Is the SPP part of the problem?

The current price situation has put the spotlight on how pig prices are set and reported in the UK.

At the heart of this discussion is the Standard Pig Price (SPP). The SPP, which, as the name suggests, is a weekly measure of standard pig prices but not ‘premium’ prices, works both ways for UK pig producers.

It tends to avoid the extreme price swings often seem in Europe but, at times like these, can be frustratingly slow to respond to market forces.

It is often used to set prices but, according to the NPA, should not be used to base contracts on.

“My concern from information I have gathering is the amount of money that never gets into the SPP, largely from retrospective payments, weaner buy back deals and other hidden bonuses. This keeps it artificially low,” NPA chief executive Zoe Davies said.

Chairman Richard Lister said another element of the SPP that is ‘tough to stomach’ is that when pigs are rolled by processors, they will often incur big penalties for overweight pigs, for example £75/pig – and these lower prices are fed into the SPP. “That shouldn’t be reflected in a standard reference price,” he said.

“Processors called for change on how the SPP is calculated and that change seems to be very much in their favour. They are feeding the prices in and we would like to be confident those prices being fed in are accurate."  

Another contributing factor is that with most pigs on some kind of contract and very few traded on the spot market and, the SPP is even more stagnant than in the past.

The NPA, which has also called on Defra to consider the introduction of a pig supply chain Code of Conduct to ensure greater transparency, has held preliminary discussions with AHDB about possible changes to the SPP.

AHDB analyst Duncan Wyatt said, while there are no formal figures, his understanding was that a ‘significant’ proportion of pig contracts included written reference to the SPP, either fully or in part.

“In the definition of the SPP, it is described as not intended for use in contracts, but in the absence of a different preferred price, I understand why it gets used,” he said.

He agreed this causes ‘some inertia’ in the SPP, preventing it from reacting to sudden market changes, he added. “At times like this of course it can be frustrating for some, but others see it as a benefit. Often commodity markets have more volatile spot markets which can be used to generate reference prices – then it’s up to participants to decide how much they want to be exposed to those volatile prices. That’s not the case here,” he added.

“I’ve had a few conversations about the relevance of the SPP recently, and on balance my view is that it does what it supposed to do, which is give an indication of the prices at which pigs have traded nationally. In that sense, it is a reported average price rather than say, an achievable market price.

“That is not to say that AHDB couldn’t offer something else in addition that people might also find relevant, but that would need to be guided by industry. I’m certainly open to ideas, and am considering one or two at the moment.”

Zoe added: “We are very keen to look, with AHDB, at whether SPP can be improved as the main reference point for UK pig prices. She highlight some areas to be explored.

“We've suggested that AHDB produces what I'm calling loosely the Q-box price which cuts out all the underweights and overweights, tackling the rolled pigs effect, and just reflects the price paid for a standard pig, similar to the SQQ price already used for sheep. There have also been calls for them to produce a premium price, too.”

How is the SPP calculated?

• Launched in July 2014, it is a voluntary survey of pig abattoirs which provide their weekly kill data including weight, probe, sex and price.
• Only ‘standard pigs’ are included which no explicit premium is paid other than weight and grade.
• Pigs on which premiums exist, for example on certain production systems, are included in the All Pig Price.
• Prices reported on a Wednesday are the average prices paid by abattoirs during the previous week (Monday to Sunday).
• It is based on individual pig data that includes the gross price before deductions (such as transport, insurance and levies) and weekly payments for overnight delivery and procurement.

What do you think? Do we need to make changes to the SPP to ensure it operates more effectively as a reference price? Have your say on the NPA forum

This article appeared in the July issue of Pig World.