A profitable pork enterprise is the goal of every pork producer. There are many considerations when thinking of profitability in the pork production sector. One of the most critical is that of Risk Management.
The main idea behind risk management is the desire to transfer the risk that a producer has in their hog inventory to a speculator who is willing to buy the hogs at a target price that the producer has the ability to determine. The willingness for a producer to sell their hogs through the avenue of Lean Hog Futures on the Chicago Mercantile Exchange makes them a hedger and takes risk off the table for his or her business. When a producer leaves pigs on the open market or on a packer contract that has a formula off the negotiated market all the way to harvest, it simply means they have decided to speculate on that percentage of their production.
Over the past few years, it seems prices on both sides of the ledger have become extremely volatile. Since 2020, we have seen hog futures swing from lows in the upper $30s to highs around $130. During the same time frame, we have seen corn range in price from $3-4 to $7-8. With moves like this, predictability on the next market move becomes almost impossible. This is why it is becoming even more important to lock in a profit for your business when the opportunity presents itself.
Ultimately, the goal in risk management is to lock in a fair profit or “crush” margin. A yearly average profit/pig over an entire year may be $10 or $15/pig. This means we need to be watching the lean hog futures prices and how they are comparing to corn and soybean meal prices on a daily/weekly basis. By paying attention to the profit margin being offered on a weekly basis, a producer can feel less pressure to “hit the high” in the hog market. If we can lock in $15/pig profit for an entire year, it really doesn’t matter if hogs are $65 or $90 average over the next 12 months.
Over the past 25+ years in the pork production business, there has been an opportunity to lock in a fair margin every year. This does require looking out over the next 12 months on a consistent basis. Of course, in taking this approach there will be years when we experience significant margin call as lean hog futures markets continue to move higher. The opposite occurs equally as often as the market moves lower after we sell the board.
The advantages to taking this disciplined approach:
- Taking emotions out of marketing decisions
- Removing the ‘roller coaster effect’
- Being prepared for the threat of African Swine Fever coming to the US swine herd.
Finally, never feel bad about not hitting the high market when you are able to lock in a targeted margin. Taking this base hit approach takes the stress off of marketing. Long-term consistency reaps year-over-year profitability. I would advise all pork producers to be disciplined and consistent in their risk management strategy. Use a trusted advisor as you see necessary. 2023 has been and is currently offering some margin opportunities to take a look at.
Article by Dr. Gawen Zomermaand
Pipestone Veterinary Service