Hog producers need to get over their reluctance to use forward contracts and work with other producers to chart their own price destiny.
And signing long-term supply contracts with processors may not be a good risk management strategy, said Walt Hackney, head of a company that markets hogs for independent American producers.
“You’ve got to change,” said Hackney, who runs Hackney Ag, a division of the Scoular Company, in Omaha, Nebraska.
“We’re in an era of opportunistic marketing created by yourself.”
Hackney spoke to the last annual meeting of Manitoba Pork. The organization has split into a lobby group representing all hog producers, and a voluntary marketing co-op.
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Hackney said his visit to the province would be “an opportunity to teach y’all a lesson.”
Instead, after meeting producers and touring the co-op’s offices, he said he was impressed with the group’s marketing sophistication.
Independent hog producers in Canada and the United States face common problems, and price discovery is one of the biggest, said Hackney.
The U.S. Department of Agriculture used to list a live price for the Iowa interior, which represented 16 buyers’ prices.
But since March 1, U.S. producers have been puzzled by the USDA’s new dressed carcass price. Because packers use different formulas for determining carcass prices, the price is no longer a useful barometer for prices, said Hackney.
“I suggest we create our own cost and price destiny and stick with it,” he said.
Working with a marketing agency, producers can design their own price discovery program using various types of forward contracts.
For example, his company offered a guaranteed floor contract running from February 1998 through to April 1999 offering guaranteed returns of $39 (U.S.) per hundredweight, plus an opportunity to take advantage of price rallies.
Few protected
Only 15 percent of his producers took advantage of the contract, which would have protected them from the plummeting prices through the winter.
Farmers need to trust their marketing agency to monitor positions, make deals and deliver their hogs, said Hackney. He said farmers have all the skills and intelligence to do their own marketing, but they lack the time needed.
Many U.S. farmers who expanded before the crash found themselves trapped in long-term production contracts they thought would provide a floor for prices, he said. When cash prices dropped below the floor, many producers and their lenders read the fine print of the contract, and discovered they weren’t protected.
Hackney said at the end of the five- to seven-year contract, producers may owe the packer for the difference between the cash prices and the floor returns.
He used the example to highlight that packers have different motivations than the producers who supply them.
