Checkoff analysis of USDA price data

DES MOINES, Iowa – A checkoff-funded analysis of USDA price data shows fewer hogs sold through daily negotiated transactions (the spot market) during January 2006 than during previous years, although the prices of more than half the hogs in the U.S. are still determined by the spot market.
The analysis, conducted by pork checkoff consultants, reviewed data collected by USDA.
“If the rate of decline in the percentage of negotiated or spot market hogs returns to the pre-2004/2005 rate, it will increase the urgency for the industry to find another form of price discovery for most of the contracts,” said 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,” he added.
Economists. Grimes is one of three economists who conducted the analysis. Grimes, Ron Plain, professor at the University of Missouri, and Steve R. Meyer, president of Paragon Economics, are economics consultants for the pork checkoff.
The data came from reports created by the Livestock Mandatory Reporting Act of 1999, which went into effect in 2001. However, in October 2005, the reporting system became voluntary because the law requiring mandatory reporting expired September 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. Data for 7,261,064 head (90.4 percent of federally inspected slaughter) were reported through the mandatory price reporting system.
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.
Negotiated market. 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 the price of at least 52 percent of the hogs in the U.S. 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,” Plain said.
More than one-third of hogs were sold 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,” Meyer said.
He added some of the pricing systems do not actually affect the variance of the price received by the producers. Other arrangements may or may not result in a realized average price 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. The negotiated hogs had the second lowest percent lean, the lightest average weight and the lowest net carcass price.
Others. The other market formula hogs had a percent lean close to the negotiated hogs and the highest average carcass weight.
“The packer-owned hogs had the highest base and net prices,” Meyer said.
Direct comparisons for all of the marketing arrangements cannot be made. The definitions for the marketing arrangements in the mandatory price reporting legislation are not the same as the definitions of arrangements reported by similar studies conducted by the University of Missouri and the National Pork Board.
However, the spot market or negotiated groups are directly comparable across all time periods, so this very important portion is consistent with previous studies.
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