Question:
What percent of hog firms use forward contracting or options? Why do hog producers not use futures or options?Answer:
Unfortunately data are not readily available on the percent of hog firms using forward contracting or options. What is readily available through Mandatory Price Reporting (MPR) data provided by USDA’s Agricultural Marketing Service is the volume of sales in the four types of producer sold marketing instruments (1) negotiated purchases was 4.9% of sales in 2013; (2) other market formula purchases (based on formula price other than the market for hogs, pork, or a pork product; formula may be based on one or more futures or options contracts) was 10.9% of sales in 2013; (3) swine or pork market formula purchases (formula price based on market for swine, pork, or a pork product) was 61.9% of sales in 2013; and (4) other purchase arrangements (including long-term contract agreements, fixed-price contracts, cost of production formulas) was 22.4% of sales in 2013.
Reasons for producers not using futures or options may include: futures contract quantity is standardized and may not match cash market quantity, do not participate in gains from future price increases, success dependent on ability to accurately forecast basis, futures position requires a margin deposit and margin calls are possible, and option premiums may be too high.
