Last week’s National Pork Industry Forum, the gathering at which both the National Pork Board (NPB) and National Pork Producers Council (NPPC) hold their annual meetings, saw several discussions of economic issues. Most notable among them was action taken regarding negotiated hog sales, a recommended change to USDA’s Agricultural Marketing Service (AMS) hog price reports and a discussion about the current and future level of the checkoff rate.
The action regarding the declining level of negotiated hog sales was a follow-up to discussion at last year’s Pork Forum during which a resolution to encourage producers to sell 10% of their hogs through negotiated trades was defeated. That resolution was introduced at the last minute in 2010, meaning that it had not gone through the normal vetting processes, both formal and informal. It is my opinion that some discomfort with the lack of normal process, not the substance of the resolution, was the reason for the resolution’s defeat in 2010.
The downward trend of negotiated sales as a percent of total barrow and gilt sales that caused last year’s concerns has continued (see Figure 1), reaching an all-time low of 2.7% for the week of Dec. 24, 2010 and averaging only 4.1% so far this year. This year’s resolution was quite simple: Encourage producers to sell and packers to buy more hogs through negotiated trades but remain opposed to any legal restrictions regarding how producers may sell or packers may buy. It passed on a voice vote.
Weekly Preview readers are familiar with this topic and know that there is no “magic number” that is sufficient to guarantee accurate price discovery. The number needed depends on many factors and is impacted by the decisions of producers, packers and their lenders. The process is not cost-free. It takes time, effort and specific talents to negotiate pig prices. Some have those talents and think it is worth the time and effort. Others do not. The question is whether the market functions efficiently and accurately with this few pigs being negotiated.
Pork Forum delegates also recommended that AMS add an estimated net price to its morning, afternoon and prior day purchased swine reports. The Purchased Swine reports include the prices and animal numbers for animals purchased on a given day. Since those carcasses have not yet been measured, USDA only knows the base price paid for them. Some packers pay lower base prices and high premiums while others pay higher base prices and lower premiums. Therefore, any day’s average base price is at least partially determined by which packers are in the market on that day. Market conditions can be identical from day to day but the average base price can change. Base prices are apples and oranges and tangerines and . . . you get the picture.
The Iowa resolution adopted by NPPC delegates calls on AMS to use its now-extensive data set to compute an estimated net price for pigs purchased on a given day by simply adding a given packer’s recent average premium/discount to the base price that particular packer reports on a given day. Different packers will have different average premiums/discounts that will conform to their buying systems and base prices. These yield estimated net prices that represent apples-to-apples comparisons on the day that purchases are being made, not after the fact as in AMS’s slaughtered swine reports that include animals that have been purchased over several recent days and slaughtered on a given day.
Finally, a South Dakota resolution asked the Pork Act Delegate Body to “consider” raising the checkoff rate from its current 0.4% (40¢/$100 value) to 0.45% (45¢/$100 value). The resolution cited increasing needs for domestic and export promotion, the new NPB advertising campaign (“Be Inspired” – more later on that) and greater needs for research in raising the issue. The needs were thoroughly discussed. In the end, delegates chose to not act on the increase this year, especially given the fact that the higher hog prices suggested by current futures markets will result in significantly higher NPB revenues even without a checkoff rate increase. I think the conclusion can best be stated “It’s good to think about and it’s good to have the discussion but let’s see what happens before we start tinkering.” That is a worthy approach, especially when one considers that NPPC’s voluntary checkoff could be adversely impacted by any change to the NPB rate.
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Steve R. Meyer, Ph.D.
Paragon Economics, Inc.