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Are the price signposts changing?

Continued emergence of producer owned packing is setting up a new closed market channel which may evolve its own pricing structures which take it farther and farther from the common, historical patterns.

Tuesday 9 May 2017 (20 days ago)

There are a lot of commentators who are glossing over the fact that the US Pork industry remains mired in a cash market which is not producing profits for those who are receiving the current market price. Many producers and firms do not receive the current market price due to contractual commitments they have with various processors. These contracts are generally determined by a formula which attempts to reduce long term price risk.

Some examples include calculating prices based on cost of production plus a margin (cost plus contracts), market formula contracts based in some way on the futures markets and with these I would lump in those who regularly hedge themselves using the futures markets. Lastly those who use some other method to determine price like a percentage of the pork cutout (a reassembling of the pork carcass value from the value of the individual wholesale cuts) or some formula based on a weighting of the primal cuts of pork.

The motive for choosing some other method of pricing vs the current market is almost always risk management. The alternate method is selected because it has, over a long period, a lower variance or range of outcomes. In the long run, market theory would also tell us that these producers trade off some amount of the average price for a reduced range of prices they face in the contract. People love to taut how well they are doing, when they are achieving more than the current market and then characterize it as somehow unfair when the other side of the coin comes around and they are receiving less than market prices.

This is one of those years when having a pricing agreement other than the current market price would likely be advantageous. As we mentioned last time, the peak of the early year seasonal hog price upswing, which happens several weeks before Easter because of large scale ham purchases by processors for the holiday, had peaked early and prices were falling. That downtrend has continued though the first of May which is strongly counter cyclical. If there is a downturn after the ham buying season it is usually minor and the summer rally begins (albeit slowly) after a week or two. We should be well into the upswing of the summer rally and have just now, in the last week or so begun to see the markets turning upward.

While it is still a little early in their development to command sufficient volume to markedly affect long term seasonal patterns, we are seeing the development of numerous new supply chains in the US and these chains are reinventing the price determination process for participant producers. If these channels continue to grow, they may substantially effect the long known signposts of the seasons which are reflected in the cycling up and down of hog prices. We may be seeing some of this already.

Expect new market chains, with their own partially or wholly independent pricing schemes to develop around branded offerings which can be about the meat attributes themselves or about lifestyle and other issues. For instance, we are seeing in the U.S., the explosion of meal service companies who operate via a weekly subscription service over the web. The buyer can order (typically) up to two meals per day for the week or some period of days and all the raw ingredients are assembled from market channels and sent in a protected packaging, with recipe/instruction card and picture of the finished dish. Usually, the meals are designed by a noted chef or team of chefs (often ones having recognition from a television series). It is typical for the various ingredients to be high quality, or artisan sourced but in small quantities with no waste. For instance, the package may contain bleu cheese from a single organic dairy, fresh herbs, beef or pork from artisan breeds or simply from a market channel of 50 to several hundred farms which produce animals under a protocol devised by the meal provider.

While these chains are currently small, large market channels are in the works for antibiotic free pork, humanely raised pork (by several different audited criteria which support the branding of the final product). In addition, the continued emergence of producer owned packing is setting up a similar closed market channel which may evolve its own pricing structures which take it farther and farther from the common, historical patterns. It is expected that over the coming years, while the vast commodity pork channel will dominate, the specialty market channels will begin to more and more pull hogs out of the typical pricing mechanisms of those commodity markets. This will make price forecasting, difficult already, especially by reference to the well-known seasonal patterns as well as forecasting the futures markets basis relationships (the key element in getting what you "expect" from a hedge) to be far more difficult than today.

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