One of the surprises in the proposed Packers and Stockyards Act rule from Grain Inspection, Packers and Stockyards Administration (GIPSA) was the prohibition of packers from buying animals from other packers. No one really expected this action by GIPSA and its underpinnings are a bit murky.

The packer-from-packer buying prohibition is included in the rule ostensibly to prevent packers from signaling their intents for the larger market by their “bids” and “asks” regarding these animals sold directly to one another. Figure 1 shows the number of hogs sold through the various pricing/transaction methods. Packer-Sold hogs (i.e., hogs raised by a packer but sold to another packer) accounted for 5.98 million head in 2009. That is 5.8% of the barrows and gilts covered by the mandatory price reporting system. These numbers have been trending slowly downward since 2006.

Industry contacts estimate that 2 to 2.1 million of these hogs are those sold by Smithfield Foods’ Utah and Colorado operations. Those hogs move primarily to Farmer John (owned by Hormel Foods) in Los Angeles.

How do these prices compare to those of other hogs? Figure 2 shows the average weekly prices of the animals sold under each method. It’s a pretty busy chart, but I think you can see that the Packer-Sold pigs (light blue line) is generally at or above the level of the other prices – especially the negotiated and swine/pork formula hogs.

Figure 3 shows these same data in another way – as a differential. The lines represent the price of Packer-Sold pigs minus the price of the respective pricing methods. Packer-Sold pigs are sometimes lower-priced than Other Market Formula (OMF) and Other Purchase Arrangement (OPA) hogs primarily because those two pricing methods depend on other markets – futures prices (which represent different time frames) in the case of OMF prices and feed ingredients in the case of OPA. Packer-Sold pigs are almost always higher-priced than the two other methods, which are oriented to the spot market.

So, is this a clear sign of collusion since packers are paying their competitors more for hogs? And, if so, wouldn’t it be a good thing for the rest of us?

I think the higher Packer-Sold prices are more a function of bargaining ability and the time to do it combined with the location of the buyers. Packer-employed sellers drive a hard bargain and packers who buy these pigs may not have many other options.

I suspect that the packer-from-packer buying provision is more a cattle issue since these purchases are not reported separately in any of the fed cattle reports. The trades are included in the reports, but they are lumped into the data for the various pricing methods. Combine that with the “sell-a–week-of-cattle X minutes” nature of the fed cattle market, where “X” is 10 or 15 or 30 from what I hear, and you have a situation where it is very easy to be suspicious – especially of something that you cannot see.

I have talked to many people in the cattle industry about asking Agricultural Marketing Service (AMS) to report packer-sold cattle the way we report packer-sold pigs. They have been generally receptive to the idea. Whether that would satisfy GIPSA enough to withdraw this feature of the proposed rule is not known.

I would suggest that GIPSA’s reaction would be quite telling. If they accept it, I would be inclined to believe they are truly concerned only about signaling and getting the data in the public realm will assuage that concern. If they do not, it would, I believe, confirm my current suspicion that this regulation is a first swipe at banning packer ownership altogether, an idea widely accepted among many of the people in charge at USDA these days.

Should this provision be included in the final rule, it spells big headaches and higher costs for some pork producers. Smithfield, Cargill, Hormel, Hatfield, the owners of Triumph Foods (they have to be “affiliated companies” do they not?) and others will be forced to sell any market hogs they cannot use in their own plants, cull breeding animals and “off” hogs through brokers. Other packers will be prohibited from buying those hogs directly. In addition, it will cause big problems for the two largest sow brokers, Lynch and Parks, since both companies or their “affiliated companies” own packing plants.

I hope this provision falls in the “unintended consequences” category, but I fear that it was clearly intended. And I truly believe that it is completely unnecessary for hogs since we know a lot about this trade already.

Enjoy Some Pork this Weekend
Here’s wishing you and yours an enjoyable Labor Day! The “last fling of summer” is frequently the last fling for pork prices before the fall surge of market hogs, so please do your part to help. Nothing is better than some ribs or chops or grilled smoked sausage!

Due to the Labor Day holiday, this week’s Preview does not include our normal weekly Price and Production tables. You can see the U.S. data at www.lmic.info/priprod/pandp.html, a page on the Livestock Marketing Information Center’s public website. Data for this week will be posted Friday afternoon.

Click to view graphs.

Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: steve@paragoneconomics.com