Smithfield Foods, the world's largest hog producer and pork processor, said this week its first quarter earnings fell short of expectations because hedging strategy backfired. Officials said the company failed to benefit from rising hog prices during its fiscal first quarter because profits already had been locked in.
August futures the first week in January stood at $57.30, nearly $20 below current contract prices. Smithfield, by using forward contracts to lock in prices early in the year, missed that bump.
With just a handful of mega-hog companies controlling some 80 percent of the production, Smithfield likely wasn't the only one that missed the boat. Courtney Kemp explains one SMALL player's experience with forward contracting and the disappearance of the spot market.
Small town sale barns are becoming obsolete as contract hog sales have become common in the age of large-scale hog confinements. Some feel the shift in hog marketing trends has affected not only the small farmer, but also the market. Jim Laughery is part owner of the Guthrie Stock Pavilion in Guthrie Center, Iowa.
Jim Laughery Guthrie Center Livestock Pavilion: "A big drop in the spot market and the biggest reason for that is because the small producers depended on being able to bring in one gooseneck load of pigs or two gooseneck loads of pigs weekly whereas the way they are today they practically have to be a trailer load or a truck load of hogs whenever they sell."
Small town sale barns have felt the shift first hand, with the number of hogs sold each week at extremely low levels. Laughery says contract hog production has pushed the majority of his sales to cattle rather than hogs.
Jim Laughery Guthrie Center Livestock Pavilion: "It seems as though smaller producers that used to produce a lot of feeder pigs, they kind of went out of business. I don't know just exactly whose fault it is but we don't sell as many pigs any more. I think every auction in the country will tell you that the pig business is the same as gone.
However, a recent study by the University of Missouri shows that although there has been a steady decline in the amount of spot, or negotiated sales, the spot market may be showing signs of stabilizing. The study found that even some larger operations are setting aside a certain number of hogs to be sold on a negotiated basis.
According to the study, the portion of hogs sold on a spot basis by U.S. pork producers was 21.5 percent last year. Although the figure was down from the 26 percent reported in the 2000 survey, the rate of decline has slowed considerably from the 1997 and 1994 surveys, which reported 43 and 62 percent respectively.
Laughery feels that a stabilization or increase in spot sales could in turn help small scale hog farmers get back on their feet if the results of the survey pan out.
Jim Laughery Guthrie Center Livestock Pavilion: "If we're going to get the young farmer back into business spot market is the only one of their biggest assets for them because they can start at a smaller basis and work themselves up so maybe they will have 2000 head of hogs. The feeder pig business I believe will pick up a little. It will never come back to where it was because there again it's in the marketing factor of it. I've probably had about three to five calls a week wanting to know if I'm going to have any feeder pigs."
And what does the future hold for the Guthrie Stock Pavilion and the sale barn industry?
Jim Laughery Guthrie Center Livestock Pavilion: "Well, the big ones will be here, there will be a need for us. I don't know how long with expenses and stuff, you know, how much less you can sell and get by."
For Market to Market, I'm Courtney Kemp.