There have been several reports that Canadian-born market hogs are being regularly discounted by U.S. packers. I’m sure that some of those reports are based on fact. But the entire situation is now causing fear that the discounted Canadian-born pigs are dragging down weighted average prices for negotiated and, consequently, swine/pork market formula sales.
How big could the impact be? Not very big, I think, but not zero either. Canadian-born pigs imported 18-22 weeks ago constituted roughly 5% of last week’s slaughter. Negotiated pigs also constituted 5% of last week’s slaughter. It is certain that not all Canadian pigs were sold through negotiated sales. It is more likely that they constitute about the same percentage of negotiated sales that they do of total slaughter – only 5%. If only a portion of those were discounted, their impact on negotiated sale prices would be very small indeed.
Perhaps the larger question is “Why doesn’t USDA just break them out of the report?” In talking to a few people at USDA, I think I have some ideas on that one – and one of them is not “They don’t care.” They do. I believe there may not be much that they can do about it. Consider:
Canadian-born and U.S.-fed pigs are reported only by the state they were fed in. There is no reference in the system for the fact that they were born in Canada. Canadian-born-and-fed market hogs are different. They are noted in the reports. But that really doesn’t help much.
USDA cannot throw out animals or lots with prices significantly above or below other prices. Recall that the General Accounting Office (GAO) report a few years back hammered USDA for throwing out low-priced lots of cattle? They have never to my knowledge done that with hogs, but I’m sure the market reporters and their superiors are pretty concerned about that criticism. So, if data are reported and there is a very low price or a group of very low prices, the law says they have to include that in the weighted average. This is one of those “Be careful what you ask for” items. One of producers’ major demands of the mandatory price reporting system back in 1999 was “Report all of the prices!” and “We want the entire range of prices reported!” So the law was written to require that and here we are. That doesn’t mean the law was wrong. It just proves that it is very difficult to predict the consequences of legislation and policies.
If USDA doesn’t eliminate the prices but simply reports them separately, they basically say that all Canadian-born and U.S.-fed pigs are priced low. But that is not the case. One reason USDA has been slow to move is that some of these pigs have been discounted and others haven’t. There is no consistent pattern and, from what I hear, the low-priced ones have been the minority. Separating the low-priced ones would definitely not be reporting the “market” for those pigs.
And what if USDA published that discounted price, what would the Canadians say when they filed their trade case against mandatory country-of-origin labeling (MCOOL)? I think “See, there’s the damages,” would be pretty close and pretty damning before a North American Free Trade Agreement or World Trade Organization panel. Again, be careful what you ask for.
I’m not certain but pretty confident that these represent the complications that USDA faces in this situation. I’ve talked to a lot of people over the past few weeks and gathered some information from a lot of them. I think these are pretty close and they certainly make sense.
Figure 1 shows daily hog prices by pricing method through Monday. The negotiated series has been pretty volatile since mid-February. But the direction has not been consistently downward and has not even demonstrated a consistent weekly pattern.
And finally, there is also the very real possibility that the prices of U.S.-born pigs have been increased as packers try to fill their “Product of the U.S.” plants. That doesn’t mean there are explicit premiums being paid, but the fact that some plants have had to find pigs to replace Canadian-born hogs suggest that their bids could certainly have increased a bit. And over 90% of market hogs are still born in the United States. It wouldn’t take much of an increase to result in higher industry-wide income that's not much solace at these price levels, but we must consider both sides of any situation.