Use it or lose it.
That’s a common, pithy and commonsensical line that often gets used for various ignored possibilities.
But reality can be a little more complicated when one tries to take advantage of possibilities. It’s a situation the hog industry and grain growers are dealing with now.
Hog farmers long called for a futures contract that reflected the cut-out value of the pig carcass. That’s the value of the sliced-up parts of the pig that gets sent to grocery stores, processors and food service providers. The price for the cut-up pig is often quite different from the price for a slaughter hog, which makes hedging hard for farmers who are using contracts that are partially connected to cut-out values.
If the only thing they can use to hedge is the Chicago Mercantile Exchange’s lean hogs contract, which represents cash hog prices, and if cut-out values diverge from hog values, the farmer can be exposed to the kind of risk he was trying to avoid. That’s a dysfunctional hedge.
So, farmers are happy that the CME began last autumn to offer a futures contract for cut-out values. (See Pork cut-out contract offers new hedging tool)
And almost none are using it.
Only a few dozen contracts trade per day, and I’ll bet only the smallest handful of producers are among the users.
I haven’t heard any complaints about the contract from the industry. But what works great in theory, and might work great for the industry in general, might just not work perfectly for individual producers.
As with so many things, the devil can be in the details and that might be part of the story here.
It is hard to get people to begin using a new futures contract. Like with most things, everybody is waiting to see what everybody else is doing before deciding whether to jump in the pool.
Hopefully the cut-out contract will grow in popularity with producers, as well as other potential users so it can survive.
The industry’s got to use it or lose it, but it isn’t easy to get people to use something new.
Grain growers have a different type of possibility they can use, but that they’ll lose over time.
The federal government has announced $50 million in funding for “green” grain drying systems, a development it is very keen to promote. (See story page 4.)
The money will come in grants to producers installing elements of grain drying that reduce greenhouse gas emissions from conventional grain drying. Farmers can apply for the grants based on what they plan to install and the government will approve those projects that it judges to promise the greatest reductions in emissions.
Getting a $25,000 grant to cover the costs of a heating system that saves drying costs is a pretty attractive prospect. That’s what one Manitoba-based unit highlighted by Liberal cabinet minister Jim Carr, the special representative for the Prairies, promises to do. With a two-to-five-year payback, investing in green heat doesn’t sound like a dumb idea.
It also seems to be a way to green-insure part of a farm’s operations against future environmental charges, regulations and actions. Climate change is becoming a bigger issue, so even though this federal government has removed carbon taxes from grain drying and is generally leaving farms out of its carbon charges, there is no promise that any future federal government won’t come down harder on farmers for their carbon emissions.
Installing a carbon-friendly heating system seems like a smart idea, especially if the government is willing to foot some of the bill.
But, as in the hog example above, the devil will be in the details. Every farm is unique, and each farm’s drying needs, biomass resources, financial depth and limitations are different. Whether or not it’s worth taking advantage of this program to get subsidized drying installed on anybody’s farm will arise from a set of custom calculations only possible on their own farm.
But this program seems to offer at least some people an enticing way of financing something they will probably want to do anyway. It’s a limited program, so it might not be available for long.
It’s another example of needing to use something or lose it. It won’t be for everybody, but with free money sitting on the table, and farmers under pressure to green-up their operations, it’d be a pity to ignore the program till it’s gone.