The senior vice president of AgStar Financial Services says, when using risk management strategies in hog production, all of the risk factors need to be considered.
Input Costs: How to Take Advantage of Risk Management was discussed last week in Winnipeg as part of Manitoba Swine Seminar 2014.
Mark Greenwood, the senior vice president of AgStar Financial Services 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, 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.
Now for us we have to understand your 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.
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 toll mills and, if you lock up your feed, you really probably need to lock your hogs because you’re betting on one and you also need to kind of bet on the other because if you lock up your feed and all of a sudden hogs would drop dramatically you would be in a different position.
For us, what we talk about is a crush position.
It’s taking that overall potential price of the hogs.
An example of that would be June hogs are trading at 105 so your total gross revenue would be about 215 dollars 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 dollar a head profit.
Greenwood recommends finding brokers or traders that you can trust and develop sound relationships with and to involve lenders so they also can understand risk management strategies.
