Pig prices have been great recently. Really great.
So now might be the time to lock in that price for the next few months because the downside price risk ahead appears greater than the upside opportunity, says Manitoba Pork Marketing Co-operative’s risk management specialist.
“Given the decent values in futures markets right now, I think there’s reason now to start taking some protection to protect your margins,” said Tyler Fulton in an interview.
This is a big change from recent months, when Fulton did not recommend locking in futures-based prices.
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He believed the futures market was not reflecting continuing strong pork demand and was offering pig producers lower prices than seemed reasonable.
But hog futures prices have run up. The June contract has risen from about $75 US per hundredweight Feb. 10 to more than $81 recently.
There now is no reason to hold back from protecting against a possible slump in the coming months. There is no clear sign of a slump coming, but with so much of the upside built into today’s futures prices, anything bad could cause prices to tumble.
“I liken the hog market now to a house of cards,” said Fulton, who gave the hog market outlook presentation at the Canadian Wheat Board’s Grain World conference.
“There are a lot of little factors, any one of which could have a substantial impact on profitability, and that’s why we’re advocating taking action.”
Fulton said this week’s United States Department of Commerce ruling on Canadian hog imports may rattle the market, but serious volatility is more likely from the expected April ruling of the U.S. International Trade Commission on hog imports.
“That truly is a wild card,” said Fulton.
But he isn’t pessimistic about the market, which still has potential to rise, so he is recommending producers buy put options to insure future prices or sell futures and simultaneously buy calls, rather than just selling futures contracts. Using options will allow producers to better capture any further rallies.
Put options allow someone to sell something at a future time at a set price. Unlike a futures contract, an option contract gives someone the right to do something but not the obligation to do it. So if prices rise above a put option’s exercise price, the holder of the option would simply let the option expire without exercising it.
An option is bought for a premium, unlike a futures contract, which has no cost other than the commission to buy or sell it.
The combination of selling futures and buying a call allows a producer to lock in a future price for his product but allows him with the call option to take advantage of a surge in price over the futures price.
If the exercise price of the call option is priced well above the futures price, it will have a smaller premium than an option whose exercise price is closer to the futures price.
