What is the best way to sell hogs?  Market formula?  Some other purchase agreement? Or a negotiated price?  If you selected the latter, you selected an option that may soon be only a memory.  The number of hogs being sold by a negotiated price is diminishing, and that was termed “worrisome” by a close observer of pork marketing.

“Worrisome” is what University of Missouri livestock economist Ron Plain calls the continued decline in the number of hogs being sold by negotiated pricing.  It is down to less than 5% of hogs, reports Plain in a recent analysis. When his former colleague Glen Grimes began the survey of market hog sales practices in 2002, 13.8% of hogs were sold with negotiated pricing.  It stabilized at 10.4% in 2004 and 2005, but continued to drop, and is now at 4.9% for 2010.

Just as the number of negotiated sales has declined, the number of packer owned hogs being sold has increased.  In 2002, that number was 16.4 percent, and has climbed to 25.2% in 2010.  No other means of identifying a value for hogs has seen such a rapid increase or decrease.  Market formula sales, other market formulas, and other purchase agreements have all remained fairly steady.

Despite the decline in negotiated pricing, that number is used to identify trends at other sale points.  Plain reports, “The widely reported Negotiated hog price is a key component in determining the price for four of the other categories. The price paid for the 4.9% of barrows and gilts purchased on a negotiated carcass weight basis in 2010 was crucial to determining the price for roughly three-fourths of the combined 64.3% of hogs purchased on Market Formula, Other Market Formula, Other Purchase Agreement, and Packer Sold.”

Plain says it is unclear how much longer negotiated pricing will be used to “effectively represent the true supply and demand for hogs and be a sound basis for formula pricing other hogs.”

If negotiated pricing becomes too minimal to be an effective determinate of the value of pork, what will take its place?  Plain says the Mandatory Price Reporting Act of 2010 requires packers to report prices and volumes of wholesale pork cuts, and he thinks that will become a more widely adopted measure of pork value.

Another function of the Mandatory Price Reporting system is to identify weights, and percent lean.  The highest scores were those hogs purchased on a contract tied to the CME lean hog futures contract at more than 55% lean.  On the other hand, with 53.5% lean were packer-owned hogs.  Average carcass weights were all in the 202 to 205 range, except for the negotiated price hogs at 198 lbs.  Their net carcass price was just over $75, with the rest of the pricing methods ranging from $70 to $77.  Both the net price, and the base price which is determined before premiums or discounts, were highest for the hogs sold by packers. 

Summary
USDA’s Mandatory Price Reporting System for hogs has shown a definite trend that fewer hogs are sold with negotiated prices every year.  As a corollary, more hogs are sold every year that are considered packer owned.  Other transfer methods have had little change in the past 10 years.

Source: The FarmGate blog