Integration and all the changes involved with it are finally upon the hog industry, states Jim Sigmon, Securities Corp. of Iowa in Cedar Rapids.
"Integration in the hog industry has been talked about for 30 years," he says. "In the last five years, we've actually put into effect the talk."
And with integration and the growth of large producers has come a huge change in marketing. Sigmon cites a report that 60% of all the hogs sold in Iowa are on packer contracts.
"The interior Iowa-Southern Minnesota hog market used to be the market for the whole country," he says. "I'm not saying that anymore. That market does not represent the large quantity of hogs sold in this country."
"Contracting is here to stay," he assures. Why? Contracts provide packers with a constant supply of a certain quality hog at hopefully the cheapest price possible.
When becoming involved in a contract, Sigmon says to remember, "Packers are buyers and they don't go out with the idea of paying more money." They shouldn't be judged harshly for that, however, because farmers are sellers and they don't go out to sell for less money either, he adds.
Price Discovery With a smaller, non-contract market to set prices, Sigmon is concerned about hog price discovery. "As the base hog market becomes thinner and thinner, what alternative pricing methods will be developed?" he asks.
Sigmon has a few suggestions, which he shared at World Pork Expo.
First, he suggests producers should look more for the 49-52% lean, which is more in line with the current market. Next, he thinks the industry will move to a pricing system based on meat prices. The Chicago Mercantile Exchange (CME) is reviewing a cutout value based on the six primal cuts: loin, butt, picnic, rib, ham, and belly. Sigmon believes a value like this may work for reporting hog prices in the future.
"And as time moves along, I think we should work out formulas using the proposed lean cutout value," he says. "However, this will be hard to accomplish betw een the packer and producer because it involves a packer margin."
Uniform Price Reports In addition, Sigmon says the hog reporting system needs uniformity. Right now, reports from many states are gathered and reported differently. Producers also need market reports that include hogs sold in packer contracts.
"I want to propose we get together with USDA and update that system," Sigmon suggests. "They need to agree on how the market is going to be reported. If we're going to have a national marketing system, then we're going to have to work under the same rules.
"And we've got to know what kind of contracts are out there," he adds. "We've got to know how many and what the costs of those contracts are going into the packer. We can still keep confidentiality."
Sigmon also suggests creating an oversight committee. "I feel very strongly there should be a committee of buyers and sellers - an oversight committee for USDA for market reporting." The committee would ensure uniformity and accuracy.
Sigmon does offer a warning about packer contracts. "I'm afraid we're setting up for another contract disaster somewhere in some of these contracts that are being developed," he says. "We already had a contract disaster in hedge-to-arrive.
"With these contracts that are unregulated and off-exchange with no uniformity, there's going to be some problems," he cautions. He believes more university studies on the effects of packer contracts are needed.
"Some form of packer contract will be necessary. But I don't believe you need to give all your chips to one packer."
Futures Market With his background in commodities, Sigmon supports using the Chicago Mercantile Exchange (CME) to lock in profits. The futures market remains a potential marketing tool for producers.
"The futures market is a regulated market, there for all to see," he says. "It is highly watched and highly regulated.
"The futures market has never been heavily used by hog producers compared to grain producers," he adds. "We do our work and try to educate them. But we still don't see many producers participating."
Why? Sigmon speculates that the hog depression of the 1980s affects hog producers risk-bearing attitude.
But risk brings opportunities, Sigmon likes to remind producers. "The more risks you have, the more rewards you have."
Hog Cycle The hog cycle looks strong and healthy, Sigmon says. It continues on its four-year course with two years of expansion and two years of contraction. If anything, he believes the cycle could lengthen to six years.
"We'll see high-priced hogs and low-priced hogs," he explains. "We're not going to change the economics of the business.
"Profit margins will become narrower on the average," he continues. "But there will still be opportunities to make some very good returns. And that's when we have to be in position to take advantage of those opportunities.
"So instead of hog producers talking about prices, they should be talking about profits and how much margin they can lock in," Sigmon states.
Sigmon suggests a producer take advantage of any time he or she can lock in a $10/head profit or more.
A good marketing plan can help a producer accomplish this. While each plan should fit an individual hog operation, Sigmon shows an example plan that would have worked for 1998:
* The cash hog high for 1998 expected in second quarter, May/June.
* Be ready to place hedges, either futures or puts, May/June.
* Look for normal summer rally by June.
Note: Sell up to 50% of yearly production by end of June. Sell another 25% during July/August period. Our range for 1998 is $35.50 to $42.00 cash and $49.50 to $55.50 lean.