By Doug Groth, DVM, Owner & Veterinarian, and Kim King, Ingredient Merchandizer & Risk Management, Carthage System
As diesel costs rise, there is less room to absorb additional transportation expense
Pork producers are planners by nature.
There are herd health plans, vaccination protocols, biosecurity procedures, production targets, feed budgets and schedules for getting pigs where they need to go. But there is another plan that deserves the same level of attention: The operation’s risk management plan.
Risk management is not about predicting the market correctly. It is about understanding where your business is exposed and determining how you will respond before changing conditions force the decision.
Markets can move quickly. Feed costs change. Hog prices change. Production performance changes. Disease challenges can alter projections that looked completely reasonable a few months earlier. Global events can influence commodity markets thousands of miles away.
A producer cannot control all of those variables, but a plan can help determine how the operation responds to them.
Before thinking about futures, feed ingredients or other risk management tools, producers need to understand their own operation.
That starts with knowing the cost of production.
It sounds basic, but an accurate cost of production provides the foundation for evaluating opportunities and understanding where an operation may be vulnerable. Feed costs, production performance, mortality, facility costs, interest expense and other factors ultimately influence the margin an operation is trying to protect.
Today’s producers tend to be well-versed in costs because understanding them has become essential to staying in business. With the amount of volatility facing pork production, knowing where an operation stands financially is the foundation for managing profitability or minimizing losses.
But cost alone does not tell the entire story. Producers also need to establish what profitability looks like for their operation.
What is the target for the year? What margin is acceptable? Are there periods when breaking even may be a reasonable objective?
Pork production and markets are seasonal. There will be periods when the opportunity is stronger and others when margins are tighter. Establishing those goals ahead of time gives producers something concrete to manage toward instead of reacting to each market movement.
Cost of production also cannot be treated as a number calculated once a year and placed in a spreadsheet. Feed costs change. Production changes. Health status changes.
If feed costs change, pigs do not perform as expected or health challenges affect an operation, the economics change with them.
That makes communication among production, veterinary, financial and risk management teams increasingly important.
A Porcine Reproductive and Respiratory Syndrome break, for example, can quickly change the economics of an operation. Fewer pigs coming from the sow farm may require an operation to source pigs elsewhere at a substantially different cost. A health challenge in wean-to-finish can increase mortality well beyond what was budgeted. The financial impact can become even greater when mortality occurs later in the finishing period, after considerably more cost has already been invested in those pigs.
Those changes ultimately affect the cost of every pound of pork the operation produces.
That is why risk management cannot operate independently from what is happening in the barns. Markets are live, but production is live, too.
There is no shortage of market information available to producers. The challenge is determining what that information means for an individual business.
Watching corn, soybean meal and lean hog markets every day is not the same as having a risk management plan.
A plan should establish the operation’s objectives, identify its major exposures and create a framework for making decisions when opportunities or challenges arise.
Knowing your business is essential to making a sound risk management plan — simply knowing where you plan to purchase ingredients from and if you’re using ingredients off the farm, how they will be stored and what cost associated with that. Upon knowing your business and its numbers, look at how much overall risk you’re comfortable with the business taking on outside of the normal business risk.
Producers who have a simple and written risk management plan miss fewer opportunities and tend to make decisions that are driven by economics rather than emotions.
The current environment provides a good example of why planning matters.
There is tremendous value in market data and historical seasonality. Patterns can help producers understand what has traditionally happened during different periods of the year, but history is not a guarantee.
No two years are exactly alike, and events far outside a producer’s control can quickly influence inputs and revenue. A risk management strategy should not depend on correctly predicting what corn, soybean meal or hog prices will do next.
Instead, producers should understand the variables affecting their operation and how those pieces work together.
As harvest progresses, there are several factors we are watching that could influence feed costs into the new year.
One of the first is how yields ultimately finish, both locally and nationally, and what that means for basis levels. Soybean meal brings another set of considerations, including crusher margins and export demand for meal.
Alternative ingredients deserve attention as well. Distillers dried grains with solubles, wheat middlings and soybean hulls could become viable options for reducing ration costs when pricing and availability make sense for an operation.
But producers looking at ingredient costs should not focus on futures alone.
Basis represents local supply and demand and does not always move in the same direction or magnitude as the futures market. That means a favorable move on the board does not necessarily translate directly into the same opportunity at the local level.
Logistics and freight are another increasingly important part of the equation.
As diesel costs rise, there is less room to absorb additional transportation expense. That can affect decisions about where ingredients are purchased and, for producers who grow their own corn, where grain should be stored.
The delivered cost of an ingredient matters more than any one number on a screen.
Those variables reinforce the importance of evaluating ingredient procurement as part of the operation’s broader risk management strategy. Futures, basis, freight, storage and alternative ingredients can all influence the final cost of putting feed in front of pigs.
The goal is not to make the perfect market call. It is to understand the variables that could affect the business, know what an acceptable margin looks like and have a plan for responding when an opportunity or challenge arises.
Feed and hog prices may be the most visible pieces of financial risk management, but they are not the only ones.
Energy is another expense that deserves attention. Diesel, LP and other energy costs can change because of global conditions that have little to do with what is happening locally. Costs that may once have been viewed as relatively predictable overhead can become another source of volatility for the operation.
Health and production can be equally important. A disease event can change mortality, average daily gain, feed conversion and marketing schedules. Changes in production can alter the number of pigs available to market and the number of pigs consuming feed.
All of those changes ultimately come back to cost of production and margin.
Risk management should not fall entirely on one person.
At minimum, the operation needs representation from ownership and someone who understands what is happening in production day-to-day. That production perspective is critical for identifying health challenges, changes in pig flow or other issues that could alter assumptions behind the plan.
A third perspective should come from a trusted market or risk management expert who understands the operation’s goals and can bring outside information to the discussion.
An advisor needs to understand the producer’s costs, objectives and tolerance for risk. In return, the producer needs confidence in the information and expertise that advisor brings to the table.
More people do not necessarily make the process better. Too many independent opinions can create indecision. A smaller group that understands the operation, trusts one another and knows the objective can remain focused when decisions need to be made.
That group also needs to communicate regularly. We believe that means having a scheduled risk management conversation at least once a week.
Markets and production conditions can change daily, but a regular meeting creates a systematic opportunity to evaluate what has changed and determine whether the plan needs to adjust. It also helps prevent decisions from becoming knee-jerk reactions to a single day’s market movement.
The strongest time to think about protecting profitability is not necessarily when margins are already under pressure.
When hog prices are strong, feed costs are favorable and the operation can see an acceptable margin, that is precisely when producers should be evaluating what they can protect.
Production and commodity markets move through cycles. Waiting until margins have deteriorated can leave an operation with fewer attractive choices. At that point, risk management may become less about protecting profitability and more about limiting losses.
Being proactive gives producers more room to make decisions.
Starting the conversation about getting future ingredients booked, you need to make sure you understand the number of animals that plan to feed and the diets and budgets you plan to use while feeding them, to understand exactly how many ingredients you need to book.
There also needs to be room for the plan to change.
A risk management strategy developed in January may need to look different by July. Every variable in your operation has the risk to change, and that’s where a plan comes in to know what to do next.
The value is not in following a document rigidly. The value is having a framework that helps the team recognize when conditions have changed enough to warrant another conversation.
Another piece of risk management that can be overlooked is decision-making responsibility.
When an opportunity presents itself, who has authority to act?
If that answer is unclear, an operation can lose valuable time while people gather information, seek approval or debate what to do.
A good plan establishes those responsibilities ahead of time.
Having a clear decision-maker is important to take advantage of opportunities more quickly. Challenges arise when there is no clear direction and the market is volatile, leading to missed opportunities.
The same principle applies to communication. Producers do not need to navigate these decisions alone, but advisors can only provide useful perspective when they understand the operation’s objectives, costs and risk tolerance.
A more useful question is, “Are we prepared for what the market could do?”
For producers who have not reviewed their risk management plan recently, the first step is an assessment.
Where is the operation today? What positions are already in place? What do current feed and hog markets mean for projected margins? Where does the operation want to be, and what options remain available to move toward that profitability goal?
Those questions become especially important when markets have already moved. The opportunities available today may look different from those available several months ago. The answer is not to chase what has already happened. It is to understand the position the business is in now and determine the best path forward.
Risk management cannot eliminate uncertainty from pork production. Disease will still occur. Markets will still move. Feed and energy costs will fluctuate. Global events will continue to influence agriculture.
Historical data and seasonality can provide useful context, but producers cannot assume this year will behave exactly like the last one.
The objective is not to correctly predict every turn in the market or capture every high and low.
It is to know your operation, establish an acceptable margin, understand where you are exposed and have a trusted team and a plan in place before circumstances make the decision for you.
As diesel costs rise, there is less room to absorb additional transportation expense
Rethinking everyday workflows and retiring ‘sacred cows’ can protect your values while driving sustainable efficiency
The pork producers who thrive over the next decade won’t simply own better technology. They’ll build better teams.
High-risk groups, including recently processed piglets, newly farrowed sows and injured animals, should receive additional scrutiny.
Producers can quickly become overwhelmed trying to turn large volumes of data into something meaningful for their operation. In some cases, that complexity is enough to discourage them from using data at all.
Goal is to use both historical and real-time production data to align nutrient supply with pig requirements at the group level.
The days of collecting volumes of data from your swine operation and wondering what to do with it “someday” are largely past.
Micro-ingredients such as amino acids, trace minerals and vitamins are globally sourced, including from regions reporting FAD outbreaks.
Your new nursery pigs have one job: To eat and grow. Your task is to manage their environment in such a way to minimize stress as they adjust to a different social structure and a solid diet.
Partnering the right vaccine with sanitation and hygiene measures can head off a lot of headaches in your farrowing space.
