Livestock Production/Industries, Marketing,

Grimes, Glenn

Meyer, Steve R.

Plain, Ronald L.

English

Research Papers in Economics

 
 
 
 
 
 
 
U.S. Hog Marketing Contract Study 
 
 
 
 
 
Glenn Grimes 
Ron Plain 
And 
Steve Meyer 
 
 
 
 
 
 
Department of Agricultural Economics Working Paper No. AEWP 2004-07 
 
 
 
 
January 2004 
 
 
 
 
 
 
 
The Department of Agricultural Economics is a part of the Social Sciences Unit 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://www.ssu.missouri.edu/agecon 
 U.S. Hog Marketing Contract Study 
January 2004 
 
University of Missouri and Paragon Economics* 
 
 
  The January data for hog marketing arrangements or marketing contracts in the 
mandatory price reporting information was summarized. 
 
  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 mandatory price reporting data was conducted in 2002, two of the 
mandatory price 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 mandatory price 
reporting 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.  In 2002 this group also included contracts tied to feed prices. 
 
4.  Other purchase arrangement.  In the 2003 and 2004 studies this category includes the 
contracts tied to feed prices along with the window risk sharing contracts of previous 
studies.  The mandatory reports do 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 them 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. 
 
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 2004 was 8,697,902 head.  Data 
for 8,034,924 head (92.4% of FI slaughter) are included in the mandatory price reporting system.   
 
 
 
 
 
 
__________________________ 
 
*Glenn Grimes, Professor Emeritus, and Ron Plain, Professor, University of Missouri; and Steve 
Meyer, President of Paragon Economics.  The study was funded by the University of Missouri 
and the National Pork Board. 
  1Table 1. 
Percent of U.S. Hogs Sold Through Various Pricing Arrangements,  
January 1999-2004* 
 
 
 1999
 
2000
 
2001
 
2002
 
2003 
 
2004
   
Hog or meat market formula  44.2 47.2 54.0 44.5 41.4  41.4
Other market formula  3.4 8.5 5.7 11.8 5.7  7.2
Other purchase arrangement  14.4 16.9 22.8 8.6 19.2  20.6
Packer-sold 2.1 2.2  2.1
Packer-owned 16.4 18.1  17.1
Negotiated - spot  35.8 25.7 17.3 16.7 13.5 11.6
*2002, 2003, and 2004 data based on USDA Mandatory Reports, 1999-2001 based on industry 
survey. 
 
 
Non-negotiated or non-spot purchases in January 2004 accounted for 88.4% of the 
purchases of market hogs included in the mandatory price reporting data.  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. 
 
 
 
Figure 1. 
Percent of Hogs Sold on the Negotiated Market 
Year 
62
43
36
26
17 17 14 12
0
10
20
30
40
50
60
70
80
1994*
'95
'96
'97*
'98
'99**
'00**
'01**
'02**
'03**
'04**
Percent
  *University of Missouri, Pork magazine, PIC, DeKalb Choice Genetics,  
    National Pork Producers Council,  Land O’Lakes studies. 
** University of Missouri, NPPC, National Pork Board studies.   
    ’02 - ’04 USDA/NASS data. 
  2  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 
53% of the hogs in the U.S. was directly determined by the negotiated market.  The true percent 
is higher because a high percentage of the packer-owned and packer-sold hogs are priced with a 
market formula. 
 
  About 27.8% of the hogs in 2004 were purchased under some system that supposedly 
reduces price risk to producers, 7.2% were bought on a contract tied to the futures market, and 
20.6% were other purchase arrangements.  These price shifting arrangements amounted to 
34.4% 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 mandatory price reports 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 
lower critical 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 2003 University of Missouri 
unpublished study.  Based on this data, for 77% of the other purchase arrangement hogs the 
price is tied to feed prices and for 23% the contract is a window type.  The ledger contracts 
amount to 61% of the other purchase arrangement hogs and 39% of these hogs have no ledger. 
 
  The continued decline in the negotiated or spot market hogs increases the urgency for 
the industry to find another form of price discovery for most of the contracts.  One possibility is to 
have mandatory price reporting of meat and tie the contracts to meat prices.  
 
  The mandatory price reporting legislation also required packers to report percent lean, 
carcass weight, base price, and net price for each marketing arrangement type.  These data for 
January 2004 appear in Table 2. 
 
Table 2. 
Hog Marketing Arrangements,  
January 2004 
 
 
 
 
% Lean 
Carcass 
weight  
(lbs.) 
Base 
carcass 
price/cwt. 
 
Net carcass 
price/cwt.* 
        
Negotiated 53.34  197.42  $51.66  $53.21 
Swine-pork market formula  54.41  201.71    51.24    53.90 
Other market formula  53.82  205.54    51.89    54.56 
Other purchase arrangement  53.99  202.49    55.18    56.52 
Packer-sold  52.34  205.97    54.76    57.61 
Packer-owned 53.33  196.56     
*Net price includes credits for quality, transportation, time of delivery, etc. 
 
 
 
  3  4
  The negotiated hogs had the second lowest percent lean, the lightest average weight, 
and the lowest net carcass price.  The other market formula hogs had a percent lean close to the 
negotiated hogs.  The other market formula hogs had the highest average carcass weight at 
205.54 pounds. 
 
  The other purchase arrangement hogs had the second highest net price.  This was 
probably due to the generally low price for hogs during January of 2004.  We believe this group of 
hogs will likely have the lowest average price for those months when the negotiated market price 
is unusually high. 

U.S. Hog Marketing Contract Study

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