Livestock Production/Industries, Marketing,

Grimes, Glenn

Plain, Ronald L.

English

Research Papers in Economics

 
 
 
 
 
 
 
U.S. Hog Marketing Contract Study 
 
 
 
 
Glenn Grime 
 
and  
 
Ron Plain 
 
 
 
 
 
Department of Agricultural Economics Working Paper No. AEWP 2008-01 
 
 
 
 
January 2008 
 
 
 
 
 
 
 
 
The Department of Agricultural Economics is a part of the Division of Applied Social Sciences of the 
College of Agriculture, Food and Natural Resources at the University of Missouri-Columbia 
200 Mumford Hall, Columbia, MO 65211 USA 
Phone: 573-882-3545 • Fax: 573-882-3958 • http://dass.missouri.edu/agecon 
   2 
U.S. Hog Marketing Contract Study 
January 2008 
 
Glenn Grimes, Professor Emeritus, and  
Ron Plain, Professor, University of Missouri 
 
Dept of Agricultural Economics Working Paper No. AEWP 2008-1 
 
  
The January 2008 data for hog marketing arrangements or marketing contracts in the USDA 
Mandatory Price Reporting (MPR) system was summarized for this report.  However, participation 
in the reporting system was again voluntary in January 2008 as it was in January 2006 and 2007.  
In 2006 Congress renewed the law making reporting mandatory, but all the necessary rules for 
implementation had not been completed by January 2008.  However, we believe the voluntary 
and mandatory data are comparable between years because virtually all of the same plants 
reported each year. 
 
The definitions for the marketing arrangements in this study are not the same as those used in 
other studies conducted by the University of Missouri and the National Pork Board.  In fact, since 
our first study using MPR data was conducted in 2002, two of the MPR definitions have changed.  
Although direct comparison for all marketing arrangements cannot be made across all the years 
of our studies, we believe the spot market or negotiated groups are directly comparable through 
all of our studies since 1994. 
 
Here are the current definitions of the arrangements reported under the MPR system and the 
changes affecting comparisons of data with earlier studies: 
 
1.  Negotiated.  This is comparable to the spot or cash markets of our previous studies. 
 
2.  Swine or pork market formula.  This is also quite consistent with the same grouping in 
previous studies.  It is a price that is tied to either the spot or negotiated hog market or to 
meat prices.  Studies prior to 2002 included some packer hogs in this group. 
 
3.  Other market formula.  This grouping fits with the futures market group in studies prior to 
2002 and after 2002.  In 2002 this group also included contracts tied to feed prices. 
 
4.  Other purchase arrangement.  In the 2003 and later, this category includes the contracts 
tied to feed prices along with the window risk sharing contracts of previous studies.  The 
MPR system does not provide information about ledgers.  In 2002 this group only included 
the window risk sharing contracts. 
 
5.  Packer-sold hogs.  These are the hogs that are produced by a packer but are probably out 
of position for the packer to slaughter in one of his plants.  Many of these hogs are priced 
with a contract, and in studies prior to 2002 most were included in Item 2 above.  In 2007 
and 2008 this group also included hogs sold by the farmer-owners of Triumph Foods and 
Meadowbrook Farms cooperatives and some of these hogs were sold on the negotiated 
market.  
 
6.  Packer-owned hogs.  These are the hogs that are produced by the packer who slaughters 
them.  In our studies prior to 2002, most of these hogs were included in Item 2 above.  The 
integrated operations use formula pricing methods to determine the amount of revenue to 
allocate to their hog production divisions. 
 
Total hog slaughter under Federal Inspection in January 2008 was 10,473,760 head.  Data for 
9,494,870 head (90.7% of FI slaughter) were reported through the MPR system.  All of the MPR   3 
reported hogs were barrows and gilts, which amounted to 93.6% of all barrows and gilts 
slaughtered under FI in January. 
 
Table 1 
Percent of U.S. Hogs Sold Through Various Pricing Arrangements,  
January 1999-2008* 
 
 
 
 
1999 
 
2000 
 
2001 
 
2002 
 
2003 
 
2004 
 
2005 
 
2006 
 
2007 
 
2008 
                     
Hog or meat market formula  44.2  47.2  54.0  44.5  41.4  41.4  39.9  41.6  38.3  37.1 
Other market formula  3.4  8.5  5.7  11.8  5.7  7.2  10.3  8.8  8.5  11.0 
Other purchase arrangement  14.4  16.9  22.8  8.6  19.2  20.6  15.4  16.6  15.2  13.4 
Packer-sold        2.1  2.2  2.1  2.4  2.6  6.7  6.1 
Packer-owned        16.4  18.1  17.1  21.4  20.0  22.7  23.1 
Negotiated - spot  35.8  25.7  17.3  16.7  13.5  11.6  10.6  10.4  8.6  9.2 
*2006, 2007, and 2008 data were reported to USDA voluntarily; 2002 through 2005 data are based on 
USDA Mandatory reports; 1999-2001 are based on industry surveys by the Univ. of Missouri. 
 
Non-negotiated or non-spot purchases in January 2008 accounted for 90.8% and in 2007 
accounted for  91.4% of the purchases of market hogs included in the price reporting data.  The 
2006 study showed 89.8%; the 2005 study showed 89.4%; the 2004 study showed 88.4%; the 
2003 study showed 86.5%; the 2002 study showed 83.3%; the 2001 study showed 82.7%; the 
2000 study showed 74.3%; the 1999 study showed 64.2%; and the 1997 study showed 56.6% 
were non-negotiated transactions. 
 
 
 
 
 
 
 
 
By adding the percentage of hogs purchased in the negotiated markets to the percentage 
purchased on a swine-pork market formula, the current study indicates that the price of at least 
46% of the hogs in the U.S. was directly determined by the negotiated market.  The true percent 
Figure 1. 
Percent of Hogs Sold on the Negotiated Market 
Source:   
1994 and 1997 studies by University of Missouri, Pork magazine, PIC, DeKalb 
Choice Genetics,  National Pork Producers Council,  Land O’Lakes. 
1999-2001 studies by University of Missouri, NPPC, National Pork Board. 
2002-08 USDA/AMS data. 
62
43.4
35.8
25.7
17.3 16.7
13.5 11.6 10.6 10.2 8.6 9.2
0
10
20
30
40
50
60
70
80
'94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08
Year
Percent  4 
is higher because a high percentage of the packer-owned and packer-sold hogs are priced with a 
market formula. 
 
About 24.4% of the hogs in January 2008 were purchased under some system that supposedly 
reduces price risk to producers, 11.0% were bought on a contract tied to the futures market, and 
13.4% were other purchase arrangements.  These risk shifting arrangements amounted to 34.5% 
of the independently produced hogs. 
 
"Supposedly" is used in the paragraph above because some of the pricing systems do not 
actually 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.  Other 
arrangements may or may not result in a realized average price that is different from the actual 
average negotiated price. 
 
The data in the MPR system do not permit one to quantify how many ledger arrangements there 
are.  Any amount by which the market price falls short of the arrangement's target price must be 
repaid in at least a portion of ledger contracts.  Some of the contracts contain a sunset clause to 
end after a specified time period.  We do have data on ledgers and other characteristics for the 
other purchase arrangement hogs from a 2004 University of Missouri and Iowa State University 
study.  Based on this data, for 61% of the other purchase arrangement hogs the price is tied to 
feed prices and for 39% the contract is a window type.  The ledger contracts amount to 29% of 
the other purchase arrangement hogs and 71% of these hogs have no ledger. 
 
The rate of decline in use of the spot market increased between 2006 and 2007.  However, we 
believe a substantial portion of the decrease was due to USDA categorizing the hogs sold by 
producers who own Triumph Foods in Missouri and Meadowbrook farms in Illinois as packer-
owned or packer-sold hogs.  Some of these hogs were probably sold on the spot market.  In 
Table 1, note that packer-sold hogs increased from 2.6% in 2006 to 6.7% in 2007 and held at 
6.1% in 2008.  We still believe the number of hogs sold on the spot market is sufficient to 
represent actual supply and demand conditions and result in a fairly accurate price for hogs.  This 
belief is based on the fact that packers’ margins have not indicated that they are purchasing hogs 
at prices much, if any, below their value based on actual supply and demand conditions. 
 
The MPR legislation also requires packers to report percent lean, carcass weight, base price, and 
net price for each marketing arrangement type.  These data for January 2008 appear in Table 2. 
 
Table 2 
Hog Marketing Arrangement Averages,  
January 2008 
 
 
 
 
% Lean 
Carcass 
weight 
Base 
carcass 
price/cwt. 
 
Net carcass 
price/cwt.* 
    lbs.  $  $ 
Negotiated  54.31  199.13  48.09  49.35 
Swine-pork market formula  54.96  204.70  48.45  50.50 
Other market formula  54.99  208.99  60.28  63.53 
Other purchase arrangement  54.58  203.52  58.38  60.19 
Packer-sold  54.77  208.40  49.86  52.57 
Packer-owned  53.59  207.02     
*Net price includes credits for quality, transportation, time of delivery, etc. 
   5 
The negotiated price hogs had the second lowest average percent lean and the lightest average 
weight.  The other market formula hogs (contracts tied to futures market) had the highest average 
weight at 209.0 pounds.  The packer-owned hogs had the lowest percent lean. 
 
This study was funded by the University of Missouri and the National Pork Board. 

U.S. Hog Marketing Contract Study

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