After sharp ups and downs in lean hog prices of the past few years, not to mention producers’ ongoing struggle with sow losses, this year’s comparatively steadier rise in prices and lower breeding-herd mortality has been the industry equivalent of being able to exhale a bit.
As is the case in better times, it’s valuable to not forget the lessons of harder days and be sure our risk management strategies to protect against potential future losses are solid. Producers need information they can use in marketing their pigs, which includes expert insight into Chicago Board of Trade contract strategies as well as activity in other markets on the world stage.
The foundation is built through breeding and raising a consistent supply of healthy pigs as well as data analytics, so producers can better track their true cost of production at any given time.
“Just like you manage pigs in the barn, you’ve got to manage that position you have on the Board, as well,” added Carthage Veterinary Service (CVS) partner and veterinarian Doug Groth, DVM. He correctly explains that once a producer decides how to put their risk management strategies into place, they should continually monitor their position on each to ensure continued best outcomes.
I view risk management in three categories that you can use as a swine producer, and advise them to strike a balance among all three. First, there are the everyday cash costs, which include the price of production and receipts from delivering the finished product: A healthy market pig. It sounds simplistic to say knowing your expenses and income is necessary as a predecessor to wise spending, expansion, culling and more — but it never hurts to review the basics.
The second category is using price protection to try to secure the best return for your investment of time and money. This could be Board of Trade futures contracts or negotiating a price directly with your packer. Finally, there are government support programs and insurance designed to assist with managing the substantial risk that comes with farming, whether that’s crop insurance for those producers who also plant, or taking out a Gross Margin or Risk Protection policy on your pigs. The federal government assists with premium subsidies for two of these.
By Producers’ Sides
With respect to understanding futures contracts and hedging, we have experts who stay in regular contact with the producers they help, providing insights and advice from their market experience and knowledge of and contacts in global markets.
CVS also participates in two ongoing disease surveys — the University of Minnesota’s on prevalence, and Iowa State University’s on epidemiology — to stay on top of the latest trends in pathology and compare PSM producers’ track records to the broader industry.
Key to any risk management strategy is producers being aware of their cost of production at all times — after all, you need to know the margins you are protecting. Doug notes this also typically helps one consistently earn an income, even if it’s a modest profit in tough times. “A producer once told me, ‘It’s great to hit a bunch of singles and doubles; I don’t want the grand slam every time, making it where I can’t afford to strike out, and I lose everything,’” he recalled.
When times are better, as they are for many producers now, it’s a prime opportunity to strengthen relationships with your two important “Bs:” buyers and bankers. Buyers might seem obvious — you want to maintain a profit stream — but touching base with your banker even when you aren’t in need of a line of credit or loan is a good idea (not to mention they can help advise you on certain aspects of risk management too).
Any business relationship maintained well when nothing is being requested is more likely to pay dividends when it is really needed. Remember, when the industry gives you an opportunity to secure profit, that’s the time to take measured steps toward remaining financially sustainable for years to come.
