CME: Why Producers and Packers Benefit from Heavier Hogs

by 5m Editor
31 May 2012, at 8:32am

US - Other drivers of hog weights: Packer buying systems, later weaning. Our Tuesday edition garnered a few comments fro readers, two of which were not included in Tuesday’s discussion but which we think might help others better understand this spring’s high slaughter weights, write Steve Meyer and Len Steiner.

The vast majority of hogs sold in the US are sold on carcass merit pricing systems that pay premiums or apply discounts based on the weight and leanness of individual carcasses. Producers and packers agree on a base price or a formula by which a base price is determined and then each hog is weighed and measured to determine the premium/discount applied to its price based on a pre-established “grid“. The measurement systems utilize a simple ruler, optic probe or ultrasound device to measure fat thickness and, in most cases, muscling to estimate the amount of lean muscle in a carcass. Similar systems use weight, yield grade and quality grade to determine the final price for some fed cattle.

Packers’ pricing grids do not change often but are not set in stone forever. If packers see an opportunity to use their pricing system to change incentives and drive producers to raise a different type of pig, they will do so. Further, one packer changing its matrix will usually lead others to do the same so the market generally sees a wave of adjusted matrixes after is sees one.

Sometimes the changes amount to “raising the bar“ for producers in that the leanness levels required to achieve a premium or avoid a discount are raised. This happened several times in the 1990s as hogs got leaner. What was once a superior hog became the norm as everyone improved. Theoretically, the new “average“ for leanness should have been built in to the base prices paid. One can get plenty of lively discussion (perhaps called arguments) over whether that actually occurred.

Other matrix “adjustments“ were made to respond to muscle quality issues when single-trait selection pressure for hog leanness led to higher incidences of pale, soft pork. Since hog carcasses are not quality graded like cattle (ie. Prime, Choice, Select, etc.), packers had to influence muscle quality through the leanness premiums they paid. The matrix adjustments usually took the form of removing leanness premiums for ultra-lean hogs with, for instance, less than 0.5 inches of backfat or more than 56% lean. History showed that these hogs were much more likely to have muscle quality issues.

The most common matrix adjustments, though, have been in weight discounts. No weight “premiums“ are paid for hogs. An optimal weight range is specified in the matrixes and discounts are applied to any hogs that do not fall within that optimum range. The optimum range differs from packer to packer and is driven largely by the individual packers’ product mix. Hormel has traditionally preferred lighter hogs to go into its extensive further processed and branded product lines. Cargill and Tyson have traditionally preferred heavier hogs to go into their more commodityoriented product lines.

The most recent wave of weight discount changes occurred last year as every major packer increased its preferred weight range for hogs. As can be seen below, the trend is nothing new as average hog carcass weights have increased from about 135 pounds in the 1950s to 206 pounds last year. That figure includes sows, boars and hogs slaughtered at lighter weights. The average weight for top barrows and gilts in 2011 was 203 pounds.

Why is the trend so strong? Economics and genetics. Both producers and packers benefit from heavier hogs as long as those hogs can convert feed efficiently. Efficient hogs allow producers to spread fixed and sunk costs over more pounds of output. Big hogs allow packers to do the same with their fixed (plant, equipment, etc.) and quasi-fixed (labor really can’t be reduced and increased on a whim) costs. Steady selection pressure for hogs that efficiently convert feed to lean meat has reduced the marginal cost of that last pound of gain, meaning more and more pounds of gain are put on each pig. The adjustments in packer matrixes have REDUCED the discounts for heavy hogs and meaning the marginal revenue for those extra pounds increases.

The other factor that may have come into play in carcass weights the past couple of years is later weaning. The industry had moved to average weaning ages of less than 20 days in the ‘90s and early ‘00s in an effort to maximize pigs per sow. But the quality of these pigs suffered as did the size of subsequent litters. The late ‘00s saw a strong trend back to weaning ages of 20-23 days. Those pigs were much heavier and healthier and that leads to heavier hogs at every subsequent point in time. The commenting reader claimed that 1 lb. more at weaning age leads to 4 lbs. more coming out of nurseries (about 8 weeks of age) and as much as 20 lbs. more at a normal marketing age.