Pork Industry

The prices being paid for hogs in the open market (spot prices) plunged in 1998, dropping from $0.45 cents per pound in May to below $0.10 cents per pound in December?well below the estimated cost of $0.35 cents per pound to produce a hog. At the same time, the Department of Agriculture (USDA) reported that the sharp decline in hog prices was not fully reflected in pork prices at the supermarket. For this period, USDA reported that the difference between the prices farmers received for their hogs and the prices consumers paid for pork was wider than it had been in decades. This report examines the (1) structural changes in the pork industry that have occurred since the 1980s and their effect on production and marketing, (2) reasons for the sudden and rapid decline in prices paid to farmers in late 1998, and (3) extent to which USDA's methods for obtaining and reporting on prices at the farm and retail level for hogs and pork products yield accurate estimates of these prices. Accurate prices are important because they provide farmers with reliable information upon which to base production and marketing decisions.

GAO noted that: (1) changes in the structure of the U.S. pork industry are occurring in response to increased efficiencies in hog production and processing and to consumer preferences for leaner, more consistent meat products; (2) technological advances, such as improved genetics, and the growing dominance of very large hog farms have accelerated these trends; (3) the majority of hogs are no longer sold in the open market; (4) about 70 percent of hogs are sold through contractual and other arrangements between packing plants--facilities that slaughter and process hogs into pork products--and farmers; (5) hog prices plummeted in late 1998, principally because supply exceeded slaughter capacity; (6) on the supply side, more hogs came to market because U.S. farmers had increased production in response to higher hog prices in earlier years; (7) Canadian hog exports to the United States rose by about 25,000 hogs per week--1 percent of the weekly U.S. hog slaughter--because a labor strike temporarily closed a Canadian plant; (8) with respect to domestic slaughter capacity, four plant closures decreased daily capacity by about 37,000 hogs; (9) because packing plants were operating near capacity, their ability to absorb an increase in supply was limited; (10) USDA's methods for obtaining and reporting hog and retail pork prices have not kept pace with the industry's changes because of funding priorities and a lack of access to data and therefore do not accurately reflect these prices; (11) at the farm level, USDA's reported prices are based on hogs sold through the open market and thus are not representative of all hog sales; (12) at the retail level, USDA reports prices that do not reflect actual consumer purchases; (13) the reported prices reflect an average of selected pork cuts offered for sale, without regard to the actual amount purchased; (14) for December 1998, when reported cash prices for hogs fell to their lowest level in decades, USDA's reported retail price of $2.38 per pound was 14 cents per pound higher than consumer purchases indicated; (15) consequently, the differences in the prices received by farmers for their hogs and the prices paid by consumers for pork products was not as wide as USDA had reported; (16) legislation enacted in October 1999 requires USDA to obtain and report prices paid by packers for all hogs purchased, priced, or slaughtered each business day, including prices for all hogs sold through the open market and most hogs sold through other marketing agreements; and (17) the legislation also requires USDA to report retail pork prices on the basis of actual consumer purchases.