We’re familiar with hearing that the markets are ruled by fear and greed.
A different feeling has been keeping a lot of producers from hedging their exposure to the sudden price drops produced by fear – discomfort with the agents and tools of price protection.
“We have always focused on production, but now if we want to keep producing pigs, we’ll have to do something about this price (volatility) – maybe have contracts or something – but then we’d need to know who to trust and how to do it right,” a Hutterite hog production manager told me recently.
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Lots of farmers don’t like locking in forward prices because they don’t want to lock themselves out of possibly higher prices in the future.
But others avoid many basic risk management strategies because they aren’t sure who to trust and don’t want to get involved in something that sounds good on paper or from the salesman’s mouth, but carries unseen risks.
That’s one of the reasons so many hog farmers have been unprepared for the hog price slump that has killed hopes that 2009 would see a rebound in hog prices to make up for the past two years’ losses.
Back in October, hog producers could lock in prices of $185 per 100 kilograms for May and June delivery in Manitoba through packer contracts offered by Manitoba Pork Marketing.
With operating costs of $130 per 100 kg or higher, and break evens, including mortgage payments, of about $150, those were certainly profitable prices.
Today, Manitoba cash prices are about $122, which fails to cover operating costs, much less operating costs plus mortgage payments.
Prices for October, November and December are about $110 now, but had been about $140 before the H1N1 flu scare, which was not a bad price for the traditionally lowest price time of the year.
The saddest element of H1N1 was that it snuffed out a major move toward risk management by many producers who were tired of losses and saw contract prices that offered profits in 2009.
Bill Alford, sales manager for Manitoba Pork Marketing, told me that especially Hutterites had become interested in signing packer contracts because a few colonies had made money in the past two years through contracts and word had spread.
Alford said he and his colleagues were busy through the fall and winter signing up Hutterite and non-Hutterite producers to contracts, which is the main reason the co-operative’s pre-priced sales have risen some weeks to 40 percent, double the rate of recent years.
The tragedy is that much more would have been forward-sold if H1N1 had hit a month or two later.
“If we had only had more time before this crisis,” lamented Alford.
“Colonies, in particular, were interested and we couldn’t get out to all of them fast enough.”
Organizations like Manitoba Pork Marketing and its sister agencies in Saskatchewan and Alberta offer contracts and other forward-pricing tools that most producers should be able to use comfortably, and these are organizations controlled by producers.
And there are many brokers and companies that offer risk management services to farmers, services that would now be paying off with profits if they had been contracted a few months ago.
Many farmers are uncomfortable locking in forward prices, especially when big profits in the future are needed to pay off current big losses. But by steadily hedging price risks, hog producers could avoid a lot of the volatility that causes those losses and forces the desperate search for large profits that leaves so many producers exposed to calamities.
“You could at least skirt some of these things that come out of nowhere,” said Alford.
With H1N1 still in our minds, and possibly coming back to haunt us in the winter flu season, getting over discomfort with hedging is a wise move.
After all, April 2010 prices of $140 might not seem good, but events like H1N1 have proven prices can get worse fast.
