Pork producers need to be careful about how they choose a base price when negotiating marketing contracts – that’s the conclusion following a review of USDA’s Mandatory Price Reporting system from 2002 and the first half of 2003.
The National Pork Board had economists Steve Meyer, Paragon Economics, and Glenn Grimes, University of Missouri, research the issue.
“When we compared prior-day prices to morning prices, there seemed to be a pattern so we looked more closely at the data,” explains Grimes. “The reason for the research is to get information to help pork producers decide which hog marketing report to tie their marketing contracts to.”
The mandatory reports started as part of the Livestock Mandatory Reporting Act of 1999. Grimes estimates about 90 percent of the daily federally inspected hog slaughter is included in the mandatory price reporting data.
“The data indicate that producers will be better off using the afternoon or prior-day price reports from USDA’s Agricultural Marketing Service as their base price,” notes Meyer. “Producers should avoid using the Eastern Corn Belt price. The Iowa/Minnesota and Western Corn Belt prices are comparable and marginally higher than the national price.”
He offers this example: A comparison of afternoon and morning weighted-average prices for negotiated hogs in USDA’s four geographic reporting areas, shows that the afternoon minus the morning price differences are all positive. They also are generally largest for the Eastern Corn Belt.
“We believe the best explanation for the positive difference is that many marketing contracts are now priced off the morning reports, thus creating an incentive for packers to delay aggressive bidding until after the morning data have been submitted to USDA,” says Meyer. “Afternoon prices are then bid higher.”
Table 1 shows the comparison of afternoon and morning weighted-average prices for negotiated hogs in the four geographic areas that USDA’s Mandatory Price Reporting system covers. Note that the afternoon minus the morning price differences are all positive and are generally largest for the Eastern Corn Belt, says Grimes. These positive differences exist in quarters when hog prices were trending downward as well as quarters that saw up-trending prices.
Table 2 shows the differences between weighted-average prices for negotiated hogs on USDA’s Prior-Day Report (issued at 8 a.m., it covers all of the animals purchased on the previous day) and the afternoon report of that prior day. Few consistent differences can be seen in these data.
“Theoretically, the prior-day report should be the most stable, and the hardest price to manipulate of all those published under Mandatory Price Reporting program since it represents all of the hogs purchased on a given day,” says Meyer. “These data suggest that the prior-day price is not consistently different from the afternoon price.”
Table 3 and Table 4 compare prices for the Eastern Corn Belt, Western Corn Belt and the nation to the Iowa/Minnesota price in the afternoon and prior-day reports,
“The only consistently positive differences are found between Iowa/Minnesota and Eastern Corn Belt prices. Interestingly, these differences appear in the afternoon and the prior-day reports,” notes Meyer. “These data demonstrate the expected situation of higher prices in the Western Corn Belt and Iowa/Minnesota, which is a subset of the Western Corn Belt data, where there are more packing plants and some areas have a hog deficit.”
Meyer and Grimes say these results are little surprise. The number of contracts tied to morning price quotes has created a strong incentive to delay aggressive bidding until later in the day. The data suggest that most of that bidding is done in the late morning and early afternoon. Hog-deficit areas in Iowa and Minnesota tend to see the highest hog prices in the United States.
“Producers should negotiate marketing contracts to use either the afternoon or prior-day Iowa/Minnesota or Western Corn Belt price as the base,” says Meyer. “Not only will those prices be higher, but the large hog numbers and longer time periods will make price manipulation more difficult.”