Academic journal article Journal of Agricultural and Applied Economics

Evaluation of Market Thinness for Hogs and Pork

Academic journal article Journal of Agricultural and Applied Economics

Evaluation of Market Thinness for Hogs and Pork

Article excerpt

We investigate thinness of hog and pork markets in terms of quantity and representativeness of negotiated transactions. Transactional volume imparts marginally greater confidence in pricing precision for Iowa-Southern Minnesota negotiated hogs than for the national carcass cut-out, suggesting that contracts tying prices to the former rather than the latter may be more representative of industry conditions. Extending mandatory price reporting to pork may remedy this discrepancy. Despite declining volume, terminal hog markets may price accurately off of Iowa-Southern Minnesota prices. Hog quality differentials across procurement methods are documented, and quality of negotiated hogs is shown to decline with declining volume.

Key Words: Chebyshev's inequality, hogs, pork, thin markets

JEL Classifications: Q11, Q13

The U.S. hog industry, like other livestock/ poultry industries, has experienced substantial consolidation and growth in alternative marketing arrangements since the early 1990s when cash transactions dominated trade (Grimes and Plain, 2005, 2007). With lower quantities (and perhaps quality) of livestock traded in cash markets, these negotiated transactions are increasingly scrutinized as being unreliable or unrepresentative of industry trade. Implications reach beyond cash markets as many contracts are tied to cash prices. Concern for market price transparency relates to the quantity of trades from which the market price, or price range, is derived, and the term thin market is used to describe markets for which reliability of a supply and demand determined price is questioned due to low volume of transactions (Hayenga et al., 1979; Nelson and Turner, 1995; Tomek, 1980) or perhaps unrepresentative transactions (Anderson et al., 2007).

The objective of this study is to examine thin market issues for U.S. cash markets for hogs and downstream negotiated prices for the wholesale pork carcass cutout. Empirical research on thin markets in agriculture typically examines whether the quantity of reported transactions in local markets is sufficient to accurately reflect general market conditions (e.g., Nelson and Turner, 1995; Tomek, 1980). However, transactional volume is merely a proxy for pricing efficiency (Buschena and McNew, 2008) and may not capture quality differentials in hogs transacted through cash markets and contracts (Anderson et al., 2007). Here, we evaluate pricing accuracy as it relates to volume in hog cash markets (i.e., a declining terminal market in St. Joseph, Missouri and mandatorily reported regional prices for Iowa-Southern Minnesota) and voluntarily reported carcass cutout prices. Specifically, we compare volume in these markets to the level necessary to support various degrees of pricing accuracy, given the observed variation in prices. Additionally, using national data, we document purported hog quality differentials across procurement methods and show that quality of negotiated hogs declines with volume.

The paper is organized as follows. The next section presents a brief review of the relevant literature, informing the choice of empirical procedures, which are discussed subsequently and are followed by a description of the data. Then the results are presented, followed by a discussion of their implications in the concluding section of the paper.

Previous Research

Much of the relevant literature in agriculture investigates thin markets in terms of quantity issues. Not only do markets with few transactions (or few participants) hold potential for price manipulation1 (Mueller et al., 1996; Nelson and Turner, 1995), but more generally, some minimum number of transactions is needed to place confidence in average (equilibrium) prices (Tomek, 1980). Relatively few transactions may be required, provided they are representative, i.e., occur at the margin (Smith, 1982). Transaction representativeness has been recognized as a thin market issue only more recently with some cash markets, which often provide a base price for formula contracting, characterized as residual markets, that is markets for lower quality goods (Anderson et al. …

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