2 March 2001

Stability needed for pig deals…

Some pig contracts are

hardly worth the paper they

are written on. Its time for

a thorough review, says

consultant Peter Crichton

DURING the past two-and-a-half years, which saw the UK pig industry notch up several £m losses, many producers wished they had some form of "floor and ceiling" contract to protect themselves against prices falling below acceptable levels.

The same wish has also in some cases been extended at the buying end with abattoirs looking to source supplies at a cost that would not go beyond an agreed "ceiling" figure.

Up to now the problem with any form of sale contract is that if market prices move outside the bands agreed, one side or the other may decide to renege on the deal.

Most contracts will normally incorporate a notice period which can be served by either side. But most producers will remember the infamous Malton Bacon letter of May 28, 1998, which effectively undermined confidence in all average pig price-related contracts.

Then Max Hilliard, the Malton boss, gave producers a stark choice; either revert to a factory spot price or serve out a 12-week notice period and then be cut adrift.

Notice periods are essential because of the two-way nature of the contract. Although there are few cases of producers being taken to task for under-supplying pigs during a contract period, there are even fewer instances of abattoirs being challenged in the courts, if they fail to honour their side of the agreement.

Innovative contract arrangements that have been on offer in recent years include "floor and ceiling" arrangements where the price will float between a minimum of, say, 80p/kg and a maximum of 120p/kg.

Some half-and-half contracts include a fixed element, with the other half of the contract floating on a spot price basis. Cost of production contracts have also been available where half the contract is related to feed costs and the other half linked to either spot price, or the AAPP.

However, when spot prices move above contract levels, which appears to be the current trend now that the shortage of pigs has started to bite, producers are tempted to supply minimum contract numbers and sell the balance of their pigs on the spot.

The reverse applies when contract prices are above spot and abattoirs only allow producers to deliver contract numbers with any additional pigs subject to a harsh factory spot price.

Retail price-linked contracts such as the Dalehead/Waitrose set-up, are to be encouraged, as this pricing arrangement saw some producers through hard times. But unfortunately this deal only covered a comparatively small niche in the market and was not widely available.

Because of the volatile nature of the meat market unless the retail sector can be persuaded to buy pigs on a forward quasi-contractual price it is difficult to see how producers can effectively lock in to a secure contract.

The short-lived UK pig meat futures market, which operated in the 1980s also provided producers and abattoirs with something of a market "hedge". Although this failed, due to lack of support, the AEX Dutch pig meat futures market is flourishing.

Futures-linked selling could provide producers with some form of insurance policy, which would effectively allow them to sell onto the market if they felt prices were likely to fall, or to buy if they believed prices were likely to rise. However futures markets are high risk and not for the faint-hearted.

The future appears to lie in the U.S system of long-term forward price contracts that guarantee the producer a reasonable return with the abattoir dealing with the retailer on a similar long-term basis.

However, until the retail sector can be persuaded to look at sourcing products on this basis, the whole of the pig industry will remain vulnerable to price fluctuations regardless of contract arrangements.

BOX – CONTRACTS

* Most contracts can be broken.

* Futures market may help.

* Long-term tie-ups offer best solution.

CONTRACTS

&#8226 Most contracts can be broken.

&#8226 Futures market may help.

&#8226 Long-term tie-ups offer best solution.