Friday’s USDA/Department of Justice “Competition in Agriculture Workshop,” held in Ankeny, IA, was long on rhetoric, but surprisingly balanced regarding substantive issues. A wide range of opinions were expressed and the proceedings were far more orderly than most expected.
The first of four scheduled workshops, the original title was “Issues of Importance to Farmers.” But the Ankeny event included discussions on seed and pork issues. The seed discussion focused primarily on Monsanto’s position in the soybean and corn trait market. The pork industry discussion was much broader.
Future sessions will be held in Normal, AL, focusing on poultry issues, Madison, WI, targeting dairy issues, and Fort Collins, CO, on beef and lamb issues. A final workshop will be held in Washington, DC, and concentrate on issues regarding farm-to-retail price spreads.
Pork was originally scheduled to be part of the Fort Collins meeting on “Livestock Issues,” but someone in Washington must have discovered that a good number of hogs are raised in Iowa and decided that this might be a good place to talk about pigs.
The primary dose of rhetoric for the day came from the first panel which was comprised of politicians, including Secretary of Agriculture Tom Vilsack and U.S. Attorney General Eric Holder. Most of the session was devoted to some degree of populist positioning, but one take-away was clear: Federal agencies will be more active than in past years regarding competition issues.
As a consumer and a taxpayer, I’m not sure that is a bad idea – given the debacle we have seen in financial markets – and provided the agencies stick to the facts and to correct analysis methods. That proviso is my primary area of concern.
Iowa pork producers Todd Wiley and Chuck Wirtz represented our industry well and they clearly demonstrated the differences in the ways hogs are raised and marketed and the differences in producers’ preferences. Both raise hogs in modern buildings, though Wirtz’ operation is designed to meet certain specification for a niche market. Wiley uses marketing contracts for most of his pigs because he wants guaranteed market access and the time-efficiency that marketing contracts afford.
Wirtz, on the other hand, negotiates the prices of nearly all of his hogs. He calls six packers each week to check their market hog needs for the succeeding week, and negotiations progress from there. Wirtz acknowledged that negotiating pigs takes time and effort, but he believes it is his responsibility to participate in the process and challenged other producers to “at least negotiate some pigs” each week to contribute to the price discovery process.
Negotiated-Price Hog Numbers Declining
Concern about the dwindling number of pigs whose price is negotiated each day will be a recurring theme of these discussions. Figure 1 shows the history of the various methods of pricing hogs and the decline in the share of negotiated-price hogs is clear. In fact, that number reached an all-time low of 4.9% the week of Feb. 29. At the same time, the share of total hogs owned by packers continues to trend higher while the percentages of pigs on other market formulas (virtually all contracts tied to Lean Hogs futures) and swine/pork market formulas hover around 50% and tend to move opposite of each other over time – indicating that hogs move back and forth between these two methods.
There is no “magic number” that needs to be negotiated for the market to efficiently and accurately determine the value of these “marginal” hogs. When I say “marginal”, I don’t mean to put these hogs down or to imply they are inferior. Neither is necessarily true. “Marginal” means that these are the last hogs valued. These are the hogs near the intersection of S and D in Figure 2 that determine the equilibrium quantity (QE) and price (PE). And in this case, the marginal hogs determine not only the price of the negotiated animals, but of the 40% of the hogs valued at or near that negotiated price.
A very small number of animals could do that if market information is sufficient and the people doing the negotiating have relatively even power AT THE PARTICULAR POINT IN TIME. I capitalize that last phrase because it is both important and dynamic. Sometimes – such as in recent weeks – owners of the marginal pigs are in the driver’s seat and can be very effective in getting higher prices. Other times – such as last summer and during the fall of most years – owners of those pigs have very little leverage and must settle for lower prices. Neither of those means the market is inefficient or incorrect. They just mean it is volatile.
With all of that said, the dwindling proportion of hogs in negotiated sales is concerning. The smaller proportion increases the probability of a mismatch between supply and demand and, thus, will like exacerbate the volatility. And with the thinness of wholesale pork price reporting, the cutout value is probably not a good alternative. What’s more – and I may be alone in this fear – the record for negotiated sales since mandatory price reporting of hog prices began is not too comforting for what might happen to pork markets with mandatory pork reporting. It appears that mandatory reporting may make participants more comfortable with the information and quicken the move to formula pricing. A rather perverse result, yes, but we have to at least consider that possibility give the pattern in Figure 1.
In the end, the message from Todd Wiley and Chuck Wirtz (and from several other panelists) on Friday was clear: Whatever the problems, we think government intervention will not solve them. Participants asked that the industry be allowed to solve its own problems. Some government help may be warranted to facilitate that process, but I hope that plea fell on open ears in Ankeny.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.