We hear you. In your daily life, commodities don’t really matter to you, right? Look around your house. The gas you use for heating and cooking is a commodity. Your coffee, cocoa, sugar—commodities. Breakfast sausage, hamburger patties, dinner rolls are made from commodities. The cotton shirts you wear, the copper pipes in your house, the electricity that charges your cell phone … you got it—all commodities. Since you pay for all of these items, their value affects your daily costs and your bank account. If you’re a farmer, commodities are your world.
Commodities are basic goods in their original form—gas, wheat, corn, cattle, hogs, cotton, gold, silver, to name a few. From one hog to the next, doesn’t matter which farm they come from, they’re all basically the same and processed into the same products. Yes, there are different colors, markings, and breeds, but hogs are hogs. And, they all have to meet specific minimum standards or grades to be sold as a commodity.
Baseline grades are used to compare one hog to the next when determining prices. One pig may have more fat, another may be leaner. These hogs will get different grades and will have different values in the market. Some buyers even use a grid to help figure out where hogs fall on the grade scale. For the hog market, animals with better qualities (based on belly thickness, backfat, muscling, body width) can get a premium price, which improves the quality of meat in the market—a benefit to the producer and consumer—and allows farmers to make a profit. Learn more about meat judging, a collegiate sport, here.
A farmer sells his hogs to a plant, also known as a processor, to make into other foods items like bacon, pork chops, ribs, and sausage. In Ohio, the number of farms raising hogs have increased by almost 12% over the last five years. Unlike beef, sheep, and poultry production, which has grown considerably over the last 15 years, hog farms are actually down from their 2002 numbers. However, the inventory of hogs in the state is up almost 20% over the last 5 years.
Livestock farmers have many expenses: nutritional supplements, vet bills, medications, general farm costs, animal holding pens, shelter, fencing, hauling equipment, etc. The biggest expense? Feed, which is made of corn, wheat, soybean, and barley—also commodities. Their pricing in the market impacts feed costs. Farmers also have to think about growth rates, regulating temperatures, animal care guidelines, sanitation, market rates, and when to sell. To wait until hogs are fully grown or to send piglets off to a finishing facility.
Everything producers need or use to grow hogs costs money, and they need to recoup or make that money back plus some so they can buy more pigs, pay wages, invest in new equipment, and make other improvements to their farm. That’s if everything is working the way it should. Add in food supply issues, like meat processing plants closing during the COVID-19 pandemic, and those producers have a whole new set of concerns.
Once the hogs are the right weight, they’re ready for sale. What next?
When humans first settled and started farming, they traded their crops or animals for other products they needed, such as hogs for honey and fur pelts. Slowly, as the market turned to cash, buyers purchased hogs directly from farmers using gold coins or paper money.
Eventually, buyers and sellers organized exchanges, a physical place to buy and sell commodities. The first such commodity exchange began in Japan during the 1700s. Farmers would bring their animals or crops to these markets to sell and buyers would bid on them. Over the centuries, other commodities were added: gold, silver, oil, energy, foreign currencies, and even mortgages.
Today, agricultural commodity buyers and sellers make deals, or contracts, many miles away from animals and farms. It would be challenging for a farmer to grow his business if he only had access to processors near his farm. Commodity markets open the buying pool available to the farmer, who can work with brokers to get the best price for their hogs. And processors use the market to ensure they have an even flow of hogs with the right features to make their products.
No single person or group determines the price of a commodity. Hog prices are based on the current value of hogs in the market. To figure out that price, buyers look at current demand (how many buyers want hogs and consumer desire for pork products) and supply (how many producers have hogs to sell), any other factors that might affect price, like the strength of the dollar, news reports about how bacon may be hard to find in the supermarket, or global trade wars.
Unlike other commodities, hogs are sold at a formula price, which we’ll explain in a bit. For a cash market, hogs are sold right on the spot. But 95% of hogs are sold for an agreed upon price when they are ready for market using a futures contract. This means, buyers and sellers agree on a price, a delivery date, and location for delivery in the future. Once the hogs are delivered to the dealer, the producer gets paid. Contracts help farmers manage risk—the possibility that, if they wait to sell, the price of hogs will go down and they could lose money on their sale. Locking in a price as they are growing their animals helps reduce risk.
There are so many factors that can affect commodity prices, it would be impossible to list them all. For crops, weather is a huge factor in pricing. Cold snaps decimate Florida citrus crops. Droughts affect California almonds. Heavy spring rains delay corn crops.
For livestock, prices can be impacted by animal quality, diseases such as swine fever, production improvements or issues, consumer opinions, market trends, etc. If you’d like to dive into commodity pricing, you can learn more here.
This is a really tough question. Every commodity is different, and how they are valued, priced, and traded is different.
Goods can be elastic or inelastic, meaning supply and demand changes based on their price. Agricultural products are considered inelastic. People need to eat, so we will always buy food. If prices go up, you will still buy bread, meat, and eggs, just maybe not as much as you did before the price changed. So, demand changes are small.
Gasoline is a good example of an elastic good. Since there are plenty of choices for where you buy gas, prices have to be competitive. A few cents cheaper down the road from your usual gas station? Now you’re filling up at another station. Demand drops quickly as consumers flock to the cheaper gas station.
Manufacturers can change the amount of food or gas they produce based on demand. But agricultural producers can’t slow production as quickly as other businesses can. They are always growing crops and livestock. So, when hog prices fall, the farmer can’t just stop the hogs from growing. The production costs for a hog farmer remain the same, which means they could make less money on their animals. Locking in a contract price helps farmers plan.
Here’s where it gets tricky. Remember that formula price? Today, no one really knows what farmers will get paid for their hogs. Buyers can’t tell what grade a hog is until it’s been processed. Since the formula agreements are based on today’s hog market, potential premiums based on animal muscling and body characteristics at sale time, plus the future value of the dollar, there is no way to know actual prices right now. Sometimes, being flexible about delivery can affect the price, or the number of hogs that can be delivered and their weights.
Most producers have some kind of agreement with a processor, which includes a negotiated base price, but that agreement may be different from the next hog farmer. Hog carcass prices might be $0.50 per pound, with a range from $0.14 to $0.25 per pound based on premiums for quality grades and discounts on excessive carcass weight (estimates as of July 8, 2020). In the end, when hogs are ready for sale, buyers and sellers both wait for the USDA to release prices, and then run that number through their specific formula agreement.
This complicated pricing isn’t unique to hogs, but the fact remains that farmers can work for six months raising an animal, only to fall short in the end due to forces outside their control. Every sale is a risk. Some farmers are getting into the meat packing business, becoming producer-packers, as a way to have more control over the process. Or independent farm operations are teaming up to negotiate a price based on cost of production, contracts that have a floor and ceiling—how low or high they are willing to go, and futures margin and risk protection. What all of this means is hog farmers have to get creative in this market to stay profitable.