Does the Prevalence of Contract Hog Production Influence the Price Received by Independent Hog Producers?

The increasing use of production contracts in the hog sector has reduced the number of spot market transactions and raised concerns about price manipulation by packers. These concerns have helped spur legislative efforts to restrict packer ownership of livestock and to regulate livestock contracts. Using panel data from the 2002 and 2007 Census of Agriculture, this study looks for evidence that production contracts are associated with market manipulation by examining whether the local prevalence of production contracts affects the price of finished hogs received by independent producers. The empirical approach examines whether changes in the prevalence of contracting at the county level are correlated with changes in the spot market price received by individual farmers. By comparing differences over time, 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. Results are sufficiently precise to rule out an economically significant negative relationship between contracting prevalence and the spot price as statistically unlikely.