Production and Marketing Characteristics
The 2004 Pork Industry Structure Study

Table 17 through Table 24 and Figure 4 report the results of questions related to marketing practices of firms in the various size categories.  Two-thirds to three-fourths of firms marketing less than ten thousand head per year indicated that they sold hogs on a “load by load” contract.  Twelve to sixteen percent of farms in these same categories indicated that they marketed through a group contract.  Over half of the firms marketing between ten and fifty thousand hogs per year indicated that they marketed on a load by load basis in 2003.  For the 50 to 500 and 500+ thousand head categories, over three-fourths of the firms marketed under a negotiated contract.  Almost 30 percent of the very largest firms indicated that they marketed hogs to their own slaughter plant. 

Table 17.        How Firms Marketed Slaughter Hogs, 2003 (percent of firms in size category)

 

Firm Size (thousand head mktd.)

1-3

3-5

5-10

10-50

50-500

500+

Load by load

77%

70%

66%

55%

13%

33%

Negotiated contract

4

6

5

5

82

76

Group contract

13

12

16

13

57

0

Own packing plant

3

2

1

2

3

29

Other

4

6

5

5

4

0

Except for the very smallest firms, most of the respondents to the survey indicated that they sold to more than one packer (Table 18).   Not surprisingly, larger firms sold to a greater number of packers.  Approximately three-fourths of the firms in the 50 to 500 thousand head category and two-thirds of the 500+ thousand head category marketed to three or more packers.  Almost one fourth of the largest firms marketed to seven or eight packers.   

Table 18.        Number of Different Packers Sold to in 2003 (percent of firms responding in size category)

 

Firm Size (thousand head mktd.)

1-3

3-5

5-10

10-50

50-500

500+

1 packer     

58%

47%

42%

38%

15%

24%

2 packers

32

36

33

33

10

10

3 packers

10

14

17

13

61

19

4 packers

1

2

7

9

8

10

5 packers

 

1

 

4

6

10

6 packers

 

 

 

2

 

5

7 packers

 

 

 

 

 

19

8 packers

 

 

 

 

 

5

While many survey respondents indicated that they sold to multiple packers, most of the hogs sold by firms selling less than 50 thousand head were sold to the firm’s largest buyer.  The average percent of respondent’s hogs sold to their largest buyer is presented in Table 19.  Eighty-five percent of hogs sold by firms in these categories went to their largest buyer.       

Table 19.        Percent of Marketings Sold to Producer’s Largest Buyer

Firm Size (1,000 head mktd annually)

Average Of Firms Reporting

1 - 3

88%

3 - 5

88%

5 - 10

84%

10 - 50

82%

1 - 50

85%

The average distance that firms haul hogs is presented in Table 20.  The survey asked firms to check one of the distance categories for the average distance that they typically ship hogs.  For larger, more spread-out operations, this would be a difficult question to answer.  For example, the fact that no firms in the 500+ thousand head category indicate that they shipped hogs an average of less than 50 miles, does not mean that these firms do not haul any hogs less than 50 miles. 

For the smaller firms, most firms indicated that they shipped hogs less than 100 miles.   However a surprising number (over 25%) of the firms in the categories marketing between three and fifty thousand head had average hauls of over 150 miles.  Firms in the 50 to 500 thousand head category appear to be most consistently located in terms of distance to market in that two-thirds of firms in this category indicated that they shipped hogs between 50 and 99 miles.  For the largest firms, (500+ thousand), 80 percent of firms responded that they haul hogs 100 miles or more on average.

Table 20.        Average Distance Hogs Are Hauled for Slaughter (percent of firms responding in size category)

 

Firm Size (thousand head mktd.)

1-3

3-5

5-10

10-50

50-500

500+

Less than 50 mi.

42%

29%

21%

18%

4%

0

50-99 mi.

24

22

31

21

66

20

100-149 mi.

17

19

20

26

11

44

150-199 mi.

9

16

14

17

6

24

200-299 mi.

5

10

9

10

6

4

300 mi. or more

3

4

6

7

7

8

The 2003 survey asked firms how they established prices on their hog marketings (Table 21).  This year’s survey expanded and perhaps clarified pricing and contract categories, so the category changes make direct graphic comparison to the 2000 survey difficult. 

Since the 2000 survey, usage of the spot (cash) market by firms marketing less than 50 thousand head per year have continued to decline.  Spot market sales by these small and medium sized firms declined by 14 to 24 percentage points.    

In what might be one of the most striking changes since the last survey in 2000, it appears that the largest firms (50 to 500, 500+) are marketing considerably more hogs on the spot market.  Firms marketing over 500 thousand head reported that they sold 15 percent of their hogs on the spot market, which is up from one percent in the 2000 survey.  A number of factors could be leading larger producers to sell on the spot market, and the impetus may be coming from the producer side, the packer side, or both.  The “thinning” of the spot market in recent years has caused numerous proposals for related legislation, and this trend could be in response (by both packers and large producers) to that threat.  It is certainly in the best interest of seller firms to maintain volume in the cash market as many of their formula contracts price off various daily cash market quotes.  The move to more spot purchases by packers could be a response to experiences in the 1990s where those packers with less fixed price or window contractual obligation fared much better given the opportunity to buy cheap cash market hogs.  Finally, a contributing factor could be that some larger firms are achieving a level of financial strength which allows more risk exposure to cash market.

A relatively new pricing mechanism has emerged in recent years in which wholesale meat prices are used to determine the value of the hogs delivered to packers.  This year’s survey included this pricing category with the pricing question and the results were somewhat surprising.  Firms of all sizes appear to be embracing this pricing option.  For all the firms marketing up to 50 thousand head per year, between five and eight percent of their hogs were priced off meat prices.  Four percent of hogs marketed by the largest firms were valued off meat prices, which is still significant given the market share of this group.

In the 2000 survey question related to pricing and contracts, respondents could not indicate if their window contract included a ledger.  In the most recent survey, there was a ledger and a non-ledger response.  While the extent of window contracts with ledgers was not measurable in the 2000 survey, it appears that very few hogs were marketed under these types of agreements in 2003.  Only two percent of hogs marketed by the 50 to 500 thousand head group and one percent of hogs marketed by the firms selling between three and ten thousand head were marketed under window contracts with a ledger.  Overall it appears that there has been a significant decline in window contracts.  The only exceptions were among firms in the 50 to 500 thousand head category, where the decline was only one percentage point and in the three to five thousand head category where it appears that the usage of window contracts increased by one percentage point over the 2000 survey.  Since the 2000 survey, pricing under window contracts declined by two-thirds or more for firms in the five to ten and ten to fifty thousand head category and by 50 percent for the largest firms category.

Table 21.        Percent of Hogs Sold on Spot Market and Under Marketing Contracts (average of percentages reported by size category)

 

Firm Size (thousand head mktd.)

1-3

3-5

5-10

10-50

50-500

500+

ALL

Spot market – negotiated

53%

40.0%

29%

26%

11%

15%

21.5

Contract - futures market

9

8

8

11

9

2

6.4

Formula - hog prices

22

27

32

37

39

68

47.4

Formula - meat prices

8

6

7

5

8

4

5.6

Formula - feed/ledger

2

5

6

5

9

1

4.0

Formula - feed/no ledger

 

4

4

5

5

6

4.8

Window – ledger

 

1

1

 

2

 

.05

Window - no ledger

1

4

3

5

16

4

6.1

Other

5

5

7

5

2

 

2.6

Except for the very largest firms, most respondents indicated that they had some flexibility when choosing marketing dates (Table 22).  While it is not clear if packers impose the tight schedule, or if logistics on the farm drive marketing dates, the percentage of firms indicating that they must market on a “tight schedule” increased with the size categories of firms.  Almost two-thirds of firms in the 500+ thousand head category indicated that they marketed on a tight schedule. 

Most firms marketing between one and five thousand head per year indicated that they had the flexibility to market hogs at the desired weight.  For firms selling between five and five hundred thousand head, 33 to 41 percent of firms indicated that they marketed hogs at the desired weight. 

Table 22.        Flexibility in Marketing Dates (percent of firms responding in size category)

 

Firm Size (thousand head mktd.)

 

1-3

3-5

5-10

10-50

50-500

500+

Tight schedule

10%

15%

26%

35%

45%

61%

Somewhat flexible

27

31

32

32

14

17

Market at desired weight

63

54

41

33

41

19

The trend toward carcass merit pricing appears to be intact through 2003 (Figure 4.).  The larger firms were selling virtually all their hogs on a carcass merit basis in 2000, and there was only a slight change in 2003.  The percentage of hogs sold on a carcass merit basis increased significantly and exceeded or was near 90 percent for the small and medium sized firms.

Figure 4.    Percent of Hogs Sold on Carcass Merit Basis

Use of the futures market appears to increase with the size of firm. (Table 23)  A high percentage of the largest firms indicated that they use the futures market at times.  Eighty-three percent of firms in the 50 to 500 thousand head category and 67 percent of the firms in the 500+ thousand head category use futures at times.  Somewhat surprising is that almost a quarter of the very largest firms indicated that they never use the futures market.

The primary reasons firms don’t use the futures market (Table 24) appear to be related to bad results in the past or the opinion that option contract premiums are too high.  Less than 25 percent of respondents in every category indicated that the use of futures markets was too complicated.

Table 23.        Use of Hog Futures Market by Hog Firms (percent of firms responding in size category)

 

Firm Size (thousand head mktd.)

1-3

3-5

5-10

10-50

50-500

500+

Use contract tied to futures

19%

28%

33%

28%

4%

14%

Use futures at times

17%

27%

33%

44%

83%

67%

Never use

64%

45%

34%

27%

13%

24%

Table 24.        Why Hog Producers Do Not Use Futures or Options (percent of firms responding in size category)

 

Firm Size (thousand head mktd.)

1-3

3-5

5-10

10-50

50-500

500+

Bad results in the past

23%

34%

30%

35%

30%

69%

Option premium too high

26

30

34

28

40

6

Don’t like margin calls

12

11

8

15

10

6

Too complicated

21

5

11

5

20

19

Other

17

20

18

18