The percentage of hogs sold on the spot market in January 2002 was 16.7, compared with 17.3 percent in January 2001, according to research from Glenn Grimes, University of Missouri agricultural economist. While the percentage still reflects a decline, it equals only one-fourteenth of the erosion from 2000 to 2001, and one-seventeenth of the drop from 1999 to 2000.

"The reason for the stabilization is a combination of things," says Grimes. "There are a number of producers who just want to sell hogs on the spot market. Packers also have more freedom to deal with the market's ebb and flow if 15 percent to 20 percent of their supply comes from the spot market."

Steve Meyer, National Pork Board director of economics, says the spot market may have dropped as low as it could and still maintain the industry's confidence.

Looking at the historical data, the spot market's stabilization is a bit of a surprise. When Grimes conducted his first study in 1994, more than 60 percent of U.S. market hogs were sold on that market. Grimes points out, if the rate of decline from 1994 through 2001 had continued, the spot market would lose its viability within three or four years. Mandatory price reporting has allowed him to closely monitor spot market sales, so he knew the level was holding steady.

Opinions vary on how many hogs need to be sold on the spot market for it to serve as a price-discovery option.

"Some say the spot market can get as low as 5 percent of U.S. hog slaughter and still be viable," says Grimes. "However, if it gets that low prices will probably be more vola-tile, with bigger swings."

"The market needs to determine what level the spot market needs to exist," says Meyer. "There's no economic theory that tells you what level that will be. When producers become skeptical that the spot market includes enough hogs to provide a clear picture, they won't sign contracts tied to it. That in turn should put more hogs back on the spot market."

Grimes' data shows that hogs sold on the spot market tend to have lighter carcass weights. The percent lean is slightly lower than for hogs sold via market-formula arrangements, but the difference is insignificant. The numbers show that packers can get quality hogs from the spot market, he says.

The spot market is still a point of discussion because of the industry's high number of formula contracts tied to the cash market. Grimes points out, if the spot market does stabilize around 15 percent, it can still be viable for formula contract pricing. But, if it shrinks, a new pricing system will be needed. The most common alternatives are contracts tied to primal meat cuts or the futures market.

Both methods are in use, but on a small scale. A few packers buy 3 percent to 5 percent of their hogs using contracts tied to meat prices.

"Meat-market pricing also is fairly thin, with only about 10 percent of the product sold in negotiated markets. The rest is sold on some type of contract," Grimes notes. "There's also concern about information flow back to producers."

As for the futures market, Meyer says that has always been a pretty good option, with a lot of information available. Although there is open entry into the futures market, he notes that producers generally don't trust that market.

While Grimes' new research shows that the spot market isn't likely to disappear overnight, the future remains dubious. Long term, as packers and producers test the waters of new contracts tied to meat prices or futures contracts, the spot market will either remain stable or fade into obscurity.