Hedge Row
Hog farmers have figured out margin protection at last, it seems.
That’s a good lesson for all prairie crop and livestock farmers, many thousands of whom still do no margin hedging.
Hams Marketing general manager Perry Mohr has been telling hog producers at marketing presentations that until recently only 10 percent of hogs going though his service were hedged. But this year that has climbed to 25 percent or more.
The farmers who hedge are locking in about half of expected production.
Read Also
Stock dogs show off herding skills at Ag in Motion
Stock dogs draw a crowd at Ag in Motion. Border collies and other herding breeds are well known for the work they do on the farm.
And because 90 percent of Hams’ clients produce all their own feed grains, those producers are well hedged, with wiggle room to protect against an unexpected fall in their hog production or benefit from a rising market.
Mohr said many hog farmers are open minded about hedging more, but the real drive has come from banks, credit unions and lenders.
After a couple of brutal downturns — in 1998 and in the mid-late 2000s — financial institutions are not keen on lending big piles of cash to farmers who won’t protect their margins.
“Producers are maxed when it comes to their financial leverage,” said Mohr. “The one way that you can really provide a convincing case for a financial institution is to actually have hogs hedged.”
That’s especially true in these times of super-volatile meat and crop prices. Hog profitability is primarily derived from the spread between feed grain and market hog prices. For more than a year, that spread has been highly profitable. Feed grain prices have been sky high but so have live hog prices, keeping the margin attractive.
Purdue University’s Chris Hurt, a leading hog analyst, noted this situation in a recent commentary and projects even better times in 2012.
“The level of profitability could be the most favourable during the high-priced feed era,” Hurt said.
“Profits in 2012 are currently forecast to be near $17 per head, which would be the highest since 2006,” he said.
“The pork industry has probably turned the corner on high feed prices as one looks to 2012 with abundant, cheap feed wheat, prospects for moderation in the rate of growth in corn use for ethanol, the potential for a larger South American soybean crop and hope for a return to higher U.S. corn and soybean yields.”
So, in that context, why would a hog producer hedge at all?
Well, I’d say they should hedge because Hurt’s outlook, as compelling as it is, won’t necessarily pan out. He could be wrong. And financial catastrophes commonly happen when expectations are overturned. If feed wheat and corn rise rather than fall, and hog prices fall rather than stay strong, margins will be crushed.
Mohr told me Hams didn’t have trouble convincing farmers to hedge when the forward price was better than the present cash price.
“Psychologically, it’s a lot easier if cash today is $150 and the price next summer is $180. It’s easy to pull the trigger on that,” he said.
But some farmers locked in good profits earlier this year, then saw the cash market continue rising, and felt afterward that they’d made a poor decision because they could have made more.
Mohr said his marketers try to convince farmers that locking in profits is simply good sense, and that margin protection is a good practice.
I hope they’re successful in convincing farmers that margin protection is essential, however it’s done. It’s nice to believe in outlooks like Hurt’s, but any outlook can be overturned by reality, and it wouldn’t be fun walking into a lender’s office next summer to explain why you let today’s fat margins escape.
