OUmcaster Farming, Saturday, January 21, 1995
SURVIVAL
In the last month, hog prices
have risen from incredibly miser
able to just plain miserable.
In the 20 years that I’ve been
involved in the hog industry,
prices have never been so low that
producers couldn’t at least cover
feed costs.
But it happened this fall. For a
time, producers who had good pro
duction and typical facility costs
were losing $25 per hog or more.
Now, with prices in the range of
S3S/cwt, the red ink has been
reduced to $lO or less per hog.
When will this turn around com
pletely, and how much of a
rebound can we expect?
For sure, the next four months
look better than the last four. But
taken together, those eight months
will have most producers asking
the question, “How am I going to
survive this?”
To that question, I have no
answers, only opinions. But to me,
it comes down to three factors
productivity, risk protection, and
an understanding banker.
Productivity
Besides price, production
related items which have the great
est influence on profit typically
include feed costs, sow productivi
ty, and maintaining facilities at
capacity.
Feed costs. The price of feed is
difficult to control. But since total
feed costs reflect both feed price
and feed conversion, do what you
can to maintain satisfactory feed
conversion.
Most producers are aware of the
dozens of management practices
that impact feed conversion. The
critical items on that list include
environment, feed wastage, and
health. Pay close attention to those
areas. Is now the time to eliminate
growth promotants or vaccines?
Hopefully, those tools should be
paying their way already, or you
shouldn’t be using them under any
market conditions.
Some producers have consid
ered decreasing the amount of soy
bean meal in the diet. That will
help if the protein is already too
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high. But if the protein level is
close to the requirement, any
reductions in soybean meal will
almost certainly impair growth
rate and feed conversion, and the
backfat on the hogs may also creep
up. And since soybean meal is fair
ly cheap right now, decreasing
soybean meal by a hefty 50-70
pounds per ton would save a mea
ger SS/ton at most —savings could
be quickly gobbled up.
Maintain sow productivity.
Most sows will wean at least eight
pigs/litter with a minimum of
effort from you. Getting that aver
age up to 8.5 or 9 takes more of
your time—making sure things go
well at farrowing, checking sow
comfort and temperatures, and
watching pigs throughout lactation
and transferring as needed.
But of all the things that you do,
it’s farrowing management that
pays major dividends. The extra
pigs that you’re able to raise basi
cally go to market for the cost of
feed, since the overhead costs are
covered by the other pigs in the
bam. So the profit on these extra
pigs, even with today’s depressed
market, is at least $25 per head.
Maintain facilities at capacity.
Under normal conditions, there is
no excuse for operating at less than
100 percent capacity. That’s
because the same overhead
expenses will be spread over fewer
pigs. Decreasing capacity by 10
percent will generally reduce pro
fit by $1 to $2 per pig.
The exception to this, of course,
is when prices are so low that vari
able costs (feed, for example)
aren’t even met Under those con
ditions, decreasing inventory
would reduce losses in the short
term. But those conditions, if his
tory is any indicator, are rare and
brief. Further, at some point
inventories will have to be brought
back to capacity, which will nega
tively impact cash flow (especially
if replacement gilts are purchased)
until the 100 percent level is
reached.
Risk Protection
A number of alternatives are
available to producers.
Production contract. The classi-
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cal contract involves a feed com
pany covering the costs of breed
ing stock, feed, and some utilities,
with the producer providing build
ings and labor. This establishes
and stabilizes a positive cash flow
as long as production doesn’t
crash.
Production contracts at present
seem to be available only to large
operations. Chances of getting a
production contract are slim if the
operation has only a few hundred
sows or finishing hogs.
Hedging. Using the futures
market can help lock in a price. If
the price is above break-even, you
also lock in a profit With a true
hedge, you make money either on
your hogs, or on the futures con
tract, but not both.
About 130 hogs are needed to
match the weight in a futures con
tract (30,000 pounds). And most
importantly, you’ll need to know
your break-even costs.
Forward contracts. PACMA
(Pennsylvania Agricultural Com
modities Marketing Association)
has, since 1986, offered forward
contracts for hogs. The program is
based on the futures market but is
less complicated than a hedge.
You simply call PACMA, get a
pice for a certain month, and then
deliver your hogs when that month
arrives. No margin calls, and no
need to watch the market to won
der if you should liquidate the
contract.
Do many producers use the
program? As Mike Omdorff at
PACMA would tell you, it goes in
spurts. Late last winter, when
PACMA was offering a weighted
average of $4B for 1994, not one
producer signed up. Now that
we’ve been through the October/
N ovem ber/December price war,
lots of producers have locked in
forward prices. Unfortunately,
many of these prices will be signif
icantly lower than cari’turrendy
can be offered for the same
periods.
A related program that gives
producers a way out if prices start
to climb is a minimum price con
tract. In this case, you establish a
minimum price with the contract
If prices go up, you can lock in a
higher price at any time, or you can
wait and simply take the price
offered when die hogs are sold. A
heftier premium is needed for this
program, but it might be a good
idea if prices are expected to
climb.
Minimum!maximum price
agreements. Some packers offer
these programs as a means for
reducing or eliminating losses dur
ing times of depressed markets.
Details differ with each packer, but
for example, a packer may pay a
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minimum of $42/cwt. and a maxi
mum of SS4/cwt.
Marketing agreements. At least
one feed company has offered a
, hog price in the high s4os over a
five-year period in exchange for a
five-year agreement to buy their
feed. Roughly speaking, if the
average price over the five-year
period exceeds the price set in the
contract, you get the proceeds.
For many producers, this prog
ram has merit Yes, you’re com
mitted to purchasing a particular
feed, and in the long you may be
better off completely independent
But that’s dependent upon your
ability to survive the shot run.
Know Your Banker
I recently spoke with represen
tatives of four lenders that do a fan
amount of lending in the swine
industry: Farmers Home Admi
nistration, Keystone Farm Credit
Meridian Bank, and Lebanon Val
ley National Bank.
I posed the same questions to
each of these individuals, focusing
around survival through times of
negative cash flow. And then
answers were surprisingly similar.
First when you find yourself in
a financial bind, and need addi
tional operating capital, have your
act together before you show up at
the bank. Know what your break
even cost is. Have a plan for repay
ing the operating loan. And be pre
pared to repay the loan fairly
quickly a year or two at most.
Second, producers that have a
good production history will have
the best success at getting the loan.
Pork Producers
Seek Representative
FLEETWOOD (Berks Co.)
The Pennsylvania Pork Producers
Council is seeking candidates for
pork industry representative.
Applicants, male or female,
should be between the ages of
18-23 yrs.
Participants should have a
strong background and sincere
interest in the future of the pork
industry.
The selection process will be
completed at the Keystone Pork
Exposition on Feb. 15. The selec
tion process will include a person
al application and interview.
ITte pork representative must be
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Even those that have had produc
tion difficulties can get additional
capital if the problems were bey
ond the producer’s control.
If the debt load is approaching
the total amount of equity on the
operation, that can be a problem.
These situations are approached
case by case. Foreclosure is one
option, but so is a loan guarantee
from Farmer’s Home.
And as producers already real
ize, bankers love risk protection.
Production contracts are the most
popular form of risk protection,
but any loan will be easier to obtain
if the risk to the lender is somehow
reduced.
Summary
1. In these periods of miserable
prices, don’t lose sight of the major
factors that impact profit The
items over which you have some
control include sow productivity,
feed conversion, and herd health.
2. Risk protection is not new.
After the last few months, most
producers could probably stand
some risk protection. For many in
this state, forward contracts, pack
er agreements, and marketing
agreements with feed companies
may offer the best alternatives.
3. Get the most from your len
der. Do that by doing your home
work. Have cash flows, price pro
jections, and break-even prices
prepared before you ask the banker
for anything. And remember that
bankers like the items in #1 and #2
good productivity and risk
protection.
able to attend the Pork Leadership
Institute on July 13-18. While
attending the institute, the atten
dee will expand his or her commu
nications and human relations
skills. While a representative,
responsibilities include attending
state activities such >as confer
ences, media interviews, service
on state committees and boards,
and county programs. Speaking
engagements may include local
pork producers, consumers, FFA,
4-H and other industry-related
organizations.
For more information, call
Floyd Huber, youth committee
chairman, (610) 944-6687.
Lebanon, PA 17042
1-800-272-MAXI