Mandatory Wholesale Pork Cutout Prices Go 'Real Time' April 1

Mandatory Wholesale Pork Cutout Prices Go 'Real Time' April 1

Producers and packers who use cutout values to determine cash hog selling prices will need to evaluate their formulas and consider changes.

Pork packers sell pork by the individual wholesale item. Pork producers sell meat by the hog. The wholesale value, or pork cutout, is an intermediate step between the producer and the retailer.

Some producers and packers base the trading price of live hogs as a percent of the wholesale pork cutout value. For example, if the cutout is $86, the packer might pay the producer 94% of that value or $80.84 per cwt. for the cash hog.

The industry is transitioning from voluntary reporting to mandatory reporting. So far, pork cutout values calculated from mandatorily reported data are running higher than values calculated from voluntarily reported data.

Producers and packers who use cutout values to determine cash hog selling prices will need to evaluate their formulas and consider changes.

Industry participants who are using cutout values in pricing formulas need to be evaluating those formulas to determine if adjustments are needed.

Mandatory reporting's goal is to make prices that are reported better reflect what is happening in the pork trade. Mandatory pork reporting is boosting the number of transactions for which prices are reported. From March 19 through 22 mandatory reporting gathered sales on an average of 385 loads per day. Voluntary cutouts were based on an average of 55 loads per day.

USDA will publish cutouts based on both voluntarily reported data and mandatorily collected data for some time. However, at some point, USDA will cease publishing the voluntarily reported cutout. Some market participants, including ourselves, believe number of transactions voluntarily reported will diminish rapidly once USDA begins publishing mandatory values on a real time basis Apr. 1.

Some background

The Final Rule establishing Livestock Mandatory Reporting for wholesale pork became effective on Jan. 7, 2013. The rule requires pork processors to submit price and volume information for all pork sales transactions to USDA's Agricultural Marketing Service. Mandatory price reporting for boxed beef cuts and lamb cuts have been in place since 2001.

Since Jan. 7, AMS has been releasing the pork data on a seven-day delay to facilitate the pork industry's transition from voluntary to mandatory pork reporting. This week AMS has been diminishing the delay. On Apr. 1 AMS will publish mandatory cutout values for March 29 and Apr. 1. From Apr. 1 forward, AMS will publish the mandatory cutout values on a real time basis.

Initial comparisons

Preliminary mandatory reporting data suggest individual pork items have been generating higher values for primal pork cuts than AMS has been picking up for the voluntarily reported cutout. That could mean that packers have been capturing a wider spread between what they pay for hogs and what they have been getting for the meat than one would calculate based on cash hog prices and the data collected for the voluntary cutout report.

AMS also upgraded yields to reflect hogs currently coming to slaughter plants. In short, more meat per hog contributes to a higher carcass cutout value.

Mandatory reporting is also capturing smaller than carlot loads, which typically trade at higher prices.

Mandatory reports also captures data on pork going to Canada and Mexico. Voluntary reporting only captures domestic trade.

It's too early to conclude that packers have been under paying for hogs. A portion of the wider spread may be going to cover a portion of packing costs. If part of the wider spread is going to cover packer costs, packer buying practices may change. Rather than paying say 94% of the cutout value for a hog, the packer may pay 91%.

Analysts do not have a way to know how the system will adjust. However, all players, particularly producers, hope the new reports will result in more transparency in the market and a system that is fairer to all participants.

Only packers will report

During the transition AMS will issue three wholesale pork cutout reports.

NW_LS500 is the current voluntary pork cutout report. It reflects:

* Negotiated meat transactions made by packers, brokers, processors and retailers

* Data for trades occurring up to 3 p.m. the day of the report

* Purchases equated to FOB Omaha basis

AMS will eventually discontinue NW_LS500.

Mandatory pork price reporting generates two estimated pork cutout value reports.

LM_PK602 reports prices FOB the packing plant.

* Meat transactions will be gathered only from packers

* Packers will report prices at the packing plant's shipping dock for individual processed items

* Labor costs, other processing costs will be subtracted out

* AMS will calculate a weighted average of the individual items to get a price for each primal cut

* AMS will then calculate a weighted average of the primals to get a price for the carcass

* Reports will be issued twice a day. The afternoon report will cover transactions from 1:30 p.m. of the previous day to 1:30 p.m. on the day of the report. The morning report will cover transactions from 1:30 p.m. of the previous day to 9:30 a.m. the day of the report.

LM_PK603 will report prices FOB Omaha. Packers will start with the same prices for individual items at the packing plant's shipping dock as they do for LM_PK602. However, packers will adjust those prices for transportation costs to generate FOB Omaha prices, roughly parallel to the current voluntary report.

Initially, AMS will report negotiated cutouts. Eventually AMS will compile reports for export trades, forward trades and formula trades. Doing so will provide data to generate a composite pork cutout much like the composite beef cutout value.

Get reports from AMS website

To get both the mandatory and voluntary reports, click here.

For a comparison of voluntary vs. mandatory reports, click here.

Suppose you're currently pricing off NW_LS500. Start studying the new reports so as to be able to build a pricing plan for when NW_LS500 goes away.

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