If you're worried that you were the only one getting hit by low market prices, you might find some consolation in a recent survey that shows only about 14% of the hogs sold in January were purchased from producers under some type of long-term, risk-reducing pricing system (see Table 1).
Glenn Grimes, University of Missouri ag economist, and the National Pork Producers Council (NPPC) surveyed the 12 largest pork packers (ranked by estimated daily capacity) in early February. The survey asked the packers to classify their purchases, by pricing method, during January 1999. Nine responded. Hormel Foods, Lundy's and Bryan Foods did not.
To more accurately portray the industry total, NPPC's Steve Meyer used industry sources to estimate the portion of the month's slaughter for the three companies failing to respond.
Hormel's January slaughter was estimated at 700,000. Industry analysts estimate that 50-70% of Hormel's supply is under contract, with the payment price tied to feed prices with a ledger balance maintained. For the survey, Grimes used 60%. Although Hormel did not respond to the Grimes/NPPC survey, they have responded to state and federal investigations about contracting. Hormel says that 50% of the hogs they purchased in 1998 were under contract. And, they point out, they have offered the contract to all size producers (see Table 2).
According to Hormel, about 85% of the contracts they have are with producers who deliver 1,000 hogs or less a month (roughly the output of a 600-sow farm). And, Hormel says, a number of those contracts that call for a delivery of more than 1,000 hogs/month are with multiple producer sow co-ops.
For Lundy's, the January slaughter was estimated at 192,000 head. Grimes assumed Lundy's slaughtered 33,000 of their own hogs in January, and added this number to the 'Other' category. It is widely believed Lundy's buys virtually all its remaining hogs on a formula price, so 159,000 head were added to the 'Formula' category.
In the case of Bryan Foods, January slaughter was estimated at 143,000 head. Bryan is known to buy some hogs on formula arrangements, while still buying a significant number on the spot market. For the survey, the split was assumed to be 50-50.
With these adjustments, the total slaughter capacity of these 12 firms made up 91% of the U.S. slaughter.
Grimes pointed out that the formula pricing method does include packer-owned hogs. Excel, for example, owns close to 120,000 sows. But, some of those pigs are purchased by producers and then sold back to Excel on a formula.
Grimes thinks that the 'plus-some amount' of the formula pricing method is generally $1 or $2/cwt., but in some instances it may be higher.
Grimes said he was somewhat surprised at the relatively small number of hogs purchased using contracts that involve ledger accounts. "For the amount of publicity about what effect this might be having on the markets and all the concern expressed by bankers, you'd think it was a much more prevalent practice," says Grimes.
Grimes says that the ledger contract number may be understated as some feed companies have contracts beyond what packers are offering. Grimes says Land O'Lakes is known to have some and Purina Mills is believed to have some.
Formula pricing: The packer agrees to take your hogs at a future point and to pay you the reported Iowa-southern Minnesota packer direct top bid plus $2/cwt.
Fixed price tied to futures market: You agree to deliver during a specific time period and the packer agrees to pay futures price closest to that period plus or minus a certain amount.
Fixed price tied to feed prices, no ledger: Your price varies according to a matrix figured using Omaha corn and Decatur soybean meal prices; sometimes referred to as a cost-plus or matrix contract.
Fixed price tied to feed prices, ledger maintained: Same as above, but a ledger balance is maintained that keeps track of the difference between the market price and the ledger matrix price.
Window risk sharing, no ledger: A $40 to $50/cwt. window is agreed upon. Within the window, market price is paid. Above the window, the difference between market price and the window top is split. Below, the difference between market price and window bottom is split.
Window risk-sharing, ledger maintained: Same as above, but a ledger balance is maintained.
