Contract market and vertical integration structures rapidly replacing traditional spot markets provide a good alliance for pork producers and packers, and consistent, high-quality products for consumers, according to a study released recently by Purdue University.
The study used 1998-2000 data as a basis for simulating spot market, contract market and vertical integration production systems for a fictitious, small Midwest packing plant. The plant, modeled after an actual packer, purchases 74,000 hogs/week.
“We found that profits for packers and producers weren’t greatly increased by increasing vertical coordination,” says Allan Gray, one of four Purdue agricultural economists who prepared the paper, “Evaluation of Alternative Coordination Systems Between Producers and Packers in the Pork Value Chain.”
But quality of cuts was vastly different. In a spot market, the packer simply takes what the producer has to offer. Quality is superior in a contract market system because the packer can relay back to the producer the kinds of hogs that he needs, Gray says.
Purdue used a model to take out the issue of whether packers are forcing people to move to vertical integration, to determine if all parties still benefit from a coordinated production system.
Gray says both producers and packers gain production efficiency and profitability. Vertical integration maintained a more consistent flow of hogs through the production chain than the spot market. And, contract and vertically integration systems were better than spot markets at delaying the marketing of lighter pigs, which yield fewer pounds of lean meat.
Spot markets offer higher prices when the market is strong. But hog farmers face less price vulnerability when operating by contract or in a vertical integration structure.