RS20032: Hog Prices: Questions and Answers

Geoffrey S. Becker
Senior Analyst in Agricultural Policy
Resources, Science, and Industry Division

Updated December 15, 1999

Summary

In late 1998, the lowest hog prices in decades created a crisis in the pork industry and prompted the U.S. Department of Agriculture (USDA) and Congress to take a series of actions to assist producers, including direct cash payments, and the purchase of extra pork products to reduce market supplies. The industry sought additional aid as low prices persisted into 1999.

What Has Happened to Hog Prices?

Live hog prices declined steadily from June 1997 to December 1998, except for a brief rally in May and June 1998. They averaged $35 per 100 pounds (cwt.) for all of 1998, the lowest annual level since 1972--and, adjusted for inflation, the lowest of the century. This 1998 average was about $20 below 1996 and 1997, when prices were above $50 per cwt. The average break-even price for producers in Minnesota and Iowa was about $39 per cwt. in late 1998, USDA calculated. During mid-December, some reported prices were below $10 per cwt. Hog prices typically decline by year's end, but rarely that steeply.

By August 1999, cash hog prices had reached a yearly high of $39. USDA has predicted that prices will average in the low $30's for all of 1999, somewhat below a more recent break-even price of about $35. Farm hog prices may average in the mid-$30's in 2000, USDA said.

Why Did Prices Decline?

There was too much pork produced for markets to absorb. The more than 100 million hogs slaughtered in 1998 were about 9% higher than in 1997; packers used those hogs to increase pork production by 10%, to about 19 billion pounds in 1998. USDA predicts 1999 pork production will exceed 19 billion pounds.

Production had expanded in response to the relatively higher prices being paid for hogs in 1996 and 1997, to lower grain prices (feed is by far the single largest cash cost), and to expectations of continuing robust growth in exports. Pork exports increased by 23%, 8%, and 18% in 1996, 1997, and 1998, respectively. They are now projected to rise by about 5% in 1999, before falling by 7% in 2000, according to USDA.

Meanwhile, hog producers had delayed reducing herds in anticipation of a modest decline in beef production in 1999 projected earlier by USDA (but which did not occur). Analysts also say a key factor is the significant structural change occurring in the industry (see end of page).

The National Pork Producers Council (NPPC) and several private analysts also note that several major packing plants closed last year, reducing daily kill capacity by as much as 10%. During the last quarter of 1998, packers were working overtime to slaughter more than 2 million hogs weekly--compared with 1.6 to 1.7 million head per week, on average, in prior years. That deterred plants from taking even more animals off the farm, these analysts note. Nonetheless, even if more slaughter had occurred, additional supply would have reached a market where overall demand might not have been sufficient to bolster prices significantly, at least in the short run.

Did Imports Contribute to the Problem?

USDA economists state that live hog imports were one--but not a major--contributor to low hog prices. Most come from Canada, which exported a record of more than 4 million head to the United States in 1998. That represented about 4% of all U.S. slaughter hogs (however, about a third of these imports were smaller feeder pigs rather than slaughter-ready). In the late 1980s and early 1990s, Canadian hog imports rarely exceeded 1 million annually. According to industry analysts, a labor strike (since resolved) slowed Canadian meat packing operations, forcing animals across the border. Also, the strong U.S. dollar relative to Canada's currency has been a factor (i.e., Canadian animals are worth more here than in Canada). Canadian producers also say they have experienced the same price problems as U.S. producers and needed to expand their own markets. (Hog imports from Canada were about 3.1 million head during January-September of 1998, and about 3 million head during the same period of 1999.)

At the same time, few if any U.S. hogs were moving northward, due at least partly to Canadian requirements that the imported animals undergo a costly 30-day quarantine for pseudorabies prior to slaughter. U.S. officials have been working with the Canadians to facilitate two-way trade; see page 5 for details. (The United States has not had a similar quarantine because Canada is certified as pseudorabies-free.)

What About Structural Changes in the Industry?

Pork production and processing have undergone dramatic structural changes in recent years. From 1993 to 1998 alone, the number of U.S. farms with one or more hogs declined by nearly half, from 218,060 to 114,380, according to USDA. Hog farms in Iowa, the nation's largest producer, also dropped by nearly half, from 33,000 to about 17,000. (These farms have not necessarily closed; some may have shifted to other farm enterprises, or had raised hogs as a part-time operation.)

During the same period, production has become concentrated into fewer but larger operations. In 1993, 990 producers had 5,000 or more hogs each and controlled 18% of the U.S. inventory. By 1998, operations with 5,000 or more hogs reached 1,915 and accounted for 42% of the U.S. hog herd, USDA reports. In 1998 just 50 producers marketed half of all U.S.-raised pigs (a different measure than hog herd size).

Economists attribute these changes to economies of scale, i.e., larger operators tend to have lower per-unit costs when operating at high capacity. Such farms also tend to receive higher prices for their animals because they are more likely than smaller farms to make product quality improvements and to use more sophisticated marketing (e.g., selling through various contracting or futures arrangements rather than on the live cash market).

Have these structural changes exacerbated price problems? In the past, when more output came from smaller diversified farms, producers more readily entered or exited the hog business in response to price changes, meaning that total U.S. supplies also changed more quickly in response to market conditions. Today's larger, highly capitalized operations--where most of the recent expansion has occurred--have high fixed costs. They must continue to produce pigs to meet these costs, even if prices are low. USDA also speculates that recent structural changes "...may have lengthened producers' planning periods. For large operations and for producers under contracts to processors with substantial investments in existing plants, production plans may be based more on the outlook for prospects over several years rather than several months."⁽¹⁾

Have Retail Pork Prices Also Declined?

Yes, but much more slowly. Supermarket pork prices averaged about $2.30 per pound in 1998, compared with about $2.32 in 1997. (USDA uses a weighted average for selected retail cuts from CPI data.) The farm-to-retail price spread for pork--that is, the difference between what the farmer received and what the consumer paid for pork--was $1.82 for 1998, the highest on record. It was $1.50 for 1997. Furthermore, the farm share of the retail price also dipped to 25% in 1998, compared with 39% in 1997. It averaged about 26% from May through October 1999, according to USDA data.

Analysts report that the comparatively steeper decline in farm hog prices is typical of past trends, although more pronounced. Retailers explain that they take longer to lower their shelf prices, and do so less frequently, in part because of concern that they might have to raise them a short time later if their own costs again rise. They believe that their customers prefer stable over fluctuating prices. However, critics charge that stores (and packers) are simply seeking to profit from lower farm prices. USDA points out that stores raise their prices more quickly in response to increases in farm (and wholesale) prices, than they lower them in response to decreases.

USDA data probably overstate both retail prices and the farm-to-retail price spread, in part because CPI price surveys do not recognize the large volume of cuts that move at store sale prices. NPPC reported that a number of retail chains by the end of 1998 were featuring items like pork chops and loins for $1 or less per pound and lean ground pork for as low as 50 cents. Also, the farm hog price used in the spread is a measure only of live cash prices, but many farmers market through contracts that pay more.

What Has the Federal Government Done?

The freefall in hog prices did not become apparent until after the 105^th Congress had enacted 1998 legislation providing "emergency" financial and disaster relief assistance for other commodities. Subsequently, Members of the 106^th Congress began offering a number of proposals to address the hog price issue. One was a successful amendment to a supplemental appropriation (P.L. 106-31) passed and signed by the President in May. It provides an additional $145 million for USDA's Section 32 surplus removal fund (see below) that sponsors said was provided to assist hog producers.⁽²⁾

Not all Members or agricultural interests have been supporters of expanded aid to the hog sector. One concern is that such assistance could competitively disadvantage producers of competing meats, who also are struggling with lower prices and weaker demand this year, they have argued, adding that prices have risen substantially from the late 1998 lows (although they are still low relative to earlier periods). Nonetheless, the government has already taken a variety of steps to assist pork producers.

Direct producer assistance: USDA in the spring of 1999 used $50 million from its Section 32 surplus removal fund to make direct cash payments to producers who applied at local Farm Service Agency (FSA) offices in February. The maximum payment was $5 per slaughter-weight hog marketed during the last 6 months of 1998 to a maximum of 500 head (or $2,500); hogs marketed under certain contracts did not qualify. Eligibility was limited to those farmers (1) still in business; (2) marketing less than 1,000 hogs during the 6-month period; (3) with 1998 gross income of no more than $2.5 million.

USDA used approximately $100 million of the $145 million in supplemental Section 32 funds (see above) for additional payments to producers, under generally the same eligibility criteria. These payments bring an individual producer's total subsidy (including any of the earlier $5 payments) to $10 per head, according to the Administration. An $8.7 billion emergency farm relief package, included in the regular FY2000 USDA appropriations bill (H.R. 1906; P.L. 106-78), earmarks at least $200 million for livestock producers, including but not limited to hog producers, for natural disaster losses.⁽³⁾

Farm credit: Earlier, FSA postponed 1998 farm ownership and operating loan repayments for pork producers and other borrowers suffering from low prices. Loans due January 1, 1999, were added to the end of a borrower's repayment period. Other credit steps included: reviewing pork producer existing loans for possible forgiveness; easing FSA loan approval by basing anticipated pork prices on futures rather than current (lower) market prices; working with farm lenders to encourage loan restructuring until borrower cash flow improves; and imposing a moratorium on USDA credit for new pork production facilities to discourage expansion. The Farm Credit Administration, which is independent of USDA, also encouraged Farm Credit System lenders to take similar steps.)

Pseudorabies eradication: The Animal and Plant Health Inspection Service (APHIS) in January 1999 accelerated the pseudorabies eradication program it has operated cooperatively with states and industry since 1989. The accelerated program was funded through a transfer of $80 million from the Commodity Credit Corporation (CCC; USDA's farm financing fund); the Administration provided an additional $40 million later in 1999. Payments go to producers who destroy infected herds, based on a weekly-adjusted fair market value.

Domestic purchases: USDA's Agricultural Marketing Service (AMS), between February 1998 and June 1999, used Section 32 funds to purchase about 170 million pounds of pork products at a cost of about $165 million. Of this, 97 million pounds valued at $95 million have been "bonus" purchases--distributed to federal food assistance programs over and above levels already planned for, and available to, them.

Export assistance: The Secretary included 50,000 metric tons of pork, equal to about 15% of annual pork exports, in a Russian food aid package signed December 23, 1998. All of this tonnage had been purchased by August 1999. Earlier, pork was approved as an eligible commodity for the GSM-102 export credit guarantee program, which backs commercial financing for foreign buyers of U.S. commodities.

Opening foreign markets: U.S. and Canadian officials have been working to implement a December 4, 1998, agreement between the two countries on a range of agricultural issues, including Canada's consent to allowing the entry of slaughter hogs from 33 states without undergoing extensive quarantine and testing requirements. Elsewhere, the Administration said it has been negotiating lower tariffs and expanding market access for U.S. pork exports to such countries as Venezuela, Singapore, Taiwan, the Philippines, Jamaica, and Argentina.

Pricing and competitiveness policies: Some producers believe that packer concentration has contributed to lower prices by stifling price competition and by a lack of transparency in reported prices. In 1997, the top four packers slaughtered about 54% of the nation's hogs, compared with 40% in 1990. Although USDA has not established a correlation between packer concentration and low prices, the Administration continues to examine this and related issues. For example, on March 31, 1999, a White House (National Economic Council) task force issued a preliminary report on hog industry structure and practices. It concluded that although pork packer concentration has increased, it is still "considerably lower" than in cattle slaughter and "lower than levels that antitrust enforcement agencies ordinarily regard as indicative of a highly concentrated industry."

However, the report also concluded that small producers have been disadvantaged by recent market developments and that "steps should be taken to assure that they can compete effectively and survive," including legislation enabling USDA to require packers to report prices they pay for hogs (see below); stepped-up efforts to educate such producers on how to maximize market opportunities; and a redoubling of the government's monitoring, review, and enforcement of livestock and meat market practices and impacts.

On October 15, 1999, Senator Johnson introduced legislation (S. 1738) that would prohibit most larger meat (including hog) packers from owning or feeding their own livestock. Such a ban was considered by congressional negotiators on the FY2000 USDA appropriation, but ultimately not included. Also on October 15, Senator Wellstone introduced a bill (S. 1739) imposing a moratorium on mergers and acquisitions by large agribusiness firms (generally, those with annual net sales or assets of more than $100 million) for up to 18 months. The bill, which also would establish a national commission to study concentration in agriculture, was offered unsuccessfully as a floor amendment to a Senate bankruptcy reform bill (S. 625) on November 17, 1999. Similar House bills have been introduced­on agribusiness mergers (H.R. 3159) by Representative Pomeroy on October 27, 1999; and on the packer feeding ban (H.R. 3324) by Representative Minge on November 10, 1999.

Mandatory price reporting: Congress did enact this year, in the FY2000 USDA appropriation law, legislation requiring packers to report the prices they pay pork (and other livestock) producers, and the terms of these sales. NPPC and other proponents of mandatory reporting argued that immediate reports of prices, along with terms of the sales, will provide the information farmers need to gain a better price for their own animals. Others argued that mandatory reporting will be costly for government and industry, raise privacy concerns, and not cure low livestock prices. (For information, see CRS Report RS20079, Livestock Price Reporting Issues.)

Country of origin labeling, and grading changes: S. 19, S. 242, H.R. 222, and H.R. 1144 would impose more stringent country-of-origin labeling requirements for imported meat products at the retail level. Proponents argue, among other things, that consumers have a right to know where their products originate (for food safety and other reasons), but some also believe such requirements would provide U.S.-raised products with a competitive advantage over foreign products. S. 19, S. 241, S. 788, and H.R. 1698 would restrict the use of USDA's quality grading services to domestic meats. Provisions to impose country labeling requirements for meats and produce were included in a wide-ranging Democrat farm relief amendment (S.Amdt. 1514) that was defeated by the Senate on August 4, 1999. (See CRS Report 97-508, Country-of-Origin Labeling for Foods: Current Law and Proposed Changes.)

Footnotes

1. ^(back)See also: USDA, Economic Research Service. Vertical Coordination in the Pork and Broiler Industries: Implications for Pork and Chicken Products. April 1999. http://www.econ.ag.gov/epubs/pdf/aer777/

2. ^(back)The bill also temporarily suspends a longstanding Section 32 provision that no more than 25% of available funds can be spent on any single commodity. The intent of the change is to encourage USDA to utilize even more of this year's Section 32 reserve--which USDA holds for unanticipated emergency surplus removals--to assist the hog sector.

3. ^(back)Conference language accompanying the measure directs USDA to consider funding an industry-proposed feasibility study on creating a national producer-owned marketing and processing cooperative. [See CRS Report RS20389, Emergency Farm Assistance in the FY2000 Agriculture Appropriations Act (P.L. 106-78.)]