Weighing the Averages: It’s a universal curiosity to wonder how the hogs sold within the various pricing options compare with each other. While the prices do differ, the actual hogs on average reflect little variation.

Net price includes credits for such things as carcass quality, transportation and scheduled hog delivery.

The spot market—also known as the cash or negotiated market– is at its lowest share of U.S. slaughter-hog sales. While that pricing option now accounts for just 10 percent of actual sales, the rate of decline has slowed compared with previous years.

“The slowdown in that rate gives us some hope that it will stop at around 10 percent of total slaughter,” says Glenn Grimes, University of Missouri agricultural economist. “If it does, we believe it will do a satisfactory job of representing the true supply and demand situation, and it can be used as the base price for market contracts.”

At the start of each year, Grimes, his university colleague, RonPlain, and Steve Meyer, Paragon Economics, review the status of market-hog sales in the United States. Over the years, some shifting has occurred among the types of pre-arranged purchasing agreements between producers and packers, but contract sales are now solidly established in the industry’s business practices.

Today, 67.2 percent of market hogs are sold via some type of contract, another 22.7 percent are owned or sold with a packer connection. That leaves 10.2 percent of the hogs on the spot market, which compares to 35.8 percent in 1999.

Following continuous, steady declines since 1999, the spot market first approached the 10 percent mark in January 2005 at 10.6 percent. The fact that it held generally steady into January 2006 suggests it may have found sound footing. 

That’s important because contracts based on hog- or meat-market formulas rely on the spot market, which means at least 52 percent of U.S. market hogs are still priced on cash-market sales. “The true percent is higher because a high number of packer-owned and packer-sold hogs are priced with a market formula,” notes Plain.

About one-quarter of U.S. market hogs are sold through price-shifting arrangements. Those include 8.8 percent, which are tied to the futures market; another 16.6 percent are sold through “other purchase arrangements.”

 

How U.S. Market Hogs are Sold: Direct comparisons for all marketing arrangements across time is not practical because definitions used in USDA’s Price Reporting Program were not the same as those used in previous industry studies. However, the spot market results are directly comparable, and the overall trendlines are applicable.  

* Data for1999 to 2001 is based on a University of Missouri survey; 2002 to 2005 data is based on USDA Mandatory Price Reports; 2006 data reflects voluntary reports to USDA.

“About 25.4 percent of the hogs in January were bought under some system that supposedly reduced producers’ price risk,” notes Meyer. “I suggest supposedly because some of the pricing systems do not actually affect the producers’ price variance. Only cash contracts—the ones usually tied to futures—and contracts without ledgers reduce producers’ price risk. Other arrangements may or may not result in a realized average price that is different from the actual average negotiated price.” 

So, while marketing contracts are an industry fixture, the fixation on the spot market continues. If it erodes further, a new market-hog pricing structure will need to take hold.