In talking about the pork industry’s future, you can point to a couple of likely developments. First, the number of marketing contracts will continue to increase. In January 2000, 74 percent of all hogs were sold under some sort of contract agreement. That’s up from 64 percent a year ago and 57 percent in 1997.
So what does this mean? With more marketing contracts, Glenn Grimes, University of Missouri agricultural economist, says “the odds are high that the industry will vertically integrate or coordinate, or be a combination of the two.”
A lot depends on Smithfield, the country’s largest packer. If the company’s stocks outperform its competitors in the next 10 years, Grimes believes other packers will be pressured to vertically integrate, otherwise they will shift to vertically coordinated systems.
He also expects the industry will continue to consolidate, but which direction it will head isn’t clear. “The probability that the pork industry will get to where the poultry industry is at isn’t real high, real quick,” he says. Once again, a lot depends on Smithfield’s success.
With the addition of Murphy Farms, Smithfield will have an estimated 675,000 sows, totaling about 13 million market hogs, which is about 65 percent of its slaughter capacity.
“The key for producers is to find a way to be interdependent,” says Steve Meyer, National Pork Producers Council’s director of economics. “We need to come up with a way to share product profits so that independent producers can thrive and be rewarded for their efforts, and allow packers to be profitable as well. It’s a real challenge for us all.”
Again this year, Grimes polled the country’s 13 largest pork packers, with 10 providing contract and slaughter numbers. He used industry data to estimate the others. Those participating in the survey account for 91 percent of January’s U.S. federally inspected hog slaughter. Here’s what Grimes found:
- By adding the hogs purchased on the spot market to those purchased on a formula basis, 72.9 percent of the hogs sold in January were priced on the spot market. This is down from 80 percent in 1999 and 82 percent in 1997.
- Slightly more than 25 percent of the hogs were purchased under some type of a risk-reducing system. Of these, 8.5 percent were purchased on a cash contract tied to the futures market, up from 3.4 percent last year. Such contracts typically are short-term, usually covering only a 13-month period. Another 16.9 percent were bought on a longer-term, risk-reducing system, up from 14.3 percent in 1999.
- One noticeable jump came in the number of contracts that reduce your price risk, such as cash contracts, usually tied to the futures market, and contracts without a ledger. These types of agreements make up 15.6 percent of the total hogs sold, up 9.9 percent from a year ago.
Meyer says this increase is a good indication that more of you are interested in finding alternatives to selling hogs on the spot market, but aren’t comfortable with or weren’t offered a long-term marketing agreement.
- Ledger contracts account for 9.8 percent of the sales, a 2 percent jump from last year.
- Other contracts, which include some packer-owned hogs, were only 1.7 percent this year. Most packers who produce hogs use a formula contract with the production unit, so these hogs are included in the formula category.
Looking ahead, Meyer projects export markets and demand to increase this year. As for prices, if hog numbers stay consistent with USDA’s December Hogs and Pigs Report, Grimes still expects prices to average $39 to $42 per hundredweight (live weight) in the second quarter, with a year-end average of $38 to $39. However, if pork demand remains strong and production drops 2 percent or 3 percent from the
December report, he estimates prices could stay at the high end of his ranges, or even end the year around $42 to $44.
A big factor driving demand is bacon, notes Grimes. Restaurants and fast-food establishments are using more bacon to add palatability to sandwiches. Other demand influencers include an increase in disposable income for U.S. consumers and the protein diet craze.
For the year, Meyer predicts slaughter will be down about 3 percent to 4 percent. However, both sow and gilt slaughter is decreasing, which translates to more production in the future. Grimes notes that Canada is sending substantially fewer cull breeding animals to the United States this year, so that won’t be as much of a market influence.
In another three or four years, Grimes predicts the spot market will be very thin. Most producers will have some sort of marketing agreement, with a limited few still selling on the spot market. With this trend, he anticipates more volatility, especially in day-to-day prices.