ORLANDO, Fla. – Most hogs are sold via contract, with more than half being sold by a formula, according to a checkoff-funded research survey by the University of Missouri. The findings were reported during the National Pork Industry Forum March 8-10 in Orlando, Fla.
Glenn Grimes, ag economist with the University of Missouri, surveyed 11 packing companies in early February, asking them to classify their purchases during January. Federally inspected slaughter for Jan. 2-27 was 7,442,297 head. Companies in the survey accounted for 86.9 percent of federally inspected slaughter during that time.
Results show that during January, 17.3 percent of hogs were sold on the spot market. Of the rest, 54 percent of hogs were sold via a formula – a reported price plus some amount. About 16 percent of hogs were sold on a fixed price tied to a feed price. Nearly 6 percent were sold on a fixed price tied to a futures market price.
Grimes said some pricing systems do not affect the variance of price received by the producers: “Only cash contracts – the ones usually tied to futures – and contracts without ledgers reduce producers’ price risk. These contracts may or may not result in a realized average price that is different from the actual average spot price. These classes of agreements account for 16.7 percent of the hogs covered by this survey, up from 15.6 percent in 2000 and 9.9 percent in 1999.”
Compared to similar studies in previous years, the number of hogs being sold by contract has steadily increased, led by an increase in hogs sold by a formula. The percentage of hogs sold on the spot market has fallen from 26 percent a year ago, 36 percent in 1999, 43 percent in 1997 and 62 percent in 1994.
Grimes explained that of packers who produce hogs, most price them with a formula contract through the production unit of their firm. The U.S. hog production owned by packers or companies with packing plants in January was estimated at 27 percent, up from 24 percent a year ago.
Pricing Methods for U.S. Hogs Sold in January (in percent)
Pricing Method 1999 2000 2001
Formula (reported price plus an amount) 44.2 47.2 54
Fixed price tied to futures market price (cash contract) 3.4 8.5 5.7
Fixed price tied to feed price (no ledger maintained) 2.9 3.3 6.4
Fixed price tied to feed price (ledger maintained) 6.9 9.0 9.8
Window, risk sharing (no ledger maintained) 3.6 3.8 4.6
Window, risk sharing (ledger maintained) 1.0 0.8 2.0
Other (packer owned, internal transfer) 2.3 1.7 0.
Total non-spot market purchases 64.2 74.3 82.7
Total spot market purchases 35.8 25.7 17.3
Source: Glenn Grimes, Professor Emeritus, University of Missouri at Columbia
These packers were surveyed:
Smithfield/Morrell, IBP, Swift, Cargill/Excel, Hormel/Rochelle, Farmland, Seaboard, Premium Standard/Lundy, Indiana Packers, Hatfield and Clougherty.
Definitions used in the study:
* Formula price – A set price computed from a quoted market price, with the computations set by a previous agreement.
* Cash contract – A fixed price set by a previous agreement tied to the futures market.
* Fixed, no ledger – This is a fixed price set by a previous agreement (frequently tied to feed price) with no ledger maintained.
* Fixed, ledger – This is a fixed price set by a previous agreement (frequently tied to feed prices) and a ledger is maintained.
* Window, no ledger – A risk sharing arrangement where the packer absorbs some loss below a designated market price and the packer shares some gain above a higher designated market price. No ledger is maintained.
* Window, ledger – A risk sharing arrangement where the packer absorbs some loss below a designated market price and the packer shares some gain above a higher designated market price. A ledger is maintained.
* Other – This includes packer-owned hogs, which are not included in other categories.
* Spot – Cash market