Who's getting paid what? That's the million dollar question in the hog markets lately.
On the day hogs traded near $10/cwt., how many producers actually bargained for and accepted a bid for that amount? Maybe only 30%, if USDA's new hog report provides any indication of true market conditions.
The USDA has been overhauling its report of daily hog prices. Starting in mid-November, USDA's market reporters in Des Moines, IA, added a new wrinkle to their daily report on Iowa and southern Minnesota sales direct to the packer. The wrinkle is a line called "negotiated sales." In January, the reports for direct sales to the packer for the Illinois and Indiana-Ohio markets also started posting negotiated sales.
Negotiated sales are sales based on a negotiation between the buyer and seller for delivery of hogs within a week. Sales based on a prearranged contract or formula and sales made over a week in advance are not considered negotiated sales. What USDA calls negotiated sales are what most producers think of as spot or open market sales.
The negotiated sales number has moved up and down but was generally in a range of 20% to 40% of the total sales in Iowa and southern Minnesota through January. USDA's estimated daily movement of hogs varied between 115,000 and 140,000 throughout January.
The Illinois reports tend to have a higher percentage of negotiated sales, generally 30-50%. Daily movement there ranged from 25,000 to 42,000.
The Indiana-Ohio percentage of negotiated sales tracked the Iowa-southern Minnesota numbers fairly close. Daily movement in that region was between 28,000 and 40,000.
On the east coast, there are hardly any negotiated sales. Almost all are formula sales, according to Mike Erwin, of the USDA Agricultural Marketing Service's Des Moines office, but most are tied via a pricing agreement to the reported prices in the Midwest. He puts the number of negotiated sales at 30% nationally.
Erwin says that although there are many hogs now sold on a predetermined fixed price, or on a corn and soybean meal matrix, the majority of hogs bought in the U.S. are still based, to some degree, on the quoted USDA price.
For example, a producer who agrees to deliver a semi-load of pigs every week for the weekly average of the USDA quoted Iowa-southern Minnesota plus $3/cwt. Or, a producer may sign an agreement to sell hogs on a contract price which splits the difference between $40/cwt. and the USDA quoted price.
But on a daily basis, Erwin figures only 30% of the hogs sold are sold on the spot market.
Erwin suggests tracking the number of negotiated sales can give the producer some idea of how many hogs a packer needs to buy as compared to how many he already has locked in.
John Lawrence, Iowa State ag economist, notes that while there is a concern about the shrinking percentage of negotiated sales, he still thinks the number of sales is large in total. "There is a sense there is no open market left. If we see 50,000 hogs priced in negotiated sales in a day, and assume on average they were 100 hog lots, that's still 500 separate sales," Lawrence explains.
The reporting of negotiated sales is just one of a number of changes the USDA is adding to its reports to try and better reflect actual prices.
Erwin points to the tremendous change recently seen in the hog industry's marketing structure as the reasons for the changes. Among the biggest he cites are:
* Negotiated sales have declined to less than a third of the total sales of hogs nationally.
* Over 85% of hogs are bought on a carcass basis, rather than live weight.
* Packers may have purchased hogs a week or more before they kill them.
* The industry has moved to a percent lean basis, with the average hog in the 51-52% lean, compared to 46-48% lean that was the standard used since 1978.
* Hogs are heavier, leaner, and have a higher dressing percentage, now in the 74-75% range.