oversight

Pork Industry: USDA's Reported Prices Have Not Reflected Actual Sales

Published by the Government Accountability Office on 1999-12-14.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                 United States General Accounting Office

GAO              Report to Congressional Requesters




December 1999
                 PORK INDUSTRY
                 USDA’s Reported
                 Prices Have Not
                 Reflected Actual Sales




GAO/RCED-00-26
                   United States
GAO                General Accounting Office
                   Washington, D.C. 20548

                   Resources, Community, and
                   Economic Development Division

                   B-283838

                   December 14, 1999

                   The Honorable Richard G. Lugar
                   Chairman, Committee on Agriculture,
                     Nutrition, and Forestry
                   United States Senate

                   The Honorable Rod Grams
                   United States Senate

                   The Honorable Charles Hagel
                   United States Senate

                   In 1998, hog farmers experienced sharp declines in the prices they
                   received for hogs sold in the open market (spot prices), dropping from
                   about $0.45 cents per pound in May to below $0.10 cents per pound by
                   mid-December—a level well below the U.S. Department of Agriculture’s
                   (USDA) estimated cost of $0.35 cents per pound to produce a hog.1 USDA
                   also reported that the sharp decline in hog prices was not fully reflected in
                   pork prices at the retail level. For this period, USDA reported that the
                   difference between the prices farmers received for their hogs and the
                   prices consumers paid for pork products was wider than it had been in
                   decades.

                   Concerned about the prices farmers are receiving for their hogs and the
                   lack of comparable declines in the prices consumers pay for pork products
                   at the retail level, as reported by USDA, you asked us to examine 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 result in accurate
                   estimates of these prices. Accurate prices are important because they
                   provide farmers with reliable information upon which to base production
                   and marketing decisions.


                   Changes in the structure of the U.S. pork industry are occurring in
Results in Brief   response to increased efficiencies in hog production and processing and to
                   consumer preferences for leaner, more consistent meat products.
                   Technological advances, such as improved genetics, and the growing

                   1
                    Excludes noncash expenses such as depreciation.



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dominance of very large hog farms have accelerated these trends. For
example, since the late 1980s, the number of U.S. farms that raise hogs has
declined by over two-thirds, while the average number of hogs raised on
each farm has more than tripled. In addition, the majority of hogs are no
longer sold in the open market. Currently, 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, up from about 5 percent in 1980.

Hog prices plummeted in late 1998, principally because supply exceeded
slaughter capacity. Several factors accounted for this imbalance. 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. In
addition, 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,
among other things, a labor strike temporarily closed a Canadian plant.
With respect to domestic slaughter capacity, four plant closures decreased
daily capacity by about 37,000 hogs, or 9 percent. In addition, because
packing plants were operating near capacity, their ability to absorb an
increase in supply was limited.

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. 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.
At the retail level, USDA reports pork prices that do not reflect actual
consumer purchases. Rather, the reported prices reflect an average of
selected pork cuts offered for sale, without regard to the actual amount
purchased. 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.
Consequently, the differences in the prices received by farmers for their
hogs and the prices paid by consumers for pork products, while
considerable, was not as wide as USDA had reported. 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. USDA officials
told us that these prices would include prices for all hogs sold through the
open market and most hogs sold through other marketing arrangements.
The legislation also requires USDA to report retail pork prices on the basis
of actual consumer purchases.




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                           The United States is one of the world’s leading pork-producing countries
Background                 and the second largest exporter of pork. In 1998, farmers sold 101 million
                           hogs, for a total of about $9 billion, producing about 19 billion pounds of
                           pork. At the retail level, the value of this pork exceeded $34 billion.

                           The pork production and marketing system begins at the farm, where hogs
                           are farrowed (birthed), nursed (fed to about 50 pounds), and finished (fed
                           to about 250 pounds, or market weight). Hogs are then sold to packers,
                           which slaughter and process hogs into pork products that are sold to
                           retailers, including grocery stores, restaurants, and other outlets.

                           Two USDA agencies collect and report hog and pork prices. The
                           Agricultural Marketing Service (AMS) collects and reports daily and weekly
                           live hog and wholesale pork prices in order to provide current price and
                           sales information to farmers and packers and to otherwise assist in the
                           orderly marketing and distribution of hogs and pork products. Farmers
                           and packers use this information as indicators of market conditions. The
                           Economic Research Service obtains retail prices for pork from the Bureau
                           of Labor Statistics and uses these data and AMS data to calculate the
                           differences between prices received by farmers, wholesale prices, and
                           prices paid by consumers. The difference between the prices received by
                           farmers for their hogs and the prices paid by consumers for pork products
                           is known as the farm-to-retail price spread. Analysts and others use this
                           information to show, among other things, the farmer’s share of the
                           consumer’s food dollar.


                           Changes in the structure of the U.S. pork industry are occurring in
Rapid Changes in           response to increased efficiencies in hog production and processing and
Pork Industry Are          consumer preferences for leaner, more consistent meat products.
Driven by Consumer         Technological advances, such as improved genetics, and the growing
                           dominance of very large hog farms since the late 1980s have accelerated
Preferences and Other      these trends. Currently, more than 85 percent of all hogs are produced in
Factors                    facilities specialized for each stage of production. In addition, about
                           70 percent of hogs are now sold through contractual and other
                           arrangements in which packing plants and farmers coordinate production
                           methods and delivery schedules, up from about 5 percent in 1980.


Hog Industry Is Moving     Over the past decade, the number of U.S. hog farms declined while the
Towards Fewer but Larger   average number of hogs per farm increased significantly. As shown in
Operations                 table 1, the number of hog farms declined from about 323,000 in 1988 to



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                                       114,000 in 1998 while the average number of hogs on these farms
                                       increased from 172 to 544, or 216 percent. Industry economists estimate
                                       that by the start of 2000, fewer than 100,000 hog farms will be in business.

Table 1: Number of Farms With Hogs,
and Total Hogs, 1988 Through 1998      Farms and hogs in thousands
                                                                               Hog                      Total     Average number of
                                       Year                                  farms                      hogs          hogs per farm
                                       1988                                     322.6                 55,466                         172
                                       1991                                     247.1                 57,649                         233
                                       1994                                     196.0                 59,738                         305
                                       1997                                     122.2                 61,158                         500
                                       1998                                     114.4                 62,206                         544
                                       Source: GAO’s analysis of USDA’s data.



                                       The decline in the number of hog farms has occurred principally among
                                       smaller farmers; of the farms that have left the industry, nearly all had
                                       fewer than 1,000 hogs. As shown in table 2, operations marketing fewer
                                       than 1,000 hogs annually accounted for a declining share of the total hog
                                       slaughter, from 32 percent in 1988 to 5 percent in 1997, the most recent
                                       year for which data are available. Conversely, farms that market more than
                                       50,000 hogs annually increased their share from 7 percent of all hogs
                                       marketed in 1988 to about 37 percent in 1997.

Table 2: Share of Hogs Marketed by
Size of Operation, 1988 Through 1997   Size of
                                       operation by
                                       hogs marketed                              Percent share of hog market
                                       annually                         1988               1991                 1994                 1997
                                       1 to 99                             32                 23                  17                   5
                                       1,000 to 1,999                      19                 20                  17                  12
                                       2,000 to 2,999                      11                 13                  12                  10
                                       3,000 to 4,999                      10                 12                  12                  10
                                       5,000 to 9,999                       9                 10                  12                  10
                                       10,000 to 49,999                    12                 13                  13                  16
                                       50,000 or more                       7                   9                 17                  37
                                       Source: Production and Marketing Characteristics of U.S. Hog Producers, 1997-98, Iowa State
                                       University, Department of Economics Staff Paper 311, December 1998.



                                       Just as the production of hogs has become concentrated, so too has the
                                       processing of hogs into pork products (known as the meat-packing



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                                             process). In 1988, the 4 largest packing companies slaughtered 34 percent
                                             of all U.S. hogs; the 20 largest companies slaughtered about 75 percent of
                                             the hogs. In comparison, in 1997, the four largest companies slaughtered
                                             54 percent of all hogs; only eight companies slaughtered about 75 percent
                                             of all hogs. In 1998, the seven largest companies represented 75 percent of
                                             total daily slaughter capacity, as shown in table 3.


Table 3: The 10 Largest Hog-Packing Companies, 1998
                                                            Daily slaughter                      Percent of                  Cumulative
Rank           Packing company                                     capacity              slaughter capacity                     percent
1              Smithfield Foods, Inc.                                 82,300                                19.7                    19.7
2              IBP Inc.                                               72,600                                17.3                    37.0
3              ConAgra, Inc. (Swift & Co.)                            39,400                                 9.4                    46.4
4              Cargill, Inc. (Excel Corp.)                            37,800                                 9.0                    55.4
5              Hormel Foods Corp.                                     34,700                                 8.3                    63.7
6              Farmland Industries, Inc.                              33,800                                 8.1                    71.8
7              Seaboard Corp.                                         15,000                                 3.6                    75.4
                                   a
8              Thorn Apple Valley                                     14,000                                 3.3                    78.7
9              Indiana Packers                                        13,000                                 3.1                    81.8
10             Lundy’s                                                 8,000                                 1.9                    83.7
               Other companies                                        67,870                                16.2                   100.0
Total                                                               418,470                                100.0
                                             Note: Totals may not add because of rounding.
                                             a
                                             Thorn Apple Valley closed its slaughter operations in 1998.

                                             Source: GAO’s analysis of data from the National Pork Producers Council.



                                             Along with consolidation into fewer and larger farms, hog production is
                                             migrating into new areas. According to the Census of Agriculture, from
                                             1992 through 1997, the number of hogs nationwide rose about 6 percent.
                                             Much of this growth occurred in areas where the hog industry was almost
                                             nonexistent before, including Colorado, Mississippi, Oklahoma, Utah, and
                                             Wyoming. However, a large portion of this growth also occurred in a
                                             traditional hog-producing state—North Carolina. Most other traditional
                                             hog-producing states—including Illinois, Indiana, Missouri, and
                                             Nebraska—experienced net declines in hog inventories. Figure 1 shows
                                             the change in hog inventories in each state from 1992 through 1997.




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Figure 1: Change in Hog Inventory,
1992 to 1997




                                                                                  1 dot equals an increase of 1,000
                                                                                  1 dot equals a decrease of 1,000



                                     Source: USDA’s 1997 Census of Agriculture.




                                     Restrictions on the pork industry’s activities, such as those that prohibit
                                     packers from producing or owning hogs, are guiding the industry into new
                                     production regions. Several midwestern states (including Iowa, Kansas,
                                     Minnesota, Missouri, Nebraska, South Dakota, and Wisconsin) have
                                     enacted some form of corporate farming law. The provisions of these laws
                                     vary widely, but they generally prohibit large corporations from engaging
                                     in farming activities, including hog production.

                                     In addition, environmental concerns surrounding large hog operations are
                                     a catalyst for the movement of hog operations from populated areas in
                                     midwestern states to sparsely populated areas in other states. These
                                     concerns have led to restrictions on hog operations’ management of
                                     animal wastes to prevent the contamination of surface and groundwater as
                                     well as to controls on the strong odors that come from the facilities.




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Hog Production Is           Traditionally, hog production has occurred on small farms that manage the
Increasingly Specialized    entire hog production cycle. Increasingly, however, hogs are produced in
                            specialized operations in which each stage of production is carried out in a
                            separate facility and tight controls are maintained over breeding and
                            feeding programs. Currently, according to industry analysts, more than
                            85 percent of all hogs are produced in specialized operations. In most of
                            these facilities, each group of hogs is moved together to the next
                            production phase, and the buildings are thoroughly cleaned and
                            disinfected between groups. This rotation system is designed to minimize
                            or eliminate the intermingling of hogs from different batches, thereby
                            guarding against the spread of disease. In addition, large farmers usually
                            have various genetic lines developed specifically for their breeding herds
                            in order to maximize production efficiency, quality characteristics, and
                            their ability to compete in various marketing niches.


Vertical Coordination       The sale of live hogs on the open market is rapidly being replaced by
Arrangements Are            multiyear contracts between farmers and packers as well as by vertically
Increasing to Meet          integrated operations in which a packer owns the hogs being produced.
                            Farmers and packers are increasing their use of such vertical coordination
Consumer Demand,            methods as a means of managing their market risks. For example, through
Control Costs, and Reduce   vertical coordination, hog farmers can lower their risks of investing in
Risks                       large, specialized operations by ensuring a buyer for their hogs. Also, in
                            some contractual arrangements, price risks are shared by both the farmer
                            and packer.

                            Packers see advantages to these arrangements as well. To maximize the
                            operating efficiencies of modern plants, packers in recent years have
                            increased their control over the quantity and quality of hogs coming into
                            their plants. High capital costs and competitive pressures have forced
                            packers to reduce idle capacity. By contracting or vertically integrating,
                            packers ensure a large, stable flow of hogs into their plants, thereby
                            maximizing the utilization of their facilities and reducing risks and costs.
                            In addition, packers can reduce their costs by improving the quality of
                            hogs slaughtered. Quality affects processing time and labor costs as well
                            as the quantity of high-value fresh meat cuts per hog. For example, each
                            hog with excessive fat requires more trimming and produces less lean
                            meat. Conversely, a lean hog takes less time to process and produces a
                            larger quantity of lean pork. Through marketing contracts, packers specify
                            the quality characteristics it wants in the hogs it purchases from
                            producers. Packers are sometimes able to control the choice of genetic
                            stock, feeding program, and management decisions on the production of



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                                       their contracted hogs. This control ensures a consistent supply of lean,
                                       high-quality hogs that meet their stringent quality specifications, which are
                                       dictated by consumers.

                                       The use of marketing contracts and vertical integration has increased
                                       significantly in recent years. As shown in table 4, in 1998, an estimated
                                       95 percent of hogs from operations with at least 500,000 hogs were
                                       produced under marketing contracts and vertical integration compared
                                       with 34 percent from operations producing 1,000 to 1,999 hogs. Overall, in
                                       1998, 64 percent of all hogs were marketed under such arrangements, up
                                       from about 5 percent in 1980. Industry economists estimate that in 1999
                                       about 70 percent of all hogs will be produced under marketing contracts
                                       and through vertical integration and that in 2000 such coordination
                                       arrangements will represent fully three-fourths of all hogs slaughtered.2 In
                                       addition, large hog operations are much more likely to be involved with
                                       coordination arrangements than are small operations.

Table 4: Percentage of Hogs Produced
Under Marketing Contracts and                                                                     Percentage of hogs under marketing
Vertical Integration, by Size of       Size of operation                                             contracts and vertical integration
Operation, 1998                        1,000-1,999                                                                                             34
                                       2,000-2,999                                                                                             38
                                       3,000-4,999                                                                                             48
                                       5,000-9,999                                                                                             59
                                       10,000-49,999                                                                                           62
                                       50,000-499,999                                                                                          85a
                                       500,000 or more                                                                                         95a
                                       All hogs                                                                                                64
                                       a
                                           Estimated.

                                       Source: Production and Marketing Characteristics of U.S. Hog Producers, 1997-98, Iowa State
                                       University Department of Economics Staff Paper 311, December 1998.



                                       Additionally, as a means of expanding their production capability and
                                       reducing risk, large farmers often contract with other farmers to grow
                                       (finish) hogs to market weight in specialized facilities. The contractor
                                       typically owns and provides most of the inputs—including the hogs, feed,
                                       and veterinary care—to the farmers and pays them a preestablished fee for
                                       their services and the use of their facilities.


                                       2
                                        This estimate includes the acquisition of Murphy Farms by Smithfield, Inc., the nation’s largest hog
                                       farmer.



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                                 Appendix I provides additional information on production efficiencies
                                 achieved in the hog industry since 1960.


                                 Hog prices plummeted in late 1998, principally because supplies exceeded
Increased Hog Supply             slaughter capacity. Several factors accounted for this imbalance. U.S.
and Limited Slaughter            farmers decided to increase production in response to higher hog prices in
Capacity Were Key                earlier years, and imports from Canada increased slightly because, among
                                 other things, a labor strike temporarily closed a Canadian plant. In
Factors Affecting                addition, four U.S. plant closures decreased slaughter capacity by about
Farmers’ Prices in               37,000 hogs per day—9 percent—and the remaining plants could not
                                 readily absorb the increased supply.
1998
Hog Supplies Set a Record        The pork industry experienced record production in 1998. As shown in
in 1998                          table 5, the number of hogs slaughtered increased from about 92 million in
                                 1997 to 101 million in 1998, or 9.8 percent, resulting in an increase in the
                                 total number of pounds of pork produced from 17 billion to almost 19
                                 billion, or 10.1 percent (the largest year-to-year increase since 1979).
                                 Similarly, this record production placed pressure on the plants’ capacity to
                                 refrigerate the slaughtered pork. As a result, the amount of pork under
                                 refrigeration (in cold storage) increased from 378 million pounds at the
                                 end of 1997 to 443 million pounds at the end of 1998, or 17.3 percent.

Table 5: Pork Production, 1991
Through 1999                     Pounds in millions
                                                      Number of hogs    Pounds of pork      Year-end pounds of
                                 Year                    slaughtered        produced        pork in cold storage
                                 1991                           88.2            15,948                    296.9
                                 1992                           94.9            17,184                    326.1
                                 1993                           93.1            17,029                    333.8
                                 1994                           95.7            17,659                    385.1
                                 1995                           96.3            17,810                    382.2
                                 1996                           92.4            17,084                    349.1
                                 1997                           92.0            17,245                    377.7
                                 1998                          101.0            18,981                    443.0
                                 1999a                         100.8            18,900                    480.0
                                 a
                                 Estimated.

                                 Source: USDA.




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                        While improved production technology and genetics contributed to
                        increased production, the higher production in late 1998 also resulted from
                        cyclical and seasonal factors. According to industry analysts, the hog price
                        cycle is about 4 years—2 years of rising prices followed by 2 years of
                        falling prices.3 When prices are high, more sows are bred and more hogs
                        are produced. This causes hog production to increase and prices to fall,
                        creating a price cycle. Seasonal variation is caused by changes in
                        production efficiency resulting from variations in the weather—more hogs
                        are born in the spring and summer than in the fall and winter, and thus
                        more hogs go to market in the fall and winter. For example, in 1996 and
                        1997, hog prices were in the range of $0.45 to $0.60 per pound, and many
                        farmers constructed large facilities and expanded their breeding herds in
                        expectation of future profitability. This expansion helped create a surge of
                        hogs coming to market starting in late 1997, and hog prices in the open
                        market fell to less than $0.10 per pound in December 1998.

                        Imports of live hogs from Canada also contributed to low hog prices in late
                        1998. Most of the hogs imported into the United States originate in Canada.
                        In 1998, Canadian imports reached a record 4.1 million hogs, after steadily
                        rising since 1992. Most of the increase occurred in the fourth quarter of
                        1998, when weekly hog imports from Canada rose by about
                        25,000—1 percent of the U.S. weekly slaughter—exacerbating the effect on
                        prices of an already large supply of domestic hogs. According to USDA
                        economists, the large volume of Canadian imports occurred because of a
                        strong U.S. dollar relative to the Canadian dollar, similar hog supply and
                        price problems in Canada, and a labor dispute at a large Canadian packing
                        plant that temporarily closed this plant.


Slaughter Capacity Is   Although hog production increased in 1998, plant capacity for processing
Limited                 the animals into consumer-ready pork products decreased, creating a
                        bottleneck in the farm-to-retail chain. Following the closure of four
                        packing plants over the previous 18 months, slaughter capacity decreased
                        by 9 percent, or 37,000 hogs per day. The plants—located in Georgia, Iowa,
                        Michigan, and South Dakota—closed prior to the fall of 1998 because they
                        were older and not economically viable. Furthermore, unlike a decade ago,
                        when the majority of pork-packing plants in the United States operated
                        single shifts, plants today largely operate double shifts. Single-shift plants
                        could increase weekly slaughter capacity 25 percent or more by increasing
                        hours or by operating on Saturday. Today, double-shift facilities are not as

                        3
                         See app. II for information on the responsiveness of hog prices to changes in production, and the
                        speed at which these prices are reflected at the retail level.



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                              able to readily increase slaughter capacity. Moreover, new packing plants
                              cannot be added quickly because they require about 3 years and
                              $100 million or more to construct and face various regulatory hurdles.


                              USDA’s methods for obtaining and reporting hog and retail pork prices have
USDA’s Methods for            not kept pace with the industry’s changes because of funding priorities
Reporting Farm and            and a lack of access to data and therefore do not accurately reflect these
Retail Prices Do Not          prices. At the farm level, USDA’s reported prices are based on hogs sold
                              through the open market (generally referred to as the spot market) and
Reflect Actual Farm           thus are not representative of all hog sales. At the retail level, USDA reports
and Retail Sales              pork prices that do not reflect actual purchases by consumers. Thus, the
                              reported difference between the prices farmers received for their hogs and
                              the prices consumers paid for pork products, known as the farm-to-retail
                              price spread, is not always accurate.


Live Hog Prices Reported      The changing structure of the hog industry may contribute to a gap
by USDA Are Not               between the publicized prices paid for hogs and the average price received
Representative of All Sales   by farmers. Most hogs—about 70 percent—are procured by packing plants
                              through coordinated arrangements, rather than through the spot market,
                              and the price is not available to USDA because of the proprietary nature of
                              the information. However, USDA reports farm-level prices for live hogs on
                              the basis of hogs sold through the spot market. In January 1999, USDA
                              revised its methods for reporting pork price spreads; it now uses an
                              average hog price for 51- to 52-percent lean hogs—which are of higher
                              quality—to better reflect the current market. However, these prices are
                              still based on hogs sold in the spot market (see app. III).

                              During periods of plentiful hog supplies, packers frequently pay a lower
                              price for hogs procured through the spot market than for hogs procured
                              through contracts. Spot market hogs are generally of lower quality, not as
                              lean as hogs sold through contracts, and more variable in weight. Through
                              contracts, packers can guarantee a stable flow of lean hogs at consistent
                              weights for their plant and hence are willing to pay premiums for this
                              certainty. Consequently, reported prices for live hogs based on the spot
                              market do not accurately reflect the average price of all hog sales. To help
                              resolve this situation, the agriculture appropriations act for fiscal year
                              20004 requires packers to report to USDA and USDA to publish the prices
                              paid for all hogs purchased, priced, or slaughtered each business day. USDA

                              4
                               The Agriculture, Rural Development, Food and Drug Administration, and Related Agencies
                              Appropriations Act, 2000 (P.L. 106-78, Oct. 22, 1999) amended the Agricultural Marketing Act of 1946 to
                              include this requirement.



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                          officials told us that these prices would include prices for all hogs sold
                          through the open market as well as most hogs sold through other
                          marketing arrangements. USDA officials told us that the Department plans
                          to implement this requirement by July 2000. However, according to the
                          officials, these plans are contingent upon congressional funding to carry
                          out this requirement.


Retail Pork Prices        USDA’s  reported retail prices do not reflect actual purchases by consumers.
Reported by USDA Do Not   Rather, the reported prices reflect an average of selected pork cuts offered
Reflect Consumers’        for sale, without regard to the amount purchased. USDA first obtains
                          average pork prices from the Bureau of Labor Statistics, which collects
Purchases                 them to calculate the Consumer Price Index. The Bureau collects regular
                          and sale prices from grocery stores and averages these prices, regardless
                          of the amount purchased at each price. Then, USDA weights these prices by
                          each cut’s proportion of a hog carcass. As a result, USDA does not report
                          retail prices on the basis of actual consumer purchases of pork products.

                          Data from grocery store scanners, which we obtained for our analysis,
                          reflect actual consumer purchases that occur at both regular and sale
                          prices. As shown in figure 2, from July 1998 through June 1999, USDA’s
                          reported retail prices for pork generally overstated retail prices when
                          compared with grocery store sales data, with the greatest difference
                          occurring in December 1998 and April 1999.




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Figure 2: USDA-Reported Retail Prices
for Pork Compared With                                             2.50
Scanner-Based Retail Prices, July 1998
Through June 1999
                                                                   2.45



                                                                   2.40
                                             Price per pound ($)


                                                                   2.35



                                                                   2.30


                                                                   2.25



                                                                   2.20


                                                                   2.15



                                                                   2.10
                                                                          Jul    Aug     Sep     Oct    Nov    Dec   Jan   Feb   Mar   Apr   May   Jun

                                                                                                                Month

                                                                                USDA's reported retail price

                                                                                Scanner-based retail price



                                         Source: USDA and Information Resources, Inc.




                                         As the figure shows, USDA’s reported retail prices for pork were $0.14 and
                                         $0.11 per pound higher than the scanner-based retail prices in December
                                         1998 and April 1999, respectively, when grocers were featuring pork.5
                                         Retail grocery representatives told us that many grocers featured pork
                                         near the end of 1998 in response to the large supply of pork and the lowest
                                         hog prices in decades. According to weekly scanner data, retail prices
                                         declined from $2.39 in mid-November to $2.14 in late December. Appendix
                                         IV lists monthly USDA-reported retail prices for pork and weekly and
                                         monthly scanner-based retail pork prices.

                                         In addition to not reflecting the actual volume of sales, USDA’s methodology
                                         does not account for changes in the mix of products purchased by

                                         5
                                          The price relationship shown in fig. 2 could be different for other time periods.



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                              consumers throughout the year, such as more hams at Easter and more
                              pork chops and ribs for grilling in the summer. Instead, as discussed, USDA
                              calculates an overall average pork price by weighting a fixed mix of prices
                              for individual pork cuts obtained from the Bureau of Labor Statistics by
                              each cut’s average percentage of a hog carcass. USDA officials told us that
                              retail pork prices based on consumer purchases would provide more
                              complete retail market information and could be obtained at an annual
                              cost of about $500,000, depending on the level of detail desired. The
                              agriculture appropriations act for fiscal year 2000 requires that USDA report
                              prices for pork products that are based on actual retail sales. USDA officials
                              told us that the Department is studying how to carry out this requirement
                              but does not currently have a specific date for implementation.


Farm-To-Retail Price          The purpose of USDA’s price spreads is to indicate differences in values for
Spreads Are Inaccurate at     a consistent quantity and quality of product measured at the farm,
Specific Points in Time but   wholesale, and retail levels over time. Although USDA’s farm prices, retail
                              prices, and the spread between them may be inaccurate at specific points
Reflect Trends Over Time      in time, its price spreads do reflect changes in trends over time.

                              Over the past two decades, the farm-to-retail price spread for pork has
                              widened. As shown in figure 3, from 1979 to 1999, average retail prices
                              rose while wholesale prices and farm-level hog prices declined slightly,
                              resulting in the widening of the farm-to-retail price spread.6 However,
                              when prices are adjusted for inflation, the farm-to-wholesale portion of the
                              spread actually decreases while the wholesale-to-retail spread remains
                              essentially unchanged. According to USDA and industry analysts, the
                              wholesale-to-retail spread may be wider because more processing is being
                              done; therefore, retail prices reflect an increasing service component in
                              pork products. A number of additional processes may increase the value
                              of the product to the consumer, such as packaging, certification,
                              marination, cooking, trimming, flavoring, or slicing; in addition,
                              advertising costs are factored into the wholesale-to-retail price spread.




                              6
                               For purposes of our analysis, we elected to use farm-level hog prices instead of USDA’s net farm value
                              of hogs. See app. III for a detailed discussion of USDA’s methodology for obtaining, verifying, and
                              reporting farm, wholesale, and retail prices and calculating farm-to-retail price spreads.



                              Page 14                                                    GAO/RCED-00-26 Reported Pork Prices
                                      B-283838




Figure 3: Annual Pork Prices as
Reported by USDA, 1979 Through 1999                         2.50
(Nominal dollars)



                                      Price per pound ($)   2.00




                                                            1.50




                                                            1.00




                                                            0.50




                                                            0.00
                                                                   '79 '80 '81 '82 '83 '84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99

                                                                                                          Year
                                                                           Retail price
                                                                           Wholesale price
                                                                           Farm-level hog price



                                      Note: 1999 prices are for January through September.

                                      Source: USDA.



                                      USDA’s  methodology for obtaining and reporting price information has not
Conclusion                            kept pace with changes in the industry because of funding priorities and a
                                      lack of access to data. Accurate prices are important because they provide
                                      farmers with reliable information upon which to base production and
                                      marketing decisions. At the farm level, USDA’s reported prices are not
                                      representative of all hog prices, while at the retail level, the prices USDA
                                      uses do not reflect actual consumer purchases. Thus, the USDA-reported
                                      price spread is not always accurate and was not as wide as USDA had
                                      reported in late 1998. Recent legislation requires USDA to obtain and report
                                      prices paid by packers for all hogs purchased, priced, or slaughtered each
                                      business day. USDA officials told us that these prices would include prices
                                      for all hogs sold through the open market and most hogs sold through
                                      other marketing arrangements. The legislation also requires USDA to report



                                      Page 15                                                                    GAO/RCED-00-26 Reported Pork Prices
                  B-283838




                  retail pork prices based on actual consumer purchases. When fully
                  implemented, this information, coupled with existing information reported
                  by USDA, will provide a more complete reflection of market conditions at
                  the farm and retail levels.


                  We provided USDA with a draft of this report for review and comment.
Agency Comments   USDA’s primary concern was that the report did not recognize the change
                  the Department made in January 1999 to improve its methods for reporting
                  the spread between farm and retail pork prices. In addition, USDA was
                  concerned that the report suggested USDA should replace its method for
                  reporting retail prices from one that adjusts the prices to a consistent mix
                  of pork products to one that is based on actual consumer purchases. We
                  revised our report to acknowledge the changes that USDA has made to its
                  reporting on spreads in pork prices and to clarify our conclusion that
                  reporting retail prices based on actual consumer purchases will, if
                  effectively implemented, represent a valuable addition to USDA’s array of
                  pork price reports. USDA also made a number of technical comments and
                  suggestions, which we incorporated into our report as appropriate. USDA’s
                  comments and our responses are presented in detail in appendix V.


                  To examine how structural changes in the pork industry have affected
Scope and         production and marketing and to identify the reasons for the sudden and
Methodology       rapid decline in prices paid to farmers in late 1998, we reviewed studies by
                  USDA and by industry and academic experts. We examined hog industry
                  statistics, including hog supply, slaughter capacity, and consumer demand.
                  We interviewed agency officials at USDA’s headquarters in Washington,
                  D.C., and key field offices in Des Moines, Iowa. Officials contacted were
                  from the Economic Research Service, the Agricultural Marketing Service,
                  and the Grain Inspection, Packers, and Stockyards Administration. We
                  also interviewed industry representatives, including the National Pork
                  Producers Council, the American Meat Institute, the Food Marketing
                  Institute, as well as major packers and retailers. In addition, we met with
                  pork industry experts at Iowa State University, the University of Missouri,
                  Kansas State University, and North Carolina State University.

                  To determine the extent to which USDA’s methods for obtaining, reporting,
                  and verifying pork prices result in accurate price estimates, we reviewed
                  USDA’s processes and procedures for collecting and disseminating data in
                  its reports for live hogs and pork cuts. Our analysis included discussions
                  with USDA as well as officials at the Bureau of Labor Statistics and



                  Page 16                                     GAO/RCED-00-26 Reported Pork Prices
B-283838




economists at Iowa State University, the University of Missouri, Kansas
State University, and North Carolina State University.

Specifically, to compare USDA’s reported retail prices, for July 1998 through
June 1999, we examined scanner-based data on retail pork prices
purchased from a data collection company. According to the data
collection company, these scanner data represent at least 40 percent of
total U.S. grocery sales of pork (including fresh and branded loins, bacon,
hams, and sausage), at over 7,000 stores in approximately 100
metropolitan areas. As part of its data collection process, the company
reported that it conducts several quality control tests on scanner sales
data received from retailers, including item count, item rank, and
department total tests, as well as comparisons against shipment
documents of goods purchased by grocery stores.

We conducted our review from April 1999 through November 1999 in
accordance with generally accepted government auditing standards.


We are sending copies of this report to Senator Tom Harkin, Ranking
Minority Member, Senate Committee on Agriculture, Nutrition, and
Forestry; Representative Larry Combest, Chairman, and Representative
Charles W. Stenholm, Ranking Minority Member, House Committee on
Agriculture; and to other appropriate congressional committees. We are
also sending copies of this report to the Honorable Dan Glickman,
Secretary of Agriculture; and the Honorable Jacob Lew, Director of the
Office of Management and Budget; and other interested parties. We will
also make copies of this report available to others upon request.




Page 17                                     GAO/RCED-00-26 Reported Pork Prices
B-283838




If you or your staff have any questions about this report, please contact me
at (202) 512-5138. Key contributors to this report were Robert C. Summers,
Thomas M. Cook, Ruth Anne Decker, and Mary C. Kenney.




Lawrence J. Dyckman
Director, Food and
  Agriculture Issues




Page 18                                     GAO/RCED-00-26 Reported Pork Prices
Page 19   GAO/RCED-00-26 Reported Pork Prices
Contents



Letter                                                                                         1


Appendix I                                                                                    22

Productivity Gains in
the Hog Industry
Appendix II                                                                                   23

Responsiveness of
Hog Prices to Changes
in Production and the
Speed at Which These
Price Changes Are
Reflected in Retail
Prices
Appendix III                                                                                  25
                          Live Hog Prices                                                     25
USDA’s Methodology        Wholesale Pork Prices                                               26
for Obtaining,            Retail Pork Prices                                                  26
                          Farm-To-Retail Pork Price Spreads                                   27
Verifying, and
Reporting Live Hog
and Pork Product
Prices and for
Calculating
Farm-To-Retail
Spreads
Appendix IV                                                                                   29

Pork Retail Sales, July
1998 Through June
1999




                          Page 20                             GAO/RCED-00-26 Reported Pork Prices
                     Contents




Appendix V                                                                                       33
                     GAO’s Comments                                                              37
Comments From the
U.S. Department of
Agriculture
Tables               Table 1: Number of Farms With Hogs, and Total Hogs, 1988                     4
                       Through 1998
                     Table 2: Share of Hogs Marketed by Size of Operation, 1988                   4
                       Through 1997
                     Table 3: The 10 Largest Hog-Packing Companies, 1998                          5
                     Table 4: Percentage of Hogs Produced Under Marketing                         8
                       Contracts and Vertical Integration, by Size of Operation, 1998
                     Table 5: Pork Production, 1991 Through 1999                                  9
                     Table I.1: Production Efficiency Gains, 1960 Through 1998                   22
                     Table II.1: Effect of Changes in Hog Production on Hog Prices               23
                       During Expansion and Liquidation Phases, 1978 Through 1998
                     Table IV.1: Monthly Pork Prices, as Reported by USDA, July 1998             29
                       Through June 1999
                     Table IV.2: Monthly Pork Sales Information, July 1998 Through               30
                       June 1999
                     Table IV.3: Weekly Pork Sales Information, July 1998 Through                31
                       June 1999

Figures              Figure 1: Change in Hog Inventory, 1992 to 1997                              6
                     Figure 2: USDA-Reported Retail Prices for Pork Compared With                13
                       Scanner-Based Retail Prices, July 1998 Through June 1999
                     Figure 3: Annual Pork Prices as Reported by USDA, 1979                      15
                       Through 1999




                     Abbreviations

                     AMS        Agricultural Marketing Service
                     ERS        Economic Research Service
                     USDA       U.S. Department of Agriculture


                     Page 21                                     GAO/RCED-00-26 Reported Pork Prices
Appendix I

Productivity Gains in the Hog Industry


                                          In the past several decades, the hog industry has experienced significant
                                          gains in productivity. As shown in table I.1, the number of pigs per litter,
                                          farrowings per sow, pigs born per sow per year, and the amount of pork
                                          produced per sow have increased since 1960.

Table I.1: Production Efficiency Gains,
1960 Through 1998                                             Pigs per             Farrowings            Pigs per sow   Pork production
                                          Year                   litter               per sow                 per year per sow (pounds)
                                          1960                     6.99                     1.68                  11.71             1,442
                                          1970                     7.27                     1.73                  12.56             1,636
                                          1980                     7.22                     1.64                  11.83             1,912
                                          1990                     7.87                     1.86                  14.62             2,480
                                          1998                     8.71                     1.95                  16.94             3,062
                                          Source: University of Missouri’s analysis of the U.S. Department of Agriculture’s data.



                                          Large and more specialized production operations are particularly
                                          contributing to these dramatic improvements. A number of factors have
                                          contributed to the shift to fewer but larger hog operations, including lower
                                          costs of production. According to economists at Iowa State University and
                                          Purdue University, costs of production vary widely among farmers.
                                          Generally, however, large hog operations have costs of production that are
                                          lower than those of smaller hog operations. Large specialized farms have
                                          total costs of production that are about 10 percent lower than those of
                                          smaller farrow-to-finish farms. Some analysts believe that the range in
                                          production costs between the most efficient one-third of all farmers and
                                          the least efficient one-third is as much as $0.10 to $0.12 per pound.

                                          Pork production involves many inputs—feed grains such as corn,
                                          high-protein feed ingredients, vitamins, minerals, water, medications, and
                                          labor—to convert live hogs into pork and pork products. Feed is the major
                                          production input for raising hogs, usually accounting for over 65 percent
                                          of all production expenses. In the early 1990s, hog costs of production for
                                          farrow-to-finish operations averaged $0.40 to $0.45 per pound of live
                                          animal. In 1996 and 1997, when feed costs rose significantly, hog costs of
                                          production increased to about $0.50 per pound. In the last year, feed costs
                                          have decreased, reducing costs of production to about $0.35 per pound.




                                          Page 22                                                    GAO/RCED-00-26 Reported Pork Prices
Appendix II

Responsiveness of Hog Prices to Changes in
Production and the Speed at Which These
Price Changes Are Reflected in Retail Prices
                                       During the 1997 through 1998 expansion phase of the hog production
                                       cycle, prices declined to a greater extent than in earlier expansion phases.
                                       As shown in table II.1, during 1978 through 1979, the largest expansion
                                       phase in the last two decades, production increased about 16 percent
                                       while prices declined 24 percent. In contrast, during the expansion phase
                                       of 1997 through 1998, production increased about 10 percent, but prices
                                       declined 40 percent.

Table II.1: Effect of Changes in Hog
Production on Hog Prices During                                                   Percent             Percent       Ratio of change
Expansion and Liquidation Phases,                                               change in          change in        in hog prices to
1978 Through 1998                                                                    hog         deflated hog             change in
                                       Year                                    production               prices           production
                                       Expansion phase
                                       1978-79                                        +15.6               –23.7                     1.52
                                       1982-83                                        + 7.1               –16.5                     2.32
                                       1987-88                                         +9.2               –19.9                     2.16
                                       1991-92                                         +7.7               –16.4                     2.13
                                       1993-94                                         +3.7               –15.4                     4.16
                                       1997-98                                        +10.1               –39.7                     3.93
                                       Liquidation phase
                                       1974-75                                        –16.7              +28.8                      1.72
                                       1981-82                                        –10.2              +18.4                      1.80
                                       1985-86                                         –4.9              +11.9                      2.43
                                       1989-90                                         –2.9              +18.1                      6.24
                                       1992-93                                         –1.0                +4.4                     4.40
                                       1995-96                                         –4.1              +24.8                      6.05
                                       Notes: An expansion phase occurs when production increases, and a liquidation phase occurs
                                       when production decreases. Also, other factors in addition to changes in production affect
                                       changes in hog prices, such as decreased slaughter capacity in 1998.

                                       Source: Glen Grimes, University of Missouri.



                                       While hog prices react immediately to changes in hog production, retail
                                       pork prices react slowly to changes in hog prices. According to U.S.
                                       Department of Agriculture (USDA) economists, the delay in changes
                                       between farm and retail prices is often attributed to the time it takes to
                                       move products from farms to retail outlets, so that the prices of products
                                       currently in stores reflect earlier farm prices. In addition, retailers set
                                       prices for advertising purposes a week or more ahead, thus limiting rapid
                                       adjustment to sudden price changes. As a result, price spreads frequently
                                       narrow when farm prices increase and widen when farm prices decrease.




                                       Page 23                                                GAO/RCED-00-26 Reported Pork Prices
Appendix II
Responsiveness of Hog Prices to Changes in
Production and the Speed at Which These
Price Changes Are Reflected in Retail Prices




Retail prices more quickly reflect farm price increases than decreases. In
addition, changes in farm prices have little effect on retail prices in the
month they occur. USDA research indicates that, on average, it takes about
3 months for farm price increases to be fully passed on to consumers,
while it takes over a year for the retail price to fully adjust to farm price
decreases. Furthermore, retailers recognize that consumers react
negatively to frequent price changes.




Page 24                                        GAO/RCED-00-26 Reported Pork Prices
Appendix III

USDA’s Methodology for Obtaining,
Verifying, and Reporting Live Hog and Pork
Product Prices and for Calculating
Farm-To-Retail Spreads
                  This appendix provides a detailed discussion of USDA’s methods for
                  collecting and reporting pork prices at the farm, wholesale, and retail
                  segments of the marketing chain as well as its methods for calculating and
                  reporting farm-to-retail pork price spreads. Two USDA agencies are
                  involved in this process.


                  USDA’s  Agricultural Marketing Service (AMS) collects and reports current
Live Hog Prices   hog price and sales information—for hogs sold in the spot market—to
                  assist in the orderly marketing and distribution of hogs and pork products.
                  Reports include information on prices, volume, quality, condition, and
                  other market data for specific markets and marketing areas. AMS market
                  reporters collect and disseminate reports intended to provide buyers and
                  sellers with the information necessary for making intelligent, informed
                  marketing decisions, thus placing everyone in the marketing system on a
                  more equal bargaining basis. These reporters cover direct sales and collect
                  information by telephone—talking with buyers, farmers, and packers.

                  Most hogs are valued after slaughter according to the weight and leanness
                  of the carcass. Packers determine leanness by, for example, measuring the
                  amount of backfat present and identifying the muscling characteristics of
                  the carcass. Each packer has developed a matrix of different carcass
                  weight and leanness combinations. This matrix indicates the premiums
                  and discounts the packer is offering from its base price. Packers provide
                  their base price and their matrix to AMS. While packers’ base prices change
                  often—sometimes a couple of times a day, the premiums and discounts
                  offered from this base price may change only 1 or 2 times per year. Using
                  these matrixes and base prices, AMS reports daily, weighted-average base
                  prices as well as ranges of prices offered by packers for different carcass
                  weight and leanness combinations.

                  USDA’s Economic Research Service (ERS) recently revised its basis for
                  determining the farm-level hog price series of the pork price spread,
                  switching from a live hog basis to a carcass basis. In January 1999, ERS
                  began obtaining carcass prices from the “National Base Lean Hog Carcass
                  Slaughter Cost Report,” which is published by AMS for use in developing
                  its pork price spreads. This daily report provides information on packers’
                  costs, on a carcass basis, for the previous day’s slaughter. This report
                  provides cost data from about 25 percent of packers that voluntarily
                  provide their previous day’s slaughter cost information. The cost
                  information provided by these packers includes the prices of hogs
                  purchased through negotiated sales as well as through formula contracts.



                  Page 25                                    GAO/RCED-00-26 Reported Pork Prices
                        Appendix III
                        USDA’s Methodology for Obtaining,
                        Verifying, and Reporting Live Hog and Pork
                        Product Prices and for Calculating
                        Farm-To-Retail Spreads




                        The cost data provided does not include packer-owned hogs or hogs
                        purchased through fixed contracts (such as window and ledger contracts).
                        AMS reports the cost data for various carcass leanness values. To develop
                        the farm-level hog price series for its pork price spreads, ERS converts the
                        51- to 52-percent lean carcass costs from this report to an equivalent live
                        hog price.


                        AMS reports sales of fresh pork cuts from, for example, packers to retailers,
Wholesale Pork Prices   packers to processors, and packers to exporters. AMS reports the price
                        range for the day as well as the daily average price weighted by the
                        number of sales that occurred at each price for each cut. In 1998, AMS
                        revised its reporting of wholesale pork prices to reflect the prevalence of
                        closer trimmed and film-wrapped cuts. AMS also adjusted its reported
                        wholesale prices back through 1979 on the basis of these revisions.

                        Information is reported only on products for which the price is established
                        through negotiation between buyer and seller. Transactions based on
                        formula pricing are not used. AMS market reporters confirm as many trades
                        as necessary to ensure accurate representation of the market.
                        Confirmation is normally attained through direct communication with the
                        buyer and the seller and also with any brokers or other middle persons
                        involved in the transaction. Reporters are not required to use a trade if
                        confirmation cannot be obtained.


                        ERS reports retail prices for pork. ERS obtains retail pork prices for six
Retail Pork Prices      major pork cuts from the Bureau of Labor Statistics. ERS calculates an
                        overall average pork price by weighting the individual pork cut prices by
                        the average percentage each cut constitutes of a hog carcass.

                        The Bureau of Labor Statistics collects retail pork prices as part of its
                        derivation of the overall Consumer Price Index. The Bureau collects
                        regular and sale prices from grocery stores and averages these prices,
                        regardless of the amount of sales that may have occurred at each price. It
                        collects retail pork prices from various stores during the first 3 weeks of
                        each month and analyzes the data collected during the fourth week. Prices
                        for both branded and nonbranded pork products are collected but deli
                        items are not included in the analysis. The Bureau of Labor Statistics
                        weights the prices it collects by the percentage of the market basket that
                        accounts for that particular pork item and the relative population of the
                        geographic area compared with other areas.



                        Page 26                                      GAO/RCED-00-26 Reported Pork Prices
                      Appendix III
                      USDA’s Methodology for Obtaining,
                      Verifying, and Reporting Live Hog and Pork
                      Product Prices and for Calculating
                      Farm-To-Retail Spreads




                      Price spreads do not represent margins, profits, or losses for individual
Farm-To-Retail Pork   firms or groups of firms. Rather, they provide a perspective, over time, on
Price Spreads         differences in prices at various levels in the marketing and distribution
                      system. Specifically, price spreads measure differences in calculated
                      values for a consistent equivalent quantity and quality of product as it is
                      successively measured at the farm, wholesale, and retail levels.

                      To ensure the measurement of a consistent quantity of product, ERS
                      calculates pork price spreads on the basis of one pound of pork purchased
                      at retail. For example, ERS adjusts live hog prices received by farmers to
                      (1) convert them to the quantity of live animal equivalent to 1 pound of
                      retail cuts and (2) remove the value contributed by by-products (such as
                      the head and offal). Thus, the farm-to-retail price spread for pork is the
                      difference between the average retail price per pound and the farm value
                      of the quantity of live animals equivalent to 1 pound of retail cuts.
                      According to ERS, 1.87 pounds of live hog are required for 1 pound of retail
                      pork. Therefore, ERS adjusts monthly live hog prices—multiplies them by
                      1.87 then removes the value contributed by by-products—to determine a
                      “net farm value” for purposes of calculating price spreads.

                      To ensure that a consistent quality of pork is measured, ERS calculates
                      price spreads to show differences between market levels for a “standard”
                      hog versus an “average” hog. Consistent means that the same product
                      (for example, a 51- to 52-percent lean hog with 0.80 to 0.99 inches of
                      backfat) is measured each month and at each marketing level.
                      Consistently calculated price spreads provide an estimate of the
                      distribution of final retail dollars among the farm, wholesale, and retail
                      segments of the marketing chain and show changes in the distribution
                      over time. Therefore, price spreads provide an analysis of the share of the
                      consumer food dollar that goes to the farmer and the shares that go to
                      other segments in the marketing system for a specific product. Thus, the
                      purpose of ERS’ price spreads is to show the value differences between
                      market levels at a specific point in time and over long periods of time for
                      the “standard” hog with 51 to 52 percent leanness and 0.80 to 0.99 inches
                      of backfat. Estimates and comparisons do not necessarily represent an
                      average live hog or hog carcass (which would change over time), nor do
                      they represent the particular mix of pork cuts a retailer may sell at a given
                      time. According to ERS, price spreads would not be meaningful if the
                      product measured were not consistent.




                      Page 27                                      GAO/RCED-00-26 Reported Pork Prices
Appendix III
USDA’s Methodology for Obtaining,
Verifying, and Reporting Live Hog and Pork
Product Prices and for Calculating
Farm-To-Retail Spreads




ERS does not adjust its prices for the lag between the time the hog is
slaughtered, processed, and merchandised. ERS uses prices at each level
for the same time period.

In 1999, ERS revised its methods for reporting pork price spreads to reflect
higher-quality (leaner) hogs and more closely trimmed pork products. As a
result of this revision, ERS adjusted its prices back through 1979 to
maintain historical consistency in reported spreads. The adjusted prices
show an increase at all levels—farm, wholesale, and retail—over previously
reported prices.




Page 28                                      GAO/RCED-00-26 Reported Pork Prices
Appendix IV

Pork Retail Sales, July 1998 Through June
1999

                                      The tables in this appendix show retail prices for pork as reported by USDA
                                      and as indicated by supermarket scanner data obtained from Information
                                      Resources, Inc. for July 1998 through June 1999. Table IV.1 shows monthly
                                      retail prices for pork reported by USDA. Table IV.2 shows monthly dollars
                                      of pork sales, pounds sold, and average price per pound, according to
                                      supermarket scanner data. Table IV.2 also shows the number of
                                      supermarkets from which the data were obtained and the percent of U.S.
                                      grocery sales these stores represent. Table IV.3 shows grocery sales
                                      information by week.

Table IV.1: Monthly Pork Prices, as
Reported by USDA, July 1998 Through   Month                                                Average price per pound
June 1999                             July 1998                                                               $2.45
                                      August 1998                                                              2.45
                                      September 1998                                                           2.45
                                      October 1998                                                             2.42
                                      November 1998                                                            2.41
                                      December 1998                                                            2.38
                                      January 1999                                                             2.33
                                      February 1999                                                            2.37
                                      March 1999                                                               2.37
                                      April 1999                                                               2.35
                                      May 1999                                                                 2.39
                                      June 1999                                                                2.41
                                      Source: USDA.




                                      Page 29                                    GAO/RCED-00-26 Reported Pork Prices
                                          Appendix IV
                                          Pork Retail Sales, July 1998 Through June
                                          1999




Table IV.2: Monthly Pork Sales Information, July 1998 Through June 1999
                                                                                             Sales coverage
                                           Volume sold (in         Average price per         Number         Percent of U.S.
Month                     Pork sales             pounds)                      pound         of stores        grocery sales
July 1998               $838,741,354            345,438,973                     $2.43          7,100                  41.5
August 1998              667,080,437            274,627,280                      2.43          7,100                  41.5
September 1998           675,633,388            280,780,867                      2.41          7,100                  41.5
October 1998             829,146,838            347,172,924                      2.39          7,100                  41.5
November 1998            681,347,323            288,670,936                      2.36          7,100                  41.5
December 1998            806,550,747            360,474,365                      2.24          8,100                  48.0
January 1999             918,693,696            391,797,768                      2.34          8,100                  48.0
February 1999            652,056,549            277,386,435                      2.35          8,100                  48.0
March 1999               666,502,105            285,661,355                      2.33          8,100                  48.0
April 1999               876,848,041            391,469,277                      2.24          8,100                  48.0
May 1999                 656,290,798            275,280,645                      2.38          8,100                  48.0
June 1999                684,759,107            283,921,132                      2.41          8,100                  48.0
Total                 $8,953,650,384         3,802,681,957                      $2.35
                                          Source: Information Resources, Inc.




                                          Page 30                                       GAO/RCED-00-26 Reported Pork Prices
                                          Appendix IV
                                          Pork Retail Sales, July 1998 Through June
                                          1999




Table IV.3: Weekly Pork Sales Information, July 1998 Through June 1999
                                                                                           Sales coverage
                                           Volume sold (in      Average price per          Number         Percent of U.S.
Week ending               Pork sales             pounds)                   pound          of stores        grocery sales
07/05/98                $184,012,644            76,599,302                    $2.40          7,100                  41.5
07/12/98                 169,295,898            69,203,714                     2.45          7,100                  41.5
07/19/98                 161,309,395            66,896,102                     2.41          7,100                  41.5
07/26/98                 156,957,374            64,555,671                     2.43          7,100                  41.5
08/02/98                 167,166,041            68,184,185                     2.45          7,100                  41.5
08/09/98                 170,427,757            70,196,043                     2.43          7,100                  41.5
08/16/98                 168,608,624            69,415,578                     2.43          7,100                  41.5
08/23/98                 165,427,885            67,911,713                     2.44          7,100                  41.5
08/30/98                 162,616,170            67,103,946                     2.42          7,100                  41.5
09/06/98                 170,943,643            70,843,948                     2.41          7,100                  41.5
09/13/98                 172,633,551            71,947,885                     2.40          7,100                  41.5
09/20/98                 162,646,874            67,918,635                     2.39          7,100                  41.5
09/27/98                 169,409,320            70,070,398                     2.42          7,100                  41.5
10/04/98                 169,991,483            70,939,337                     2.40          7,100                  41.5
10/11/98                 173,945,183            73,220,230                     2.38          7,100                  41.5
10/18/98                 166,266,162            69,065,605                     2.41          7,100                  41.5
10/25/98                 160,448,739            67,155,177                     2.39          7,100                  41.5
11/01/98                 158,495,272            66,792,575                     2.37          7,100                  41.5
11/08/98                 163,281,370            68,389,831                     2.39          7,100                  41.5
11/15/98                 165,193,474            68,977,641                     2.39          7,100                  41.5
11/22/98                 183,850,274            78,575,078                     2.34          7,100                  41.5
11/29/98                 169,022,206            72,728,386                     2.32          7,100                  41.5
12/06/98                 176,345,282            75,813,652                     2.33          8,100                  48.0
12/13/98                 178,268,295            76,479,646                     2.33          8,100                  48.0
12/20/98                 222,069,710           100,910,921                     2.20          8,100                  48.0
12/27/98                 229,867,460           107,270,146                     2.14          8,100                  48.0
01/03/99                 197,406,198            84,392,531                     2.34          8,100                  48.0
01/10/99                 173,383,249            71,098,553                     2.44          8,100                  48.0
01/17/99                 188,095,922            81,369,338                     2.31          8,100                  48.0
01/24/99                 175,132,425            74,746,446                     2.34          8,100                  48.0
01/31/99                 184,675,901            80,190,899                     2.30          8,100                  48.0
02/07/99                 167,199,062            71,067,317                     2.35          8,100                  48.0
02/14/99                 158,870,502            67,490,080                     2.35          8,100                  48.0
02/21/99                 161,630,150            68,666,397                     2.35          8,100                  48.0
02/28/99                 164,356,835            70,162,641                     2.34          8,100                  48.0
                                                                                                              (continued)


                                          Page 31                                     GAO/RCED-00-26 Reported Pork Prices
                               Appendix IV
                               Pork Retail Sales, July 1998 Through June
                               1999




                                                                                  Sales coverage
                                Volume sold (in         Average price per         Number         Percent of U.S.
Week ending      Pork sales           pounds)                      pound         of stores        grocery sales
03/07/99        169,601,382           73,718,223                      2.30          8,100                  48.0
03/14/99        163,617,195           70,649,583                      2.32          8,100                  48.0
03/21/99        163,769,662           68,744,015                      2.38          8,100                  48.0
03/28/99        169,513,866           72,549,535                      2.34          8,100                  48.0
04/04/99        229,635,131          116,811,854                      1.97          8,100                  48.0
04/11/99        159,537,657           69,696,818                      2.29          8,100                  48.0
04/18/99        167,038,346           68,918,936                      2.42          8,100                  48.0
04/25/99        158,843,955           66,830,770                      2.38          8,100                  48.0
05/02/99        161,792,951           69,210,900                      2.34          8,100                  48.0
05/09/99        167,712,672           71,679,279                      2.34          8,100                  48.0
05/16/99        166,275,551           69,108,155                      2.41          8,100                  48.0
05/23/99        161,977,448           66,677,843                      2.43          8,100                  48.0
05/30/99        160,325,126           67,815,369                      2.36          8,100                  48.0
06/06/99        175,752,331           72,698,802                      2.42          8,100                  48.0
06/13/99        176,636,691           74,442,447                      2.37          8,100                  48.0
06/20/99        166,022,634           68,885,787                      2.41          8,100                  48.0
06/27/99        166,347,452           67,894,095                      2.45          8,100                  48.0
Total         $8,953,650,384      3,802,681,957                      $2.35

                               Source: Information Resources, Inc.




                               Page 32                                       GAO/RCED-00-26 Reported Pork Prices
Appendix V

Comments From the U.S. Department of
Agriculture

Note: GAO comments
supplementing those in the
report text appear at the
end of this appendix.




In USDA’s letter, the
references to page
numbers refer to GAO’s
draft report. When useful,
we have updated the
page numbers in the
margin.




See comment 1.




See comment 2.



Now on pp. 25-26.
See comment 1.



See comment 3.




                             Page 33   GAO/RCED-00-26 Reported Pork Prices
                    Appendix V
                    Comments From the U.S. Department of
                    Agriculture




See comment 2.



See comment 2.




See comment 2.


See comment 2.


See comment 2.

See comment 2.

See comment 2.

See comment 2.

See comment 2.

See comment 2.

Now on pp. 11-12.
See comment 1.



Now on p. 11.
See comment 2.




                    Page 34                                GAO/RCED-00-26 Reported Pork Prices
                    Appendix V
                    Comments From the U.S. Department of
                    Agriculture




See comment 2.


See comment 2.

See comment 2.



See comment 2.

Now on p. 13.
See comment 4.


See comment 2.


See comment 2.




See comment 2.



Now on pp. 25-26.
See comment 1.


See comment 2.

See comment 2.




                    Page 35                                GAO/RCED-00-26 Reported Pork Prices
                 Appendix V
                 Comments From the U.S. Department of
                 Agriculture




See comment 3.




                 Page 36                                GAO/RCED-00-26 Reported Pork Prices
                 Appendix V
                 Comments From the U.S. Department of
                 Agriculture




                 1. We agree and have revised our report to recognize that in January 1999
GAO’s Comments   USDA revised its methods to develop pork price spreads using prices for
                 leaner hogs. Leaner hogs sell for a higher price in the marketplace, thus
                 having the effect of narrowing the spread between hog prices and retail
                 pork prices.

                 2. We agree. The final report was revised to reflect USDA’s comment, as
                 appropriate.

                 3. We are not suggesting that USDA discontinue its current method of
                 reporting pork price spreads. Rather, we believe that the recent legislative
                 requirements to include prices based on most hog sales and actual
                 consumer purchases, coupled with existing information reported by USDA,
                 would provide a more accurate portrayal of the farm-to-retail pork price
                 spread at a given point in time.

                 4. We agree that retail prices did not fall in proportion to the decline in hog
                 prices. However, pork retail prices are composed of various value-added
                 services, such as processing, transportation, and marketing, in addition to
                 the cost of the hog. Therefore, even if the entire decline in hog prices were
                 passed on at the retail level, the decline in percentage terms would be
                 smaller.




(150132)         Page 37                                      GAO/RCED-00-26 Reported Pork Prices
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