The packers’ ravenous hunger for contracted pigs seems to be sated,
says University of Missouri agricultural economist Ron Plain.
That’s a good thing, because until this year packers seemed set to kill
off the cash market in hogs, which would have hurt farmers.
“I think this is very significant,” said Plain of the apparent plateau
in contract hog production. The hog cash market collapsed from
comprising almost two-thirds of all market hogs produced in 1994 to
less than one in five in 2000.
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“You didn’t have to project that trend very far into the future before
you hit zero (cash market),” Plain said.
Packers and producers have been writing long-term production contracts.
It’s a system with advantages for both sides.
Producers have long-term deals that allow them a degree of financial
security, which bankers of indebted hog operations like to see.
The packer gets a guaranteed supply of hogs at prices that are more
predictable than if it was relying on cash market purchases.
Packers can also improve the quality of the meat they produce by
specifying genetic and other quality factors in their contracts with
producers.
But Plain said while contracts offer the industry advantages on many
grounds, both producers and packers would suffer if the cash market
disappeared.
Even if only a few pigs are sold on the cash market, those sales have a
powerful effect, since most contracts are based on publicly reported
hog prices. If there was no cash market, neither packers nor producers
would know where to set their prices levels. Price discovery would
vanish.
Even though the cash market is still shrinking, the rate of decline has
slowed, Plain said.
In January 2002, 16.7 percent of hogs slaughtered in reporting American
plants were purchased on the cash market. In January 2001, 17.3 percent
were cash market hogs.
Plain said he believes the spot market for hogs will stay at 15 percent
for a few years. And he said that as long as it stays above five
percent of all hogs sold, it will offer a reliable gauge of packer
prices.
“I don’t think that at 17 percent there’s any question that it’s an
accurate reflection,” said Plain.
“There’s more than enough volume to serve the purpose.”
Packers have slowed their contracting because they don’t want to
contract 100 percent of their kill.
“Having a portion of their kill acquired off the spot market allows
them more flexibility than they would have if it was all under contract.
“A contract obligates a packer to kill all those it covers. (Cash
market sales provide) flexibility to adjust kill rate to profit
margins, their ability to take down time and do repair work and
maintenance.”
Plain said it also helps the industry improve efficiency. The cash
price is a yardstick against which contract prices and operating costs
can be compared.
Plain said it would be difficult for producers to know what price to
sell or contract their pigs for if there wasn’t a cash market to give
accurate contemporary prices. The levelling off of the decline in the
cash market should be reassuring for pig producers.
“We think producers may well have an adequate cash market for years to
come,” said Plain.
