Using Formula Prices in the Absence of Publicly Reported Prices: An Application for Segregated Early Weaned Pigs

A formula for deriving the price of segregated early weaned pigs using corn, soybean meal, and market hog prices was estimated by equating return on investment for the different phases of production. USDA reported prices were compared with prices derived from this and several other common formulas. Based on several accuracy measures, the estimated formula was better at predicting spot-market prices than other formulas. Producers appear to form price expectations based on futures plus expected basis rather than simply futures or current cash prices. However, the method of choosing price expectations will depend on the risk attitudes of the buyer and seller and their business relationship. Developing pricing formulas based on the framework outlined here (equal returns on investment) has merit for establishing prices in the absence of publicly reported information. However, it is important that users of the formula understand the conceptual framework of how and why it was developed. Copyright 2004, Oxford University Press.