Grimes: Most Hogs Sold on Contracts

March 14, 2001

Most hogs are sold via contract, with more than half sold by a formula, according to a checkoff-funded research survey by the University of Missouri. The findings were reported during the National Pork Industry Forum by Glenn Grimes, agriculture economist with the University of Missouri.

Eleven packing companies were surveyed in early February and asked to classify their purchases during January. Federally inspected slaughter for Jan. 2-27 was 7,442,297 head. Companies in the survey accounted for 86.9% of federally inspected slaughter during that time.

Results show that during January, 17.3% of hogs were sold on the spot market. Of the rest, 54% of hogs were sold via a formula - a reported price plus some amount. About 16% of hogs were sold on a fixed price tied to a feed price. Nearly 6% were sold on a fixed price tied to a futures market price.

Grimes said some pricing systems do not 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. These contracts may or may not result in a realized average price that is different from the actual average spot price. These classes of agreements account for 16.7% of the hogs covered by this survey, up from 15.6% in 2000 and 9.9% in 1999."

Compared to similar studies in previous years, the number of hogs being sold by contract has steadily increased, led by an increase in hogs sold by a formula. The percentage of hogs sold on the spot market has fallen from 26% a year ago, 36% in 1999, 43% in 1997 and 62% in 1994.

Grimes explained that of packers who produce hogs, most price them with a formula contract through the production unit of their firm. The U.S. hog production owned by packers or companies with packing plants in January was estimated at 27%, up from 24% a year ago.