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US Swine Economics Report - 11th September 2003.

by 5m Editor
11 September 2003, at 12:00am

Regular report by Ron Plain on the US Swine industry, this week explaining why we are now experiencing a slow decline in spot market sales of slaughter hogs.

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Ron Plain
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The rapid decline in the number of hogs sold on the spot market has ended. We are now experiencing a slow decline in spot market sales of slaughter hogs.

According to research done by Glenn Grimes, 62% of barrows and gilts were sold to packers on the spot market in 1994. In 1997, 43% of barrows and gilts were sold on the spot market. In 2000, 26% were spot market sales. In 2001, 17% were. At that rate of decline, spot market sales would reach zero sometime around the middle of this decade.

Under the mandatory price reporting law, USDA/AMS now tracks spot market or "negotiated" sales to hog packers. According to USDA/AMS data, in the last five months of 2001 16.7% of packer purchases of market hogs were negotiated sales. In 2002, 14.66% were negotiated sales. During the first eight months of 2003, 13.81% were. The current rate of decline implies that more than 10% of barrows and gilts will be sold on the spot market in 2005. In fact, the number of spot market sales during the second quarter of 2003, 14.12%, was higher than each of the three previous quarters.

Spot market sales of hogs have been replaced, in large part, by contract sales to packers and to a lesser degree by packers raising their own hogs. During the first eight months of 2003, 65.15% of the barrows and gilts packers slaughtered were acquired under a marketing contract and 18.86% were raised by the packer.

The rapid movement away from the spot market and towards contracts was driven by the desire of both producers and packers for some degree of predictability in future hog sales. The slowdown in the movement away from the spot market to contracts appears to be driven by a desire for more flexibility, especially on the part of packers, than long term contracts allow. Interestingly, the share of barrows and gilts covered by marketing contracts was slightly higher last year, 65.67%, than it has been thus far in 2003.

So, is the spot market for slaughter hogs outdated and doomed to extinction? Or, is it reaching a plateau and will continue for years at the level of 10-14% of barrow and gilt sales? I can make a good argument either way.

5m Editor