With Mandatory Price Reporting now in effect for livestock marketing, producers have the ability to compare their livestock sales receipts with the rest of the industry and determine if their sales arrangements are more or less profitable, and how they are performing. And with that yardstick available, how did you measure up?

An annual survey conducted by the University of Missouri has provided valuable information for 15 years. Livestock economists Glenn Grimes and Ron Plain have tallied the results of several pricing tools in their January report on marketing contracts for hogs. Recent federal legislation makes the comparisons easier, since the price reporting by slaughter plants is required, but Grimes and Plain say their statistics for 2009 are quite comparable to recent years because the same plants have been reporting prices to them under a voluntary system.

Their research covered over 9.1 million hogs, out of the total hog slaughter of 9.8 million under federal inspection. All of the hogs in the Mandatory Price Reporting system were barrows and gilts, and represented over 95% of those slaughtered in January.

As an indication of how hog market pricing has changed in a relatively short period of time, 62% of hogs in 1994 were sold on the spot or cash market with a negotiated pricing structure. However, in 2009, that defined only 8.1% of the hogs sold. In the 1990’s the change amounted to about 10% of the hogs per year that switched away from the cash market to a contracted price. During the current decade, the change has been much more gradual, losing about 1% each year since 2001.

If only 8% of hogs are sold on the cash market 92% are sold with a variety of other pricing formulas. In January 2009, over 41% were sold on a hog or meat market formula, which is tied to the spot market, negotiated hog market, or meat prices. That has been a consistent share over the past 10 years, usually varying less than 3-4% from year to year.

In January of 2009, the next largest group was packer-owned, which represented nearly 26% of hogs sold. That share has steadily grown from 16% in 2002. Grimes and Plain define that group as being produced by the same packer that slaughters them. They say integrators use formula pricing to determine what they will allocate to their hog production divisions. Grimes and Plain also report that some hogs owned by packers may be sold, without going through slaughter plants owned by those packers. Those hogs sold by packers without processing make up only 5% of the volume, but that has been a growing trend, and two years ago comprised nearly 7% of hogs slaughtered.

The economists say that hogs sold on the cash market and hogs sold under a swine or pork market formula make up 49% of hogs, or nearly half that are sold by a negotiated price. Analyzing the marketing agreements, Grimes and Plain say nearly 20% of hogs were purchased from a producer with a formula that reduces price risk for the producer, such as the nearly 8% of hogs tied to a futures contract. However, they indicate that the vast majority of hogs are sold under agreements that put the producer at more risk than the packer. They say the Mandatory Price Reporting system does not allow them to determine the extent of the use of ledger agreements that put individual producers at increased risk.

Grimes and Plain say they believe the 8% of hogs sold on the spot market represents a true supply and demand volume and determines a fairly accurate price for hogs. They say that is based on the fact that packer margins indicate they are buying hogs based on supply and demand.

Summary:
The significant changes in the livestock packing industry over time has lead to more hogs being owned by packers, and fewer hogs being priced with the spot or cash market. While the bulk of hogs are priced with a formula paid by packers to producers, producers seem to be taking more of the pricing risk than are the packers. With less than 10% of hogs sold on the open market, it may still be a sufficient number to actually determine hog values, since packer margins have been parallel to those few hogs sold for slaughter on the open market.