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Is it better to lock in a small loss?

DES MOINES, Iowa — Arlen Zuhlke didn’t like what pork market analyst Steve Meyer had just finished saying.

But the Nebraska farmer appreciated having a chance to think through the next couple years of likely profitability before stumbling into them.

“At the age I’m at, you don’t need to go through another 12 months of losses to pull your equity out,” said Zuhlke.

Meyer had just encouraged midwestern hog farmers in the United States to consider locking in summer and fall 2018, and all of 2019 hog prices.

He sees Chicago lean hog futures prices for summer months above anything he can justify, and says the fourth quarter is unlikely to rally much. On the other hand, fall 2018 prices have lots of reasons to fall.

“We think there is a lot more downside risk,” said Meyer.

“This is the time to be playing defence on marketing hogs.”

That’s where this year’s particular problem arises. For many farmers, future contracts for late 2018 and for much of 2019 will lock in losses. That’s a painful prospect for many, who might prefer to chance the markets and hope for an unlikely rally.

“The toughest thing to do any time your managing risk is to lock in a small loss instead of facing a large loss,” said Meyer.

Indeed, guaranteeing yourself a loss isn’t something most farmers will rush into, but Meyer’s reasoning isn’t crazy.

The U.S. hog herd is continuing to expand and today’s pregnancies and weanlings will be pushing into the market for months to come.

U.S. packer capacity, regardless of new plants being introduced, is going to be pressed in the fourth quarter.

And the expansion of the U.S. hog herd is likely to continue in 2019 because farmers usually have to lose money for a year before they cut back on farrowings.

Add to those factors the reality of foreign tariffs on U.S. pork being imposed by Mexico and China and you have a recipe for bearishness.

So, the most reasonable thing to do right now is take some price protection, Meyer thinks.

“This is a great opportunity… to price these hogs better than anything we have on our fundamental analysis,” Meyer said.

Zuhlke has a particularly vexing situation, as do many older hog farmers. He’s planning to gradually back away from hog farming, but obviously doesn’t want to do it after a significant period of losses. He’s built up equity and wants to pull that out some time.

Predictions are just predictions and they don’t always pan out, so Meyer’s view might not be borne out by the future. Perhaps Zuhlke doesn’t need to rush out the door.

But if Meyer is right, Zuhlke might just have received advice that helps him tie things up better, even if it seems a bit premature.

Now he just has to figure out what to do, which is never easy for any farmer living with the complexities of agriculture.

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