Performance of hog/pork markets under different market structures

Abstract

The U.S. hog/pork markets are characterized as concentrated supply and surplus markets in the Midwest, and scattered and thin markets in the rest of the country. Following from the spatial equilibrium theory, if slaughter costs are the same, the price of slaughter hogs in deficit areas should be equal to the Western Corn Belt price plus freight and handling differentials. The purpose of the study was to test the performance of the different hog/pork market structures to better understand how to improve market performance in the industry, and to provide insight to livestock market alternatives in cases of thin markets. Price-level analysis was used to study and compare market performance of different regions and specified markets. It was clearly demonstrated for over two decades that while deficit markets are expected to command premium prices under competitive spatial equilibrium, this was not the case for the Northeast, Southwest and the Southeast markets, inferring poor market performance. A Part of the cause appears to be due to the opportunity for price discrimination. Price differentials, on the average, are at least $1.00 per hundredweight lower than the competitive model would predict. Since these thin markets do not have the volume to support many slaughter plants, price discrimination appears to be practiced by the oligopsonist buyers in procurement of local hogs, while some firms purchase part of their supplies from the surplus areas delivered at a premium over the local hogs.A similar problem existed in the thin markets of the Prairie Provinces of Canada and the market structure has been changed by producer marketing boards. This appears to be at least a partial solution. In a few places in the U.S., development of producer marketing cooperatives has changed the live hog market structure and reduced the problem somewhat. Clearly, consideration of some of the alternative market structures that offer opportunities to improve performance need to be investigated by researchers and the hog/pork industry. These alternatives include producer marketing groups, producer owned packing plants, contract production by packers and electronic marketing to widen markets.