Analysts look at hog market woes — and tools to help

CLIVE, Iowa — The Iowa Pork Congress looked different this year, going virtual due to the COVID-19 pandemic, but that didn’t stop event organizers from addressing a hot topic in the U.S. hog and livestock industry — market transparency.

Three market analysts — Bill Kaelin, managing member of K&M Trading LLC; Pat Von Tersch, principal of Professional Ag Marketing; and Tim Hughes of CIH LLC — took on the topic of livestock market transparency.

The trio offered some tools that pork producers can use to find out more about pricing and contracts and protect their own operations from volatility in the market.

“We are increasingly seeing a divergence in the prices received by hog farmers,” Kaelin said.

Kaelin addressed the issue of price discovery in the current hog markets — or lack of it.

“Do we have it in today’s swine industry? I think the answer is definitely not in today’s negotiated hog market,” said Kaelin, who went on to explain why price discovery continues to be needed in the U.S. market.

“Do we even need price discovery? I believe the answer is clearly yes, especially if we want an industry that is going to continue to be characterized by a large number of independent producers,” Kaelin said.

Equal Access

One little-known tool that producers and anyone can use is the Swine Contract Library. Hughes discussed the library and how it works.

The library is operated under the U.S. Department of Agriculture’s Agricultural Marketing Service. The record of swine marketing and purchase contracts is kept as a requirement of the Packers and Stockyards Act.

“It’s intended to aid price discovery process and provide equal access to market information for all market participants. It as built for you, as a producer, and the packers, to know what contracts are out there and being delivered upon at any time,” Hughes said.

Hughes said that the library is not well known throughout the industry and can be used as one of several tools by producers.

“It’s mandatory reporting for each unique contract between packers and producers. It allows for transparency of contracts being delivered upon, and that’s where it kind of stops. It does not report the volume of pigs being delivered on each contract. It doesn’t give you the number of futures on each contract or which packers are using which contracts,” Hughes said.

But teamed up with two other USDA reports that producers likely are more familiar with, the 201 report and the 215 report, the library may be helpful.

“If you take all of this information, download it historically and then build a tool, you can start querying how your pigs were paid relative to your peers,” Hughes said.

One alternate way to have price discovery in the market is via a relatively new product in the U.S. pork market, Kaelin said.

“In early December of last year, CME listed a contract tied to the USDA daily negotiated pork cutout. Specifically, the contract is tied to the USDA mandatory cutout report, the LM_PK602. It settles to an index, which is a five-day average of this cutout and, importantly, is the same size, has the same tick value, settlement months as the lean hog contract,” Kaelin said.

Kaelin said even with the disadvantages of the cutout contract, he believes it is the future of price discovery in the industry.

“There will be those that point to things like it doesn’t reflect values of products sold forward, product that’s sold in exports or in formula or offal values. That said, it is vastly superior in terms of liquidity relative to the negotiated hog contract,” Kaelin said.

Managing Risk

Another tool that producers can use to manage risk is crop insurance.

“For those of us who are also involved in row crop operations and have some feel for that, we now have, on the livestock side of things, and on the hog side of things, in particular, a risk protection insurance that acts a little bit similar to what crop insurance would, at least from the perspective of subsidies,” Von Tersch said.

Von Tersch explained how two separate livestock insurance options work, Livestock Risk Protection and Livestock Gross Margin.

“The way to think about LRP is it’s an awful lot like an exchange-traded put option. We’re finding that it works pretty effectively in allowing for us to not only seek out opportunities to manage price risk or to manage lower prices and lower markets and sync it up with exchange-traded options,” he said.

The other type of insurance is LGM.

“Think about that as a way to protect the historical crush. LGM essentially is buying corn calls, soybean calls, soy meal calls and then also buying hog puts. It’s defending the crush where LRP is just defending revenue, just defending you from lower hog prices,” Von Tersch said.