By Doug Groth, DVM, Carthage Veterinary Service, with Kim King, Ingredient Merchandiser & Risk Management, Carthage System
There will always be another market move.
Corn will change. Soybean meal will change. Hog prices will change. Basis will change. Health status and production will change. And something happening halfway around the world can quickly create another variable producers did not anticipate.
The question is not whether something will change. It is whether your operation has a plan when it does.
Risk management is not about correctly predicting the next move. It is about knowing your operation well enough to recognize an opportunity, understand your exposure and make a decision before circumstances make it for you.
That starts with knowing your numbers.
Know the margin you are managing
Most producers today have a strong understanding of cost because they have had to. But knowing cost of production is only the beginning.
What does profitability look like for your operation? What is an acceptable margin? What are you trying to accomplish over the course of the year?
Those answers can tell producers when individual markets can become a distraction.
There is tremendous value in historical data and seasonality, but no two years are exactly alike. Trying to predict every high or low in corn, soybean meal or hog prices can quickly pull attention away from the number that ultimately matters: The operation’s margin.
If an acceptable margin is available, producers should be prepared to evaluate the opportunity to protect it.
Feed has to be part of that calculation. It represents one of the largest, if not the largest, costs of production in your operation, yet it can be tempting to focus heavily on the hog side of risk management while assuming corn or soybean meal will take care of itself.
Managing one without understanding the other leaves part of the operation’s margin exposed.
The board does not tell the whole story
Ingredient procurement provides a good example of why risk management has to extend beyond the numbers producers see on a screen.
As harvest progresses, we are watching where yields ultimately finish locally and nationally, and what those results could mean for basis levels into the new year.
Basis matters because it reflects local supply and demand and does not always move with futures. A move on the board does not necessarily translate into the same opportunity at the local level.
For soybean meal, crusher margins and export demand are important pieces of the picture. Other ingredients, including distillers dried grains with solubles, wheat middlings and soybean hulls, should also be watched for opportunities to reduce ration costs when they make economic and nutritional sense.
Then there is freight.
Higher diesel costs leave less room to absorb transportation expense. Where ingredients are purchased can significantly affect their delivered cost. Producers growing their own corn also have to consider transportation when deciding where grain should be stored.
Futures matter, but so do basis, freight, storage and availability. The lowest number on a screen does not necessarily equal the lowest cost delivered to the farm.
Production can change the plan, too
Risk management cannot operate separately from what is happening in the barns.
Consider a Porcine Reproductive and Respiratory Syndrome break. Fewer pigs coming from the sow farm can force an operation to source pigs elsewhere, potentially at a significantly different cost. Increased mortality in wean-to-finish changes the cost of production again.
Timing matters, too. Losing a pig late in the finishing period has a very different financial impact than losing one shortly after placement, because considerably more cost has already been invested in that animal. Feed budgets can change for the same reason.
Before booking future ingredients, producers need to understand how many animals they expect to feed, the diets they plan to use and the feed budgets associated with those animals. Those production assumptions determine how much of each ingredient the operation actually needs.
When production changes, the risk management conversation may need to change with it.
Put the plan on the calendar
A risk management plan should not be something developed once a year and put away.
Markets and production conditions are moving targets. We recommend putting a regular conversation on the calendar, ideally at least once a week, to review what has changed and determine whether the operation needs to respond.
That does not mean making a move every week.
In fact, the discipline of a regular review can help prevent the opposite of reacting emotionally to a single day in the market.
The right group does not need to be large. Ownership should be represented, along with someone who understands what is happening in production day-to-day. A trusted market or risk management expert can provide another perspective, help interpret outside information and assist with execution.
Trust within that group matters. Everyone needs to understand the operation’s costs, goals and tolerance for risk.
There also needs to be clarity around who can make a decision. Opportunities can move quickly. If no one knows who has authority to act, time can be lost gathering approvals while the market continues to change.
Do not wait for the difficult market
One of the easiest times to overlook risk management is when things are going well.
It may also be one of the most important times to pay attention.
When hog prices are strong, feed costs are favorable and an operation can see an acceptable margin, producers have an opportunity to be proactive. Waiting until margins tighten can leave fewer attractive options and shift the objective from protecting profitability to limiting losses.
Markets move through cycles. Strong conditions do not last forever, just as difficult conditions do not last forever.
The goal is not to guess exactly when that cycle will turn.
The goal is to know what profitability looks like for your business and recognize when the opportunity in front of you aligns with it.
Start with where you are today
If you have not reviewed your risk management plan recently, start with an assessment.
Where are you today? What positions do you already have in place? What do current feed and hog prices mean for your projected margin? Where do you want the operation to be, and what options are available to help get there?
Do not spend the conversation worrying about an opportunity that passed three months ago. Evaluate the business based on the information available today.
Risk management will never eliminate uncertainty. Disease will happen. Markets will move. Feed, freight and energy costs will fluctuate. Global events will continue to create variables producers cannot control.
What producers can control is how prepared they are to respond.
Know your cost. Know your margin. Understand your exposure. Surround yourself with people you trust. Then have a plan in place before the market forces you to make one.
