Production Contracts and the Spot Market Price of Hogs
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The increasing use of production contracts in the hog sector has reduced the number of spot market transactions, raised concerns about price manipulation and helped to spur legislation requiring price reporting by packers. Using data from the 2002 and 2007 Censuses of Agriculture, this study looks for evidence of market manipulation by examining whether the local prevalence of contracting affects the average price received by independent producers. The empirical approach uses a fixed-effects model to examine whether the change in the prevalence of contracting is correlated with the change in the spot market price received by individual farmers. This approach controls for unobservable time-invariant individual and county characteristics, such as product quality and location, that might be correlated with price and contracting prevalence. Findings indicate that a negative economically significant relationship between the share of local production delivered under production contracts and the price received by independent producers is unlikely.