Revenue is a key metric for a producer to be successful in their pork production enterprise. As we consider strategies for success, I’d like to highlight a few key tactics producers can adopt that, in the long run, will help to improve revenue. Some of these are basic and some of you will say, “yea, duh,” but it never hurts to review the basics.
- Understand the markets
The first thing you should understand is all of the different “markets” that relate to your farm business. For example, do you understand mandatory price reporting for the Western Cornbelt hog market, the National hog market, the CME Index, and the Pork Cutout? Before you sit down to negotiate any hog procurement agreement with your packer/buyer, you will be at a disadvantage if you do not understand these markets in detail. Key questions to ask are how are they derived, what are the differences, who does them, why do they sometimes say ‘not published due to confidentiality’, and are they audited? You should also understand the details on the grains, particularly corn and soymeal markets.
- Know your buyer(s)
The second strategy that is overlooked is to know all of your regional packer buyers. It is easy to develop a relationship with your local country buyers, but I also suggest getting to know the head buyers in your area. Ask them questions and try to understand aspects of their business that you don’t understand. There are not very many companies left to buy your hogs, so be respectful and don’t burn bridges. We learned during COVID that when plants are going through shutdowns, having more than one packer agreement was beneficial and allowed producers to get their hogs harvested. I firmly believe that every producer should have a minimum of two agreements with different packers; I like three and maybe even four agreements better depending on your individual situation. This helps in situations where shutdowns could occur – weather (tornado or fire damage, etc.), foreign animal disease, or COVID are a few examples. Another advantage is that it allows you to diversify your pricing, if you can negotiate hog procurement agreements that have differentiation. This is especially true today when attributes like open pen gestation, Prop 12, and Duroc sired have different value opportunities between the different packers. Not one market seems to stand the test of time so diversify your pricing and you will always be half right.
- Implement risk management
The third tactic is to implement a consistent risk management strategy that allows you to ‘crush’ your hogs to a consistent profit margin. Today I deal with a third of producers who do a great job, a third that does a mediocre job, and a third that doesn’t do any risk management. In this world of extreme volatility, you really need to adopt risk management strategies for your business. Remember consistency is the key. So often I see producers who have fallen into the trap of trying to hit the top of the market and are left with no coverage when it crashes. Focus on the crush margin and lock-in your profit margin when they hit levels you’ve already predetermined. For example, when the markets allow you to crush $10/head maybe you should do that on 10% of your hogs, do another 10% when you get to $12.50/head, and another 10% when it hits $15/head. The point here is to get started, and if the markets keep allowing a higher crush follow it up and keep doing some until you have half or two-thirds covered. Then it is up to you if you want to do more or let the market run. If it does, don’t be afraid to lock those margins when you can. If you set your targets in advance and have a plan, you’ll be more successful. It should be understood that you really need good records and financials so that you know your breakevens. That will allow you to know exactly what the markets are offering you on that crush margin per head. Almost every year the futures markets have allowed pork producers to lock in very good margins. If you utilize this type of strategy your margins should be more consistent year after year.
Lastly, know when you need help. If you don’t understand the markets or how to do risk management, I encourage you to find an advisor or consultant that does. It will take some determination on your part and a willingness to learn new skills, but understanding these things will pay off in the end. In addition, if the next generation is coming into the operation include them in this learning process as it will benefit both of you and your business over the long term.
Article by Brian Stevens,
President, Big Stone Marketing, LLC