USDA price data shows fewer hogs sold through the spot market during January 2006 than during previous years, although the prices of more than half the hogs in the United States still are determined by the spot market.
“If the rate of decline in the percentage of negotiated or spot market hogs returns to the pre-2004/’05 rate, it will increase the urgency for the industry to find another form of price discovery for most of the contracts,” says Glenn Grimes, professor emeritus at the University of Missouri. “However, the slowdown in the rate of decline in negotiated or spot purchase hogs gives us some hope that the number of negotiated hogs will stop at around 10 percent of total slaughter. If it does, we believe it will do a satisfactory job of representing the true supply and demand situation and can be used as the base price for market contracts.”
Grimes, Ron Plain, professor at the University of Missouri, and Steve R. Meyer, president of Paragon Economics, conducted the analysis on the USDA price data.
The data came from reports that were created by the Livestock Mandatory Reporting Act of 1999, which went into effect in 2001. It became voluntary after the law expired on Sept. 30, 2005. The reports cover all but the smallest harvest facilities. Total hog slaughter under Federal Inspection in January 2006 was 8,030,370 head. USDA had data for 7,261,064 head (90.4 percent of federally inspected slaughter).
Annual studies since 1999 show the percent of hogs sold at negotiated prices has fallen from 35.8 percent for all of 1999 to 10.2 percent in January 2006. By adding the percentage of hogs purchased in the negotiated markets to the percentage purchased on hog or meat market formulas, the current study indicates that the price of at least 52 percent of the hogs in the United States was directly determined by the negotiated market.
“The true percent is higher because a high number of packer-owned and packer-sold hogs are priced with a market formula,” says Plain.
Producers sold more than a third of their hogs through a price-shifting arrangement, including 16.6 percent through other purchase arrangements and 8.8 percent on contracts tied to the futures market.
“About 25.4 percent of the hogs in January 2006 were bought under some system that supposedly reduces price risk to producers,” says Meyer. “Some of the pricing systems don’t actually affect the variance of the price received by the producers. 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.”
The mandatory price reporting legislation required packers to report percent lean, carcass weight, base price and net price for each type of marketing arrangement. (See Tables 1 and 2 for the percent of hogs sold through various pricing arrangements and for price data).
The negotiated hogs had the second lowest percent lean, the lightest average weight and the lowest net carcass price. The other market formula hogs had a percent lean close to the negotiated hogs and the highest average carcass weight. Packer-owned hogs had the highest base and net prices.
Direct comparisons for all of the marketing arrangements can’t be made. However, the spot market or negotiated groups are directly comparable across all times.
National Pork Board
Table 1. Percent of U.S. hogs sold through various pricing arrangements,
1999 2000 2001 2002 2003 2004 2005 2006 Hog or meat market formula 44.2 47.2 54.0 44.5 41.4 41.4 39.9 41.8 Other market formula 3.4 8.5 5.7 11.8 5.7 7.2 10.3 8.8 Other purchase arrangement 14.4 16.9 22.8 8.6 19.2 20.6 15.4 16.6 Packer-sold 2.1 2.2 2.1 2.4 2.6 Packer-owned 16.4 18.1 17.1 21.4 20.1 Negotiated-spot 35.8 25.7 17.3 16.7 13.5 11.6 10.6 10.2
* 2006 data were reported to USDA voluntarily; 2002 through 2005 data are based on USDA Mandatory Reports; 1999-2001 are based on industry surveys by the University of Missouri.
Table 2. Hog marketing arrangements averages, January 2006
Carcass Base Net Percent Weight Carcass Carcass Lean (Pounds) price/cwt. price/cwt.* Negotiated 53.95 202.21 $54.68 $55.52 Swine-pork market formula 54.68 205.61 54.25 56.40 Other market formula 54.34 209.90 55.53 58.11 Other purchase arrangement 54.03 206.22 55.62 56.83 Packer-sold 54.29 205.11 56.51 59.42 Packer-owned 53.57 204.57
* Net price includes credits for quality, transportation, time of delivery, etc.
National Pork Board