Mark Greenwood, the senior vice president of AgStar Financial Services of Mankato, MN says, when using risk management strategies in hog production, producers need to consider all of the risk factors.
Mark Greenwood, speaking at the 2014 Manitoba Swine Seminar in February likens risk management in swine production to a three legged stool.
“You have your hogs and you’re selling those hogs probably every day so you can use the CME futures that are traded on the board out of Chicago,” he said. “You also have an option strategy, you can also work with packer contracts where you can do a basis type of contract with the packer so there’s that way but in addition to that you also have to think about your feed costs.”
Greenwood says as a consulting company and working with producers he needs to understand his production model.
“How much of that feed do you actually raise on your own, are you buying all of it and so understanding what that overall profile is on what your feed risk management strategy is as well,” he said. “Then you can develop multiple different strategies there particularly on the corn side. If you have to buy all your corn you can use futures, you can work with local elevators or feed mills.”
Greenwood says if a producer locks in his feed price, he needs to do the same with his hogs because he’s betting on one and he also needs to kind of bet on the other because if he locks up his feed hog prices suddenly drop dramatically, his position would also change.
“For us, what we talk about is a crush position. It’s taking that overall potential price of the hogs,” he said. “An example of that would be June hogs are trading at $105 so your total gross revenue would be about $215 a head less your overall costs and your feed costs would probably be about 75 to 80 dollars a head. You’d have some other overhead costs but net profit you’d probably be looking at today of about a $50 a head profit.”
Greenwood recommends finding brokers or traders that the producer can trust and develop a sound relationship and to involve lenders so they also can understand risk management strategies.
He says things keep changing, but futures prices aren’t new, in fact others have used them as a risk management tool. Lack of use in the past was due to the producer and lender not understanding how to use them.
His company started using in 2003 because Packer agreements changed.
The main question for the producer is what is his goal, realistically speaking and the number one item must be for him to know his cost of production.
Greenwood says successful companies today are as good at risk management as they are with their production management. They use all the tools of the futures including options and spreads to enhance margins.
“The bottom-line is you don’t go broke if you lock in a profit.” •
— By Harry Siemens