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US Pricing Mechanism

Alberta Pork Pricing & Marketing Information: Prepared by Phoenix AgriTec Inc.

Explanation of US pricing mechanisms

Most US pricing mechanisms originate from a base price depending on region and location of the plant. The US Base Price is one of the only similar components between Canadian and US pricing methodologies. Most US pricing mechanisms contain the following components:

  1. US Base Price
  2. Yield
  3. Weight
  4. Grade Premiums

1) US Base Price

The US base price included in a local formula can be one of over a dozen prices reported daily by the USDA for a specific region(s) in the US. Of the 12 or more prices, some are considered purchased data while others are referred to as slaughter data. Below is a definition of the 2 different markets:

Purchase Data Highlights

  • Regional reports are all purchase data, ISM, WCB, ECB
  • Bought by packers on a given day
  • Not processed so no knowledge of carcass characteristics, premiums/discounts
  • Base Price only
  • Different leanness and weights
  • Look forward in TIME
  • Examples: LM_HG 200, 202, 203, 204…212

Slaughter Data Highlights

  • Slaughtered on a given day and purchased over the last 2 weeks
  • Contain more data than purchase data
  • Include base price, net price, live weight, carcass weight, sort loss, backfat, loin muscle depth
  • Standardize % lean
  • Look backwards in TIME
  •  LM_HG 201, 213

As illustrated in the Canadian pricing mechanism explanation, depending on which US base price is used, certain characteristics will follow. The characteristics are the same regardless of where the Base Price is used. Some prices are lagged and others forward- looking which can skew price from day to day or even week to week.

In addition to the information already provided on slaughter data and purchase data, there exist sub-categories within many purchased data prices which are used by some packers to generate daily or weekly cash prices.

Below is a sample illustration and listing of sub-categories and definitions within a purchased or slaughter data cash price.

  • Negotiated
    Cash or spot market purchase by a packer of livestock from a producer under which the base price for livestock is determined by seller-buyer interaction and agreement on a delivery day. The livestock are scheduled for delivery to the packer no more than 14 days after the date on which the livestock are committed to the packer.
  • Other Market Formula
    A purchase of swine by a packer in which the pricing mechanism is a formula price based on any market other than the market for swine, pork, or a pork product. The term “other market formula purchase” includes a formula purchase in a case in which the price formula is based on one or more futures or options contracts.
  • Swine or Pork Market Formula
    A purchase of swine by a packer in which the pricing mechanism is a formula based on a market for swine, pork, or a pork product, other than a future or option for swine, pork, or a pork product. (WCB pm + $1.75) or (Cutout - $9.00)
  • Other Purchase Arrangement
    A purchase of swine by a packer that is not a negotiated purchase, swine or pork market formula, or other market formula, and does not involve packer-owned swine. (COP, Corn price matrix)

Packers in the US are known to use multiple combinations of the above listed categories to differentiate themselves from rival plants. The use of multiple subcategories or combinations makes it challenging to pinpoint exact formulas for specific delivery locations.

In addition to USDA reported cash prices explained above, some US packers have adopted the use of the USDA National Carlot Pork Report, commonly known as cutout, to purchase live hogs. Typically, a percentage is applied to the carcass value generating a US Base Price. It is from that base price that the next step in US pricing begins.

 


For the purposes of this report and price comparisons, Tyson uses a combination of values reported in the purchased data base price known as the WCB pm (LM_HG 212).

2) Yield

Hog pricing in the US does not contain a conversion factor. It does not require one as pigs purchased in the US are susceptible to a measurement known as YIELD.

Yield is a percent measurement of meat on a particular carcass and varies by plant and slaughter method. The amount of yield dictates value of a hog as total live weight is multiplied by yield to achieve a carcass weight which is then applied against the Base Price. The greater the yield, the higher the value of the hog.

3) Weight

Unlike Canadian plants, many US slaughter facilities weigh and report weight LIVE prior to slaughter and apply an actual measured yield to get carcass weight. In Canada, an assumption is made for yield at a value of 80%. This value has been used since the inception of the new pricing methods approximately 10 years ago.

4) Grade Premiums

US hog prices in many cases do not include an index like that of Canadian methods, but rather have pre-determined grade and yield premiums added to the US Base price depending on carcass quality. Each plant varies with its premium structure but typically all are based on carcass quality and characteristics. Net premiums can range from $1 - $8 US per cwt depending on the purchase plant and what US base price is used. As a note, Tyson premiums appear to be very large compared to other plants, however that is consistent with the base price they originate from which is lower on average than other plants.

A common pricing mechanism for calculating cash US $ per hog prices is as follows.

Live weight * yield = Carcass weight

Example – Carcass weight is: 270 * 0.7550 = 203.85

(US Base price + Premiums) * Carcass weight = US $/hog

Example – Revenue Per hog: (($95.00 + $5.50) * 203.85) / 100 = $204.86 US per hog

There is no Foreign Exchange Rate to apply to US pricing so the above example is complete. A base price of $95 at Tyson would net a producer roughly $205 per hog US, FOB the plant. By comparison, the same $95 in Alberta nets a producer $188 before FX is applied and $179 CAN per hog using an FX of 0.9523, conversion of 1.8257, 1.10 index and a $1 premium on the same 270 lb hog.