The year 2020 has been anything but normal. I think we can all agree that the hog and pork markets are as volatile as ever! In recent years, this industry has undergone PEDV, African Swine Fever, and now Covid-19. All of the market ups and downs isn’t for the faint of heart.
Big Stone Marketing offers a forward pricing program just for this reason. As we believe all producers should have a risk management program for their operation, our program is a tool to help manage risk and lock in prices when opportunities arise. This unique program offers producers the option of either a fixed basis (where BigStone Marketing takes the basis risk) OR leaving the basis open (where the producer has the basis risk).
We aim to make placing a forward contract easy! All you need to do is call and tell us…
- What delivery period you want to forward price.
- What target price you want us to use.
- If you want to use our fixed basis or not.
BigStone Marketing personnel will place the order and provide you a one-page contract confirming the forward contract. Big Stone Marketing also handles all the margin calls for your positions through delivery!
Every producer has a substantial investment in every pig they raise. Why not protect it?
- Put a game plan in place that will allow you to be profitable.
- Write it down so you can reference it.
- Calculate your break-even so you have a basic understanding of your costs with a reference point.
- Set profit targets that are achievable/realistic and then place orders with BigStone at your strike price.
The most common mistake we see is when producers try to hit the high price. This usually occurs when the news is bullish and the market feels like it is going to keep running up, so producers wait. The result is usually a market correction. Then producers wait for it to return to those higher levels and it never does. This leaves producers getting little coverage in these situations. Those that are successful with their risk management programs have a plan. They know their cost of production, set reasonable profit goals, and place orders to achieve those targets. When you stay consistent with this program, you’ll find that sometimes you lock in high prices and sometimes you don’t; however, your profitability stabilizes and is more consistent over time and that should be the goal.
Stay on track with the game plan and continue making sales out front to take advantage of forward contracting opportunities when available.
For example, for those that were consistent and forward priced hogs at $100 in June 2014 when the market ran to $130, they also got to sell February 2015 market hogs for $90 when the market fell to $50. It all worked out and they protected their profit opportunity. During that same time, we saw many producers disappointed that they only locked in $100 and missed the high of $130. Frustration caused them to stop putting positions on, and when the downturn came, they had no coverage on and so they got $50.
Fixed Basis Program
Our fixed basis program is another great tool for producers but can be confusing. Fixed basis levels are based on the last 3-5 years of historical basis levels and are set accordingly. In other words, if a fixed basis level seems high, it is because it has been high over the last 3-5 years which end up being your higher risk delivery periods for basis swings. If the fixed basis level being offered is a lower or positive number, that is because it’s been relatively low risk in the past.
I encourage you to use our fixed basis program as a part of your risk management program and build the basis levels into your strike price order. For example, if you are looking to lock in a good June futures price at $85 and Big Stone Marketing is offering a -$4.00 basis then set your strike price at $89 on some of your orders. If they fill then you achieved your strike price and will have zero basis risk!
BigStone’s Forward Contracting program is designed to help producers take advantage when profit opportunities become reality. Prioritize the items discussed above and take advantage of this unique program. If you would like to discuss further or need some help putting together your risk management program just give us a call; we are happy to help. I believe we are all ready for 2021! If you currently don’t have a risk management program I encourage you to do so for this new year!
By: Brian Stevens, BigStone Marketing President