For my own understanding of the dynamics of the hog industry, I have been thinking through possible motivations that integrators (one firm who has interests in two or more stages of the hog production/marketing channel) have to push prices down and run the independent producers out of business. Read through my reasoning and give me some feedback on whether I am thinking about this correctly.
Many of the integrators are acquiring their pigs through some form of contracted growing with farmers. I assume that those contracts are based formula pricing that uses the open market price as an input into the calculation that determines what the hog producer receives as the contract price. This year the contracts are based on the higher prices from last year, therefore those who had contracted their pigs are not receiving the mind-numbing low prices of the past weeks. They are receiving the higher contract price. Which by the way is being touted as evidence that contract growing is the way to stay in business.
But as we move forward in time, the low prices now will be used in the contracts yet to be made in the future. Therefore a low price now will result in a lower contract price next period and the integrator will be paying less for their primary input--pigs.
The open market price is now being determined by an increasingly smaller number of pigs traded on the open market. The "thinner" the market, the easier it is to manipulate. The cheese market and the accusations against Kraft for manipulating it come to mind.
So integrators have a motivation to decrease the number of pigs traded on the open market, because a thinner market is easier to manipulate. Thus driving independent producers out of busy is in their long term interest.
They also have reason to drive the open market price down because it is a basic component of their contracted price. I have heard antidotal information that the major packing plants are first taking their "contracted" pigs and saying that their capacity does not allow them to buy many "open market" pigs. The packers are the primary drivers of the open market price. It is their demand matched with the supply that determines price.
Most of the packers (not all) are also integrators. We have a situation where corporate entities have economic motivation to push prices down and drive independents out of business.
I am probably over simplifying. Does this make sense to anyone else?
Kate Smith, Philadelphia
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