Price data from the U.S. Department of Agriculture (USDA) shows fewer hogs were sold through daily-negotiated transactions (the spot market) for January 2008, than in previous years.
This is despite the fact that the prices of about half of the hogs in the United States still are determined by the spot market.
Pork checkoff consultants, who reviewed data collected by USDA, conducted the analysis.
“If the rate of decline in the percentage of negotiated or spot market hogs returns to the pre-2006/2007 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 market hogs gives us some hope that the number of negotiated hogs will stop at around 10% of total slaughter,” he says. “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.”
Three economists conducted the analysis: Grimes; Ron Plain, professor at the University of Missouri; and Steve Meyer, president of Paragon Economics and columnist for National Hog Farmer’s weekly e-mail newsletter, North American Preview.
The data came from reports created by the Livestock Mandatory Reporting Act of 1999, which went into effect in 2001, but became voluntary when the law requiring the act expired on Sept. 30, 2005.
Total federally inspected hog slaughter for January 2008 was 10,473,760 head; data was collected for nearly 91% of that total and reported through the mandatory price reporting system.
The percentage of hogs sold at negotiated prices has fallen from 35.8% in 1999 to 9.2% in January 2008. 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 negotiated market directly determined the price of at least 46% of U.S. hogs slaughtered.
“The true percent is higher because a high number of packer-owned and packer-sold hogs are priced with a market formula,” says Grimes.
More than a third of hogs were sold through a price-shifting arrangement, including 13.4% through other purchase arrangements and 11% on contracts tied to the futures market.
“About 24.4% of the hogs in January 2008 were purchased under some system that supposedly reduces price risk to producers,” observes Grimes. “I suggest ‘supposedly’ because some of the pricing systems do not actually affect the variance of the price received by the producers. Only cash contracts, those 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 averaged negotiated price.”
The mandatory price reporting legislation requires packers to report percent lean, carcass weight, base price and net price for each type of marketing arrangement.
The negotiated hogs had the second-lowest percent lean and the lightest average weight.
