CME: Decline in Weekly Pork Production Reported

US - The 5-year reauthorization of the Livestock Mandatory Reporting Act of 1999 (LMRA), whose passage by the House of Representatives we mentioned last week, was signed into law by President Obama on Monday, write Steve Meyer and Len Steiner.
calendar icon 29 September 2010
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It all got done with hardly any rancor and without lapsing and causing the troubles that arose in 2005 when the system was voluntary for over a year. The problems were especially acute for lamb producers and the cull cow trade.

The most important changes in this bill deal with the pork industry and the biggest of those changes is that reporting of wholesale pork prices and sales quantities will now be mandatory. Wholesale beef cuts were included in the original LMRA but pork was not, primarily because producers and packers could not agree to recommend it to Congress and Congress told both groups it would not pass anything that the industry did not agree on. In short , it was a deal killer and producers compromised to get a comprehensive system for hog price reporting in place.

The reason wholesale prices/volumes are included this time around is two-fold. First, the power of meat buyers has grown immensely since 1999 and packers/processors have increasingly found themselves at least partially uninformed about market conditions. Not all packers yet agree that a mandatory price reporting system is needed to rectify the situation but enough of them have changed their mind to make the idea at least palatable.

The other reason, of course is the very low percentage of cuts that are now being reported. The following chart shows the per cent of weekly pork production for which prices are reported to USDA assuming truckloads of 40,000 pounds. While never large, the percentage declined steadily through 2004 before rising slightly into mid-2009. Some weeks in 2010 have seen some of the lowest percentages ever. But no one should think that mandatory reporting will drive this percentage anywhere near 100 per cent since a high proportion of hams and bellies are processed by the companies that slaughter the pigs (and are thus never traded at all as an unprocessed wholesale cuts) and a significant proportion of the cuts that are traded are priced on a formula basis.

Producers supported adding wholesale cuts to the mandatory system because they are unsure about the future of hog price discovery due to the consistent reduction of the number of animals sold and bought through negotiated trades (chart below). That category of trades (the blue line) is the basis for most of the Swine/ Pork Market formula sales (the yellow line) and those two categories comprise the CME Lean Hog Index. There is little evidence that the price discovery system has failed in any consistent or significant manner but these dwindling numbers increase the probability that such a failure may occur from time to time. A robustly reported wholesale market is seen as a plausible pricing alternative.

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