers.

3.2 Antibiotics Role in Production and the Current Market Structure and Conduct

AGP have different advantages at each stage of production. These advantages
allow producers to intensify their production in many ways. The use of subtherapeutic
antibiotics as growth promotants has given producers an increase of about three dollars
per head (Cromwell, 2002) for use in starter and grow-finisher diets; this includes
subtracting the cost of the antibiotics. This figure only counts the savings from the
growth of the pig, not the extra income the producer would receive using a value based
system where uniformity, muscle quality, and age of animal would gain more money, and
does not include the effects of widespread AGP use on prices received by producers.
With this extra capital, the producer can re-invest more capital into the farm business,
which could lead to more intense production. Subtherapeutic antibiotics in production
affect the industries’ market structures and conduct through growth promotion, disease
control, and providing higher production numbers.

The use of antibiotics in gestating and lactating sow feeds has the smallest impact

relative to other production stages. Table 3.2 shows that using antibiotics in gestating

47

and lactating sows has little effect on litter production numbers. It also shows that there
is a great benefit when antibiotics are used and management is held constant at average
levels. In some cases, adoption of proper management techniques generates larger gains
than antibiotics use at this stage of production. In a study done in 1964 by Mayrose et al.,
the farrowing rate decreased through the use of antibiotics. Although this may be due to
poorer management practices in the control group, it shows that knowledge may be more

important than use of antibiotics.

Table 3.2 The Effect that Subtherapeutic Antibiotics have on Production Factors in
Gestating and Lactating Sows.

 

 

Production Measure Antibiotics (1963- No Antibiotics (1972-1985)
1972)

Number of Litters 398 688
Conception Rate (%) 91.4 82.6

Number of Pigs Born per Litter 10.8 10.2

Live Pigs per Litter 9.8 9.3

Average Birth Weight (kg) 1.29 1.38

Number weaned (21d) 8.8 7.5

Average Weaning Weight (kg) 5.67 5.37

Survival of Live Born (%) 89.7 80.9

Incidence of Mastitis, metris,
and agalactia
Source: Cromwell, 2002

<10 66 (for 1972-75 only)

Antibiotics show their greatest effect in decreasing production costs and
increasing gain when fed in starter diets as is evident from the Danish Ban example
(Hayes, 2003). This is because the younger pigs have a higher susceptibility to disease.
Newly weaned pigs have a higher susceptibility to disease than any other pigs because
they are under great stress after weaning and have an underdeveloped immune system,

causing a decrease in the ability of the immune system to fight off diseases (Ensminger,

48

1991). The stress of weaning, changing dietary forms, and changes in the environment
increases the chances illness among newly weaned pigs. Antibiotics help prevent
bacteria from infecting the newly weaned pigs. This leads to a lower mortality rate and a
higher rate of gain for young pigs. Table 3.3 shows the advantages of using antibiotics in
starter diets. Starter pigs in this table are categorized as 6 to 20 kg (14 to 44 lbs). The
mortality rate is cut in half, from 4.0% in the control group to 2.0% in the AGP group.
The number of days the pigs are fed falls from 35.9 to 30.8, a reduction of 5.1 days. It
would be more difficult to duplicate these gains with a change in management styles due

to the nature of the starter pig’s susceptibility to diseases.

Table 3.3 Comparison of Fed Antibiotics Versus Not Fed Antibiotics (control) in Starter

 

 

Pig Diets.
Production Measure Control Antibiotics in Diet
Daily Gain (kg) 0.39 0.45
Feed/pound gain 2.28 2.13
Mortality (%) 4.0 2.0
Number of Days 35.9 30.8
Feed (kg) 31.9 29.7

 

Source: Cromwell, 2002

The final stage of production where antibiotics are used is in the growing and
finishing diets. These pigs normally weigh between 20 and 115 kg (44 to 253 lbs). This
stage has a lower risk of disease because the pigs have had a chance to gain immunity to
the diseases present in the herd. Antibiotics at this stage are mainly used for growth
promotion and improving feed efficiency (N AHMS, 2000), as is evident from Table 3.4.
AGP caused reduction in pounds of feed used per pound weight gain and number of days

on feed indicate a greater efficiency in the diets with antibiotics.

49

Table 3.4 Comparison of Fed Antibiotics Versus Not Fed Antibiotics (control) in
Grower—Finisher Diets.

 

 

Production Measure Control Antibiotics in Diet
Daily Gain (kg) 0.75 0.78
Feed/pound gain 3.30 3.23
Number of Days 126.7 121.5

Feed (kg) 314 306

 

Source: Cromwell, 2002

As evidenced in earlier discussions, AGP allows producers to increase
productivity and efficiency while decreasing production costs. It also leads to more
uniform growth, and less managerial time looking for and treating sick animals. Before
the heavy use of subtherapeutic antibiotics, producers had to worry about the spread of
disease, causing the need for a low number of animals per room and outdoor housing.
This changed with the growing use of antibiotics as buildings were constructed to house
more animals in bigger rooms. Confinement operations were gaining popularity as the
method for growing and finishing hogs to take to packers. This was due to the fact that
more animals could be raised within a smaller land base, and fewer personnel were
needed to watch over them. Antibiotics provided some of the means necessary to reduce

the risk associated with disease and an intense farming operation.

50

CHAPTER FOUR
CHANGES TO THE COST AND MARKET STRUCTURE

4.1 Changes in the Cost Structure

Removal of AGP from the pork industry will likely have a greater impact on the
cost structure of producers than the revenue. With the expected increase in mortality
rates, sort loss, and feed costs per gain; producers could face a challenge in maintaining
low production costs. Changes in costs along with size constraints for production
facilities may cause producers to have to either adopt new technologies or move to less
spatially efficient production systems (more square foot per head). However, the total
impact also depends on the producer’s size, production system, management skills, and
whether there will be a full or partial ban. A partial ban would directly affect the grower/
finisher feed additives and the producers involved with this stage of production (Farrow
to Finish and Wean to Finish), while a full ban would affect all stages of production.

The overall change in the feed cost per pound gain will depend on two factors: 1)
the change in average daily gain (ADG) and 2) the change in feed efficiency. According
to accounting, the cost of using antibiotics in feed is considered a veterinary expense.
However, ADG and feed efficiency will change feed costs per pound gain dramatically.
Not only do pigs receiving subtherapeutic antibiotics grow about 10 percent faster, but
also they are about five percent more efficient in converting feed to body weight
(Mathews, 2001). This lowered efficiency will have a greater affect on total cost for
lower cost producers, but marginally, could cost the higher cost producers more. Lower

cost producers may be benefiting from economies of scale and the ability to buy feed in

bulk.

51

In terms of non-feed costs, there are many factors that change with respect to the
size and style of the operation. Of the $43.65 million spent on veterinary expenses in the
swine industry, $21.4 million of it is on antimicrobial feed additives (USDA, 2001). This
means that the veterinary expense should decrease by 49%. However, there will be a cost
incurred by the producer to treat animals that do get sick. This increase of sick pigs will
then slow grth and likely raise the labor cost as workers would have to spend more
time treating sick animals and identifying problems. Costs for therapeutic antibiotics are
greater than the cost of subtherapeutic antibiotics, thus possibly off-setting the reduction
of AGP cost and may cause minimal change in veterinary expenses.

Mortality on a farm can have a significant impact on its profit. Death loss will
increase as a result of a ban, as is evident in studies conducted where subtherapeutic
antibiotics were taken out of the feed and compared to groups with varying levels of
antibiotics in the feed (Cromwell, 2002; Hayes, et al., 2001; Mathews, 2001). The
average mortality difference, as reported by Cromwell (2001), was an increase of 2% in
deaths. This translates into an increase in cost of $0.46 per head from mortality if AGP
are to be taken from the system (Miller et al., 2003). The majority of the cost from death
would be in the nursery and farrowing stages as indicated in chapter three.

Sort loss can have its affect on the producers bottom line as well. Pigs under or
over a certain weight will receive a discount by the packer. Antibiotics have been shown
to help reduce market weight variability (Tillman, 1996), which leads to higher profits for
producers. It was found that there would be an overall sort loss of $1.39 per pig.

However, due to the increased days on feed for the group, allowing for slower growing

52

animals to reach the target range, would cause the cost to be one third as much, or $0.49
per pig, on average (Liu et al., 2003).

Wages that are paid to the employees may also be affected by a ban on antibiotics.
Employees will have to increase the time spent observing and treating animals. In
addition, employee’s average wages may increase because education (training) levels
would increase due to the demand for employees that were able to correctly identify
diseases and proper treatment. A study done by Wade and Barkley (1992) determined
that the change to the human capital would be 5.236 percent with the removal of
antibiotics. Data from a survey done by the National Hog Farmer (2005) was then used
to help adjust this change to a more modern number. This was done by multiplying the
percentage change (5.236%) by the change in education (training) levels of employees
since 1992 (4.8892%). Because there has been an increase in education over the past
decade of the average swine employee, the percentage change was then dropped down to
a 4.98 percent change in labor costs due to a ban on AGP. Ideally labor would be more
descriptive for various management styles and their characteristics, but due to insufficient
data, this could not be conducted.

If an AGP ban implies fewer animals marketed per farm, then per animal fixed
costs for production would increase. Due to mortality rates, lower numbers weaned, and
less litters per sow cause fewer animals sold per year in which to spread the fixed costs
over

Currently, antibiotic use allows producers to reach a greater efficiency through
lower cost of production. In order to estimate the changes to the swine industry after a

ban on AGP, different management styles need to be observed. For this study, cost

53

structure will be used as a determinant of management and how antibiotics affect the
different cost structures is a method of determining how the different management styles
will react to the change. Management skill is often hard to quantify for individual
producers; their reaction to the ban may be unknown. However, using cost structures for
groups of producers at different efficiencies can provide insight into how different
management styles could dampen or magnify the total affect on producers from banning
AGP.

Changes in production values were determined by taking data from a study done
at the University of Kentucky. The farm used antibiotics, and then switched to an
antibiotic free herd for the reason of research safety. Production data was kept on the
farm for the nine years preceding the change and for the following 13 predeceasing years
(Cromwell, 2002). The categories for this production data are given in table 4.1.
Percentage change was calculated using the University of Kentucky Data for

subtherapeutic antibiotic free and AGP herds through the following equation:

% change = (antibiotic free-antibiotic)/antibiotic (1)

This formula allows the production data to be changed according to the same magnitude

found in the University of Kentucky (UK) study. These numbers were considered the

average affect a ban on AGP would have on production and costs. In order to get a range

of impacts a higher impact and lower impact was found by adding or subtracting 10

54

percent from the average calculated effect. This was done by using the formula

established here:

((Antibiotic free-Antibiotic) i (|Antibiotic Free-Antibioticl *.10))/Antibiotic (2)

This allowed for a range of approximately 10 percent for errors and variations of effects
and physiological differences. The results from formulas one and two are represented in
table 4.1.

After these changes in the production characteristics were calculated, the next step
was applying these changes to the production data from United Feeds. First, the middle

third of producers had to be calculated. This was done by using the following equation:

Middle third values = ((AF* #)-(TF *#/3)-(BF*#/3))/(#/3) (3)
AF - All F arms
# - Number of Farms
TF - Top Third of Producers
BF — Bottom Third of Producers
Once the values for the middle third of producers were calculated, equations could then
be assigned to the production values. The production figures were placed into an

equation to distinguish how that factor affects the total cost of production, matched up in

table 4.1. This was done using the following equation:

New Production Value =Original Value + (Original Value“ % change) (4)

55

Changes were all matched up with the production factors and changed for all variables
that were identified in table 4.1. The new numbers provided a change in the cost
structure for differing levels of the management skill and how each level would be
affected from the change. A sensitivity analysis was then conducted to determine how
the results fluctuated by using the high and the low changes for each of the variables. For
certain production characteristics that had more than one change from the UK study, the
changes were calculated as a combination proportional to the amount of change that was
taking place. For example, in the United Feeds Data, there was only one value for the
amount of feed in wean to finish production. However, the UK study showed different
changes for the newly weaned pigs and the finishing pigs. In order to account for this
change, the total feed intake was taken on a percentage of the weights in the stages. For
instance, the pig is in the starter phase for 12.8% of the total growth weight. So the final
feed intake was multiplied by 12.8% to account for the time spent in the nursery. The
same was then done for the finishing phase and then the results were added together.
Once it was discovered how the production characteristics affected the costs, the
production figures were matched up with their corresponding changes from the
University of Kentucky study. The changes were applied by multiplying the percentage
change to the production figures to gain a probable performance from the ban on AGP.
Equations were then identified using accounting methods that linked different production
aspects so changing one variable would affect another, which in turn would affect the

costs that the producer endured.

56

Table 4.1 Percentage and Nominal Change to the production performance from using

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AGP to AGP fiee.
Avg.
Average % Avg. United United
United Feeds Production Change from Feeds before Feeds afier
Measure Production Measure U of K Study Change ChanL
Litters/Sow/Y ear (B to W) Litters/sow/year -0.09628 2.22 2.01
iigs sold/sow/year (F to F) Litters/sow/year -0.09628 16.52 14.08
Number of Hogs Sold (F to F) Number weaned -0.14773 8156 6198
Weaned Pigs Sold/Y ear (B to W) Number weaned -0.14773 16092 12508
Pigs/sow/Y ear (B to W) Survival of Live Born -0.08800 19.95 17.00
AllHfls Sold (F to F) Survival of Live Born -0.08800 8156 6198
Total Feed/CWT of Pork (F to F) Daily Gain (starter) -0. 13333 331.30 347.92
AveragQDaily Gain (W to F) Daily Gain (starter) -0.l3333 1.43 1.36
Lbs of feed/hog/day (F to F) Feed/gain (starter) 0.07042 4.21 4.27
Lbs of feed/head/day (W to F) Feed/gainistarter) 0.07042 4.04 3.95
Total Feed/CWT of Pork (F to F) Feed (starter) 0.07407 331.30 347.92
Total Feed/CWT Pork (W to F) Feed (starter) 0.07407 282.59 291.69
All Hogs Sold (F to F) Mortality (%) 0.02000 8156 6198
Mortalig Rate (W to F) Mortality (%) 0.02000 3.82 5.83
Total Feed/CWT of Pork (F to F) Daily Gain (finisher) -0.03846 331.30 347.92
Average Daily Gain (W to F) Daily Gain (finisher) 0.02167 1.43 1.36
Lbs of feed/hog/day (F to F) Feed/gain (finisher) 0.02167 4.21 4.27
Lbs of feed/head/day (W to F) Feed/gain (finisher) 0.02167 4.04 3.95
Total Feed/CWT Pork (F to F) Feed (finishq) 0.02614 331.30 347.92
Total Feed/CWT Pork (W to F) Feed (finisher) 0.02614 282.59 291.69
Labor (F to F) Labor 0.0498 5.82 6.71
Labor (B to W) Labor 0.0498 7.62 9.32
Labor (W to F) Labor 0.0498 3.43 4.52

 

 

 

 

 

 

4.1.1 Changes in the Cost Structure for a Partial Ban

A partial ban includes only AGP fed during the growing and finishing phase of

production. Antibiotics are mainly fed at this stage for grth promotion and not to

control the onset of disease. This means that these producers on average should have the

57

 

easiest time adjusting to the ban. A partial ban would also allow the industry to respond

with a minimal effect since they are not disease reducing.

Table 4.2 shows the changes in cost for the three different types of management

dependent on their previous cost level. The breed to wean producers would not notice a

difference as a partial ban would not affect them.

Table 4.2 Pre and Post Ban Production Costs for All Production after a Partial
Ban on Antibiotic Use in Swine

 

 

 

 

 

 

 

 

 

 

 

Farrow-FinishI Breed-Wean2 Wean-FinishI
Pre Post Pre Post Pre Post
High Management $38.92 $39.52 $24.91 $24.91 $40.93 $41.78
Medium Management $40.89 $42.06 $28.48 $28.48 $41.46 $41.73
Low Management $45.09 $48.12 $32.37 $32.37 $45.87 $47.69

 

 

 

IReported as cost per hundred weight
2
Reported as cost per head

According to these changes, the cost minimizing firms for the Wean to Finish
operations would change from the top third to the middle third. This means that there
could be a diseconomy of scale with the removal of antibiotics in the grower/finisher
diets. In the data, the top third of producers also happens to be the larger firms and the
bottom third of producers on average are the smaller producers. Assuming that the firms
are cost minimizing firms and are representative of their size, this means that there might
be a shift in the market structure of the industry to smaller, more cost efficient facilities.
Some of these firms may be taking part in captive supplies by the packing industry and

have requirements to maintain large farms. Although these firms are not profit

58

maximizing or cost minimizing, they still are making a profit, as indicated in table 4.3,

with their new costs as presented in table 4.2.

Table 4.3 Profits for All Production after a Partial Ban on Subtherapeutic Antibiotic Use

 

 

 

 

in the Swine Industry.
F arrow-FinishI Breed-Wean2 Wean-FinishI
High Management $12.19 $8.07 . $10.17
Medium Management $9.15 $5.93 $11.44
Low Management $3.87 $6.81 $4.51

 

 

 

 

 

 

IReported as profit per hundred weight
2Reported as profit per head

4.2 Changes in the Cost Structure for a Complete Ban

Changes to the cost structure for a complete ban of AGP are greater than that of a
partial ban, and affect more producers in the industry. Weaning pigs have the hardest
time adapting to the change physiologically, thus causing the bottom line of these
producers the most (Hayes, 2001). This is due to the decrease in the total number of pigs
produced (income) and also causing the fixed costs per pig or hundred weight to increase.
A full ban on AGP will produce similar results as a partial ban for wean to finish
producers, but breed to wean and the farrow to finish producers costs should change more
dramatically then the partial ban.

Table 4.4, shows the average cost before and after the ban. Like the partial ban,
the low cost producer for wean to finish producers changes to the middle producer. This
is discussed later in section 4.2.3. All other producer’s average costs remain in the same
rank. Another interesting result from the ban is that the costs other than feed are most

significantly affected by a ban on antibiotics for all production groups with the exception

59

of wean to finish producers. The changes in above feed cost to feed cost ratios are
provided in table 4.5 for each of the different producers. Using the above feed costs and
dividing them into the feed costs calculated the ratios in table 4.5. This shows that
production phases with higher ratios should be affected greater by the ban, giving
evidence that the benefits of feeding antibiotics are better for the phases that are not as
feed intensive. Evaluations of the results of the full ban, separated by production style,

are discussed in the following sections.

Table 4.4 Pre and Post Ban Production Costs Compared for All Production for a Full Ban
on Subtherapeutic Antibiotic use in the Swine Industry

 

 

 

 

 

 

 

 

 

 

 

 

Farrow-FinishI Breed-Wean2 Wean-FinishI
Pre Post Pre Post Pre Post
High Management $38.92 $45.65 $24.91 $34.64 $40.93 $42.42
Medium Management $40.89 $46.56 $28.48 $36.12 $41.46 $42.37
Low Management $45.09 $53.65 $32.37 $39.33 $45.87 $48.46

 

 

TReported as cost per hundred weight
2Reported as cost per head

Table 4.5 Difference in Above Feed Cost to Feed Cost Ratio for All Production in Swine

 

 

Industry
Farrow-Finish Breed-Wean Wean-Finish
Above Feed Cost:
Feed Cost 4.373 5675 1.342

 

 

 

 

 

 

Table 4.6 shows the total profit levels of farms with the varying cost structures
before and after the ban takes place. While both middle and low management firms are
able to decrease the distance between them and the top firms, neither is able to catch the

large firms in terms of total profit level. Previously profit maximizing firms appear to

60

remain as the profit maximizing firms after a ban on antibiotics. This means that high
profit firms are not going to shift out of their current market size; however, they will
loose some efficiency. It is interesting to note that even though the producers may have
switched their profits on a marginal basis, there was no change in total profit for the
various production styles with the exception of the breed to wean producers. For breed to
wean producers the middle cost producers move ahead of the low cost. Even though the
low performance producers for the breed to wean are the largest, it doesn’t aid them after

the ban like the rest of the producers.

Table 4.6 Total Profit Levels per Farm Pre and Post Ban for All Styles of Production

 

 

 

 

 

 

 

Farrow to Finish Breed to Wean Wean to Finish
High Pre $389,679.59 $95,425.56 $245,149.62
Management Post $142,414.98 -$29,856.40 $208,067.98
Medium Pre $233,152.33 $94,023.57 $192,289.08
Management Post $81,692.84 -$25,907.70 $173,900.58
Low Pre $84,253.60 $67,538.16 $102,525.30
Management Post -$13,271 .50 -$52,512.20 $60,500.62

 

 

 

 

 

 

4.2.1 A Complete Ban of AGP on Farrow to Finish Producers

The cost changes in table 4.7 displaying the difference in the traits that were
developed using the formulas one through four. This table shows that there is an
advantage to the middle third of producers; however, the top third of producers still have
the lowest cost level. The bottom third of producer’s costs level increases enough to drop
profit below zero, so therefore should exit the industry or change their technology to
capture more economies of scale that the higher management firms have already

captured.

61

 

The effects of the ban could potentially increase costs to a range of $45.31 to
$53.80 per hundred weight depending on the previous profit category. The number
weaned, survival of the live born, and labor are the most sensitive factors to the changes
from antibiotics. Producers that are considered as medium management are affected the
least by the antibiotics. This could be due to lower fixed costs than the other
management styles as well as having better production ability. By spreading their lower
fixed costs over the inventory, the change in total costs is less than the top producers.
The low management producers appear to remain the lowest because their production
costs are the highest before the ban, and therefore the change in total costs is going to
remain the highest, and in this case exceed the input. The low management producers

appear to experience a negative profit, likely forcing them to exit the industry.

62

Table 4.7 Changes in Costs per Hundred Weight for Farrow to Finish Producers and the

Sensitivity Analysis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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63

Table 4.7 Changes in Costs per Hundred Weight for Farrow to Finish Producers and the
Sensitivity Analysis Continued

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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64

4.2.2 A Complete Ban of AGP on Breed to Wean Producers

When the scenario for the complete ban of AGP was simulated for the breed to
wean producers, the change in costs resulted in negative profits for every group. This
may indicate that the breed to wean industry is competitive or vertically coordinated
enough that savings were passed on to the wean to finish production facilities through
lower prices. The potential new level in costs are in a range from a high of $39.86 to a
low of $34.07 per head sold depending on the previous profit level. Cost structure of the
producers will apparently remain the same after a ban is enacted. With the relatively
dramatic change in costs, many of the producers fall to a negative marginal profit. This
means that unless there is a change in feeder pig prices, no breed to wean producer would
be able to make a profit. Even if feeder prices increase, producers all three groups may
decide that raising feeder pigs is not profitable enough anymore and change to a farrow to
finish operation where they could collect gains or opt to leave the industry.

The breed to wean producers exhibit the highest above feed cost to feed cost ratio,
shown in table 4.5. Because antibiotics affect the physiological production of the sows,
not the feed efficiency or feed intake per head, it is no surprise that these producers could
potentially take the biggest hit from a ban on AGP. Most of the benefits associated with
the use of antibiotics for this stage are with hogs produced and the amount of weaned
pigs sold. It has been found however, that producers could therefore, with proper

management, offset the significant effects of the change in use of antibiotics.

65

Table 4.8 Changes in Costs per Pig for Breed to Wean Producers and the Sensitivity
Analysis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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66

The sensitivity analysis shows the same as the farrow to finish producers; the
labor and number weaned variable can be most sensitive to changes followed by survival
of live born. This is due to the fact that labor and number of animals weaned make up so

much of the above feed costs.

4.2.3 A Complete Ban of AGP on Wean to Finish Producers

Wean to finish producers are affected the least by a ban on AGP in terms of
changes in costs. With the costs potentially ranging from $42.39 and the $48.79, wean to
finish producers will have an easier time adjusting to the ban than other producers. This
is due to the nature of the operations. Most of the operations are all-in-all-out and keep
the animals in groups. This helps to decrease and control diseases within the herd.

In wean to finish production, like farrow to finish production, we see a change in
the economies of scale. The medium management producers have the lowest cost
because of a shift of cost minimizing size due to the ban on AGP. This indicates that the
previously medium cost producers are reaching greater economies of scale, and the high
management producers have passed them and are potentially large enough to reach
diseconomies of scale. Table 4.9 shows the differences in costs before a ban and after a
ban and the sensitivity of individual characteristics.

Table 4.9 shows a non-proportional growth in costs where the middle producers
actually become the low cost producers. This would cause a shift for producers that are
cost minimizing to replicate the medium management production style. Profit
maximizing producers will already be in the middle pre-ban, because the middle third of

producers were already had the highest profit levels.

67

The change in above feed cost to feed cost ratio, displayed in table 4.5, is the
lowest of all the other production categories. This is the result of the antibiotics mainly
providing benefit to the growth and feed efficiency. This means that if AGP stopped
being fed to the grower and finisher pigs, they would require more feed to reach the same
market weight. There is little difference in the mortality rate of the animals after the

weaning stage, so antibiotics do not have a significant effect on the total number sold.

68

Table 4.9 Changes in Costs per Hundred Weight for Wean to Finish Producers and the
Sensitivity Analysis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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69

Table 4.10 Changes in Costs per Hundred Weight for Wean to Finish Producers and the

Sensitivity Analysis Continued

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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70

CHAPTER FIVE

SUMMARY AND CONCLUSIONS

5.1 Summary

The impact of a ban on Antibiotic Growth Promotants (AGP) depends on the
structure of the swine industry and on the nature of the ban. Many studies have examined
the effects of a ban on consumers and producers, but these studies have considered swine
production and producers to be homogeneous. However, producers manage various
types of operations, and even within an operational type, have different cost structures.
These differences mean that the effect of removing AGP from production will affect each
producer differently. Viewing the swine producer as heterogeneous leads to interesting
conclusions about how an AGP ban would impact the various cost structures.

The question posed at the onset was whether an AGP ban would impact various
cost structures differently; in particular whether a ban would have a relatively larger
effect on low-cost producers. Low-cost producers typically operate larger farms that
generate economies of scale by spreading their labor and fixed costs over a greater
number of animals. It was hypothesized that a ban would reduce these economies of
scale by increasing the optimal amount of labor per animal.

One of the assumptions that were made in this project is that the companies that
have high management (low cost) firms were also on average on the larger firms. This
assumption was consistent for the Farrow to Finish and Wean to Finish producers. This
was reverse for the Breed to Wean firm though. The connection between cost and size
for the producers was taken from the average size of the producers in those categories.

Conclusions of economies of scale were made from these assumptions.

71

The findings first and foremost show that a full ban on AGP would increase
productions costs for all producers (Table 5.1). To a degree, there are differences among
the cost increases faced by different producers that corroborate the hypothesis. For
example, a full ban would increase the labor costs by $2.04 per cwt for the low-cost
producers, but increase the medium-cost firms’ labor costs only by $0.27 per cwt. In one
case, breed to wean producers, the medium-cost producers without the ban become the
low-cost producers in the presence of a full ban. However, according to the results, the
effects do not increase the relative profitability of the high-cost producers sufficiently to
compete with the low-cost producers. Nonetheless, the results are sufficient to show that
a full AGP ban would affect the producers differently, particularly the medium-cost
producers v. the high-cost producers.

Table 5.] Pre and Post Ban Production Costs Compared for All Production for a Full Ban
on Subtherapeutic Antibiotic in the Swine Industry

 

 

 

 

 

 

 

 

 

 

 

 

Farrow-FinishI Breed-Wean2 Wean-FinishI
Pre Post Pre Post Pre Post
High Management $38.92 $45.65 $24.91 $34.64 $40.93 $42.42
Medium Management $40.89 $46.56 $28.48 $36.12 $41.46 $42.37
Low Management $45.09 $53.65 $32.37 $39.33 $45.87 $48.46

 

IReported as cost per hundred weight
2Reported as cost per head

The most important factors affecting profits is labor costs. With antibiotics,

employees did not have to spend time observing and treating pigs for illness. Without

antibiotics, not only does the time with the animals increase, but employees would

require a higher education to observe different symptoms and to be able to diagnose and

treat them correctly, thus increasing both hours and hourly wages. Because labor costs

 

are a large part of the above-feed costs, total costs are volatile with respect to relatively

small changes in labor use and costs.. Thus, the effect of an AGP ban is sensitive to

changes in labor costs across farm types, and to the impact of the ban on labor use and

costs. This was evident in the sensitivity analysis presented in chapter 4.

The complete findings for a full ban on antibiotics are as follows:

The ban would increase production costs for all types of producers and
swine operations.

The ban would limit or reduce economies of scale in the swine industry.
This change in the economies of scale are sufficient to change cost
minimizing (productivity maximizing) from the large to medium for wean
to finish producers.

The change in profit from labor costs does not seem to increase enough to
help the smallest farms, but this is could change with sufficient data.

The effects of an AGP ban are strongly influenced by labor costs.
Changes in labor costs have differential effects on profit for different farm
sizes/efficiencies by an AGP ban.

Holding prices constant, a ban on AGP would make many producers
unprofitable, most likely leading to an exit from the industry and/or an
increase in prices. Small producers, while closing the profit gap, are still

the most likely to exit the industry.

73

 

This paper also examined the impacts of a partial AGP ban on the different types
of swine operations and cost structures. A partial ban is a ban enacted for only the AGP
in grower/finisher feeds. This means that in the starter pigs, where the antibiotics are
most effective physiologically, AGP would still be used. This is because young pigs
have weaker immune systems, and antibiotics allow them to stay healthy and grow faster.
A partial ban would help reduce the amount of bacteria that develop resistance to
antibiotics, yet not affect the production phases where the antibiotics are most needed for
the welfare of the animal.

The effects on costs of a partial ban are listed in table 5.2 for the various
operations and cost structures. Because the partial ban does not affect use of AGP in the
breed to wean operation, there is no effect on costs. For farrow to finish operations, costs
increase for all producers, and increase the most for high-cost producers. For wean to
finish, costs increase for all producers, but increase by $0.85 per cwt for low cost
producers and only $0.27 per cwt for medium producers. This would be sufficient to

make the current medium-cost producers into the low-cost producer with the partial ban.

Table 5.2 Pre and Post Ban Production Costs for All Production after a Partial
Ban on Antibiotic Use in Swine

 

 

 

 

 

 

 

 

 

 

 

 

F arrow-F inishI Breed-Wean2 Wean-FinishI
Pre Post Pre Post Pre Post
High Management $38.92 $39.52 $24.91 $24.91 $40.93 $41.78
Medium Management $40.89 $42.06 $28.48 $28.48 $41.46 $41.73
Low Management $45.09 $48.12 $32.37 $32.37 $45.87 $47.69

 

lReported as cost per hundred weight
2Reported as cost per head

74

 

Given that prices producers received stayed relatively constant following a ban,
many producers would end up with a negative income level.2 This would almost
inevitably lead to an exit in from the industry. Many of these producers are in the breed
to wean stage of production. These producers would then either have to switch to a
farrow to finish operation or exit the industry. Small producers in the farrow to finish
operations would also run into the same predicament and decisions that the producers in
the breed to wean operations would have. Small producers in every segment are more
likely to exit following a ban than large or medium producers as their profits are the
lowest (Table 5.5).

One of the characteristics associated with the cost structures is farm size.
Although they are not a one-to-one correspondence, high-cost producers tend to be
smaller and low-cost producers tend to be larger. For example, average farrow to finish
farm size is 11,336 head sold per year for the low-cost producers, 8,490 head sold per
year for the medium-cost producers, and 4,634 head sold per year for the high-cost
producers.

One of the major observations from this study is that for the large farrow to finish
and wean to finish producers the ban has an important effect that reduces existing
economies of scales. Whether this reduction is large enough to affect farm sizes is
unclear at this point, since the farm size decision is affected by many factors other than
productive efficiency. This means that the cost minimizing firms, that aren’t constrained
by a contract, asset fixity, or other constraints or costs will scale back their production

and fall into the middle or medium size. Depending on where their utility lies, some

 

2 Passing cost increases on to consumers would decrease the quantity of pork consumed, again leading to
exit from the industry.

75

 

large producers would still be able to remain large because they are still making a profit.
However, these producers (on a per head basis) are not going to be considered a cost
minimizing or profit maximizing firm. On a total ban issue, there is no evidence that
shows that profit maximizing firms will change size as is evident in table 5.5, with the

exception of the Breed to Wean producers.

Table 5.3 Total Profits for Top, Middle, and Low Production Producers Pre and

 

 

 

 

 

 

 

Post a Complete Ban on AGP
Farrow to Finish Breed to Wean Wean to Finish
Top Pre $389,679.59 $95,425.56 $245,149.62
Production Post $142,414.98 -$29,856.40 $208,067.98
Middle Pre $233,152.33 $94,023.57 $192,289.08
Production Post $81,692.84 $25,907.70 $173,900.58
Low Pre $84,253.60 $67,538.16 $102,525.30
Production Post -$13,271.50 $52,512.20 $60,500.62

 

 

 

 

 

 

 

The results show that in the farrow to finish and wean to finish operations the ban
introduces diseconomies of scale for the large low-cost producers as the effect on their
costs are going to be higher than the middle third of producers. Although this study didn’t
measure economies of scale directly, the high cost structure for previously low-cost
producers indicate the presents of diseconomies of scale. In the case of wean to finish
producers; this could lead cost minimizing producers to decrease in size. However, in the
breed to wean group, there would actually be a greater economy of scale and production

would go toward the larger farms.

76

5.2 Policy Recommendations
From the conclusions discussed, the following policy recommendations are to aid
the producers into a smooth transition and decrease the impacts of a ban on antibiotics,

but are not essential to a successful ban.

5.2.1 Policy Learned from Europe

Denmark and Sweden’s experiences with banning AGP provide insight on
methods and lessons to decrease the impact that a ban would have on producers.
Observing their steps and reactions and what worked and what didn’t will help better to
prepare the United States swine producer. The following two recommendations will help
the producer and the government cope with the impact of an AGP ban in the swine
industry.

First, the government should mandate a change in management practices before
an AGP ban. This will ease the transition and spread the costs over a larger timeframe.
In Europe, many of the management practices that aided producers were put into place
before their ban. Management practices such as creating more space per animal and
increasing the age at which an animal can be weaned are examples of management
practices that some countries in Europe enacted. While at the time this legislation may
not have been intended for this consequence, it did affect the impact that the producer
noticed during the ban. These practices allow for the animals to gain a stronger immune
system and cause less stress on the animals, which help to control the incidence and

spread of disease on the farm.

77

The second problem that the United States government could encounter is that
currently, there is no governing body that oversees the use of antibiotics. The Food and
Drug Administration (FDA) controls which antibiotics can and cannot be used and how
they should be used, but cannot monitor in practice how the drugs are used. At the
current time, there is no agency that records or monitors antibiotic production or use in
the United States livestock industry. Denmark and Sweden both have the ability to
monitor individual veterinarians and how they use the drugs. The government would
need to monitor drug use on farms more closely in order to keep reluctant producers from

using AGP.

5.2.2 Policy Recommendations from this Study

One of the first observations of this study is that the impacts of a partial ban on
AGP should allow the producers to remain profitable, causing minimal effects on
production costs and industry structure in relation to the full ban. While there may be a
change in cost-minimizing producers to the previously medium-cost firms in the wean to
finish phase, overall the change in cost structures is minimal compared to the impact that
a full ban would create. A partial ban on the use of AGP would be more cost efficient
than the full ban in terms of getting the most benefits for the least amount of costs.
Denmark used a partial ban to start the full ban, thus spreading out the costs and allowing
farmers to ease into a full ban. According to Hayes et al., in 2003, Denmark using a
partial ban received 80 percent of the benefits of not using antibiotics for about 20

percent of the cost of the full ban. However, if removal of AGP from the complete

78

 

system is the final goal, then using a partial ban as a starting block would be extremely
helpful to producers by spreading changeover costs over a longer timeline.

When enacting a full ban, producers will witness many changes to their cost
structure. Something that would be helpful, especially to the breed to wean firms, would
be a subsidy that declines over time. This could be done with the use of a price floor for
feeder pigs that would be enough to help offset the increase in costs. The subsidy would
then phase out over time by getting smaller and smaller so that those producers that
would exit the industry could do so at a slower pace and decrease the shock that the
market would experience. Lowering the price floor gradually over time would allow the
market price to gradually meet with market demand. Once the price floor has been
lowered to the original market price, it can be eliminated. This would help maintain a
steady supply of pork and weaken the shock to the market. A declining subsidy would
allow the market slowly to make the adjustments needed to the new market conditions
and allow producers to change their marketing strategies and decrease the impact that
producers of various sizes feel.

If the United States government passes a law banning the use of AGP in swine,
there would be more of a positive view on United States Pork, which could lead to more
exports. It could provide the United States pork producer with the opportunity to access
niche markets the world over in addition to their current domestic and international

markets.

79

 

5.3 Limitations of the Study and Future Research

Current limitations prevented me from fully exploring the initial hypothesis that
the high-cost producers would be affected less by the ban to a level where they could
compete equally with the current low—cost producers. Not enough labor data and a lack
of measuring management capacity could have altered the results of the hypothesis.

Ideally, a poll of producers across America would allow individual results to be
observed. This would allow discovery on how individual regions of hog production
would be affected as well as fill in holes and not have the assumptions present in this
paper. A national survey would also help develop a better picture of how management
styles and labor costs vary across the United States. One of the problems of using the
United Feeds data set is that only the averages are reported. It is often hard to determine
how the producer calculated their numbers and if they have the same calculations that the
company/researcher is using.

Finally, there is no current way to quantify various management styles and how
they deal with change. The only way to measure this is to use an indicator, such as
education, experience, or costs. This method, however, does not capture the ability of the
producer to respond to situations. As stated previously, having good management can
often offset, or exceed, the effects of a ban on AGP, especially in the breeding and
finishing stages. Thus, being able to measure management would allow the researcher to
develop models to determine the impact that a ban on antibiotics would have on various
producers and determine how much of the changes in cost are attributed to management

and how much are attributed to AGP.

8O

 

The following are some relevant needs that should be addressed in future
research:

0 Develop methods and measures in order to quantify management capacity and
how shocks to the system will affect these managers.

0 Determine how the heterogeneity of the producer’s management capacity
contributes to firms’ decisions. For instance, how would the management
capacity affect how a firm would deal with the ban on antibiotics?

0 Obtain more information on the cost differences across different operation

characteristics.

 

0 Measure how the effects of the change in market structure go through the market

channel and consumers willingness to pay for the change?

81

 

APPENDICES

82

Appendix A The Original United Feeds Data Set for Farrow to Finish Producers.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

All Farms Top 1/3 Middle 1/3 Low 1/3
All Hogs Sold: Avg. Number 8156 11336 8490 4634
Calculated Pigs Sold/Sow/Y ear 16.52 18.42 16.54 14.60
Lbs. Pork Product/Sow/Y ear 4287.00 4893.00 4336.87 3630.00
All Hogs Sold: Avg. Weight 256.63 258.43 258.75 252.66
Market Hogs Sold: Avg. Weight 260.96 264.99 261.36 256.52
All Hogs Sold: Avg Net Price 51.82 51.89 51.40 52.18
Market Hogs Sold: Avg Net Price 52.22 52.07 51.93 52.67
Total Feed/CWT Pork 331.30 298.51 328.79 366.66
Lbs. Feed/Hog/Day 4.21 4.10 4.31 4.22
Lbs. Com/CWT Pork 246.89 218.84 243.44 278.47
Cost/Bushel Corn 2.44 2.45 2.47 2.40
Lbs. Soybean Meal/CWT Pork 64.52 61.17 64.68 67.71
Cost/T on Soybean Meal 239.19 229.97 246.67 240.76
Lbs. Premix/th Pork 5.48 4.61 5.56 6.27
Feed Costs Other than Corn and SBM 6.64 6.23 6.51 7.18
Feed Costs/Ton Feed 151.70 152.94 153.32 148.80
Supplies and Miscellaneous 0.36 0.41 0.29 0.38
Veterinarian and Medicine 1.05 1.15 1.01 0.99
LP Gas and Electricity 1.39 1.26 1.22 1.69
Insurance and Taxes 0.68 0.69 0.66 0.69
Repairs or Maintenance 1.14 1.04 1.17 1.21
Tractor and Truck 0.61 0.57 0.53 0.73
Interest on Average Inventory 1.45 1.31 1.44 1.60
Building and Equipment Depreciation 2.55 2.38 2.64 2.63
Building and Equipment Charge 3.30 3.23 3.08 3.60
Building and Equipment Rent 2.21 3.17 1.88 1.59
Boar and Semen Cost 0.69 0.76 0.71 0.60
Gilt Premium 0.74 0.70 0.70 0.82
Labor 5.82 5.43 5.45 6.59
Costs above Feed/th Pork 16.52 16.09 15.69 17.81
Feed Cost/CWT Pork 25.13 22.83 25.21 27.28
Total Cost/CWT Pork 41.65 38.92 40.89 45.09
Profit/CWT Pork 10.17 12.97 10.51 7.09

 

 

83

 

 

Appendix B The Original United Feeds Data Set for Wean to Finish Producers.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

All Farms T0p 1/3 Middle 1/3 Low 1/3

Market Hogs Sold: Avg. Number 6709 8153 6095 5930
Market Hogs: Average Weight 266.46 268.47 265.42 265.58
Market Hogs: Average Price/CWT 52.64 52.13 53.35 52.38
Pigs Purchased: Avg Weight 12.20 12.16 12.13 12.32
Pigs Purchased: Avg Price/Head 33.25 32.10 33.16 34.50
Total Feed/CWT Pork 282.59 256.00 284.27 307.36
Lbs. Feed/Head/Day 4.04 3.68 4.22 4.20
Avg. Daily Gain 1.43 1.44 1.48 1.37
Death Loss (%) 3.82 3.55 3.53 4.40
Lbs. Com/CWT Pork 207.62 184.57 204.49 234.06
Cost/Bushel Corn 2.41 2.38 2.39 2.46
Lbs. Soybean Meal/CWT Pork 57.94 55.08 57.71 61.05
Cost/T on Soybean Meal 229.16 222.13 228.99 236.37
Lbs. Premix/th Pork 5.48 4.61 5.55 6.27
Feed Costs Other than Corn and

SBM 5.31 5.75 5.04 5.16
Feed Costs/T on Feed 148.18 154.08 143.44 147.42
Supplies and Miscellaneous 0.28 0.23 0.35 0.25
Veterinarian and Medicine 0.60 0.66 0.54 0.61
LP Gas and Electricity 0.78 0.68 0.90 0.75
Insurance and Taxes 0.46 0.49 0.43 0.46
Repairs or Maintenance 0.79 0.50 0.42 1.48
Tractor and Truck 0.74 0.79 0.76 0.67
Interest on Average Inventory 1.30 1.16 1.07 1.69
Building and Equipment Depreciation 2.19 2.25 2.22 2.10
Building and Equipment Charge 2.31 2.43 1.88 2.66
Building and Equipment Rent 2.41 2.95 2.11 2.20
Labor 3.43 4.15 2.68 3.52
Calculated Weaned Pig Cost/CWT 11.14 10.63 11.26 11.52
Costs above Feed/th Pork 21.80 21.78 20.53 23.19
Feed Cost/CWT Pork 20.91 19.72 20.39 22.66
Total Cost/CWT Pork 42.72 40.93 41.46 45.87
Profit/CWT Pork 9.92 1 1.20 1 1.89 6.51

 

 

 

 

 

84

 

 

Appendix C The Original United Feeds Data Set for Breed to Wean Producers.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

All Farms Top 1/2 Low 1/2

Weaned Pigs Sold: Avg. Number 16092 11651 19748
Calculated Pigs Sold/Sow/Y ear 19.95 20.61 18.84
Litters/Sow/Year 2.22 2.29 2.10
Pigs/Crate/Y ear 165.87 210.34 120.09
Breeding Herd Replacement Rate (%) 52 50 55
Weaned Pigs Sold: Avg Price/Pig 33.73 31.78 35.91
Weaned Pigs Sold: Avg Weight 12.43 12.16 12.63
Breeding Stock Sold: Avg Price CWT 41.22 42.22 40.11
Breeding Stock Sold: Avg Weight 475.04 484.21 461.89
Total Feed/Pig 127.28 115.69 142.00
Feed Cost/Pig 9.77 9.02 10.88
Lbs. Sow F eed/Sow/Y ear 2422.00 2275.00 2507.00
Avg Feed Cost/Sow/Year 189.62 181.34 200.88
Average Corn Price/Bushel 2.42 2.40 2.46
Average Soybean Meal Price/Ton 233.34 241.45 230.49
Feed Cost Other Than Corn and

SBM/Pig 3.06 2.84 3.36
Feed Costs/Ton Feed 153.53 156.12 153.21
Supplies and Miscellaneous 0.59 0.55 0.63
Veterinarian and Medicine 1.56 1.40 1.78
LP Gas and Electricity 1.20 0.94 1.58
Insurance and Taxes 0.66 0.43 0.91
Repairs or Maintenance 0.63 0.51 0.74
Tractor and Truck 0.48 0.39 0.60
Interest on Average Inventory 1.57 0.85 1.98
Building and Equipment Depreciation 2.39 1.84 2.95
Building and Equipment Charge 2.91 2.25 3.65
Building and Equipment Rent 3.57 4.75 0.64
Boar and Semen Cost 1.94 1.80 2.18
Premium for Gilts Purchased 1.59 1.50 1.95
Labor 7.62 6.10 9.72
Costs above Feed/Pig 20.67 17.23 24.48
Feed Cost/Pig 9.77 9.02 10.88
Total Cost/Pig 28.48 24.91 32.37
Profit/Pig 5.93 8.07 3.42
Profit/Sow 118.30 166.32 64.43

 

 

 

 

85

 

 

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