A36-Lancaster Farming, Saturday, February 12, 2000 Contracts Take Center Stage At Pork Expo Educational Seminar ANDY ANDREWS Lancaster Farming Staff NORTH CORNWALL (Leba non Co.) About 100 hog pro ducers and agri-industry representatives learned Wednes day that it was quite possible, in late 1997, to lock in on $45 per hundredweight prices on some futures contracts for 1998 the year of the worst hog price reces sion in U.S. history. That same year, producers saw prices on hogs plummet into the ’teens. According to Steve Meyer, di rector of economics for the Na tional Pork Producers Council (NPPC), the key to survival in the swine business may be to look seriously at futures-based contracts and manage your busi ness accordingly. Meyer spoke Wednesday morning during the educational session of the 22nd annual Key stone Pork Expo at the Lebanon Valley Expo Center in the fair grounds. Meyer provided a lesson in “Marketing 101,” pointing out that information on the basics of running a swine operation like a business is available on the NPPC Website at | www.nppc.org. The site has a spreadsheet that works on Excel. Meyer pointed out the impor tance of timing the decision to sell based on what objective you have. Some research data showed that, historically, it mat ters little if you select futures contracts, for the most part, at six or 10 months. Managing, said the NPPC economist, implies decision making. “If you do the same thing all the time, you’re not managing,” he said. There are many different ways of managing risks and pricing hogs, whether the pro ducer is looking at cash flow, equity management, or other factors. The key is to find a level that will not put more than 10 percent of the business equity at risk. A business that works on low equity, high costs of operation, and low prices could be placing the business in peril. Finding ways of cutting input cost, in cluding locking in.on low feed prices when available, and ex amining all the options on fu tures contracts, could help. “Know what your costs are and write out an objective for your return on equity,” said Meyer. “Get out of the market guessing game and get into Marion Center FFA took second place at the Keystone Pork Bowl. From left, Coach Howard Cattau, Cristen He trick, Angela Lloyd, and Lauren Ferringer. Not in photo: team member Nathan Elkin. something you can control.” “There has been tremendous growth in marketing contracts in the last five to 10 years,” said Laura Cheney, assistant profes sor of agricultural economics at Michigan State University. In her presentation, “Navi gating Hog Marketing Con tracts,” Cheney noted that in 1997, 57 percent of all hogs were sold under marketing contracts. That number increased to 64 percent last year. Nearly two thirds of all hogs today are sold under some sort of marketing contract and the numbers continue to increase. Producers need to understand the “language” of contracting, said Cheney. There are two dif ferent types: • Marketing contract. This is an agreement with a buyer to sell something in the future. The buyer is the packer, who usually has complete ownership of the animals. This type of contract leaves management decisions to the packer. • Production contract. This often implies joint ownership, where one firm owns and the other raises the animals. A “pro The York County 4-H team captured third place at the Keystone Pork Bowl Wednesday. From left, Jessica In nerst, Lane Innerst, Coach Melissa Trostle, Hope Long, and Russell Wilson. ducership” agreement is signed. But keep in mind, Cheney noted, there is no such thing as a “standard” contract. Many var iables can be written into them, including short- and long-term agreements that allow producers and packers to “build a relation ship.” For the most part, packers and producers who enter the agreements must agree on standards of how the hogs will be raised. Packers are looking for Pork Quality Assurance Level 111 certification, approved genetics, an environmental as surance program, a quality and specified feeding program, proper facilities, quality hogs, and quality care arrangements. The contract information is included by Cheney in the book, “Being Competitive & Success ful In the Pork Industry,” the proceedings from the 2000 Com petitive Seminar For Pork Pro ducers, available from the NPPC. In 1996, a survey was con ducted that reviewed what packers enjoyed most about con tracts. The packers noted im proved plant supply, efficiency, producer relationships, and im proved competitive edge as ad vantages. They noted the downside, too increased price risk and reduced flexibility. The survey looked at the pro ducer’s side and noted improved prices, market access, and re duced price risk. Disadvantages were potential lower returns and reduced flexibility. The most common contract was the formula contract, for more than 90 percent of all hogs sold under contract. But in the hog recession, producers were “not getting 40 cents when were in the ’teens,” Cheney said. Ac tually, contract producers fared little better, obtaining perhaps a few cents more per pound. For those still relying on cash at delivery, those cents can add up. “Marketing contracts are a risk-management tool,” she said. “They are not a solution to imbalances in supply and demand.” Producers still need to exam ine their objectives. “It’s a tool, but not the only one,” Cheney said. Producers need to examine hedges, cooper ative structures, and other meth ods. Contracting is no substitute for price and financial manage ment. Cheney herself lives on a five generation hog farm. The farm itself operates under short-term fixed contracts. Now may be the best time to look more seriously at contract ing. According to Lou Moore, Penn State economist, with luck, producers may reach the break even point mid-year. Producers keep on getting bigger. In 1999, the number of hog operations with less than 100 head comprised 53.6 percent of total operations but marketed only 1.5 percent of all hogs. But operators with 5,000 head or more comprised 2 percent of op erations, yet their hog inventory Evaluating marketing contracts and managing risk were some topics at the Keystone Pork Expo. Speakers included, from left, Steve Meyer, director of economics with the National Pork Producers Council and Laura Cheney, assistant professor of agricultural economics, Michigan State. was 46.5 percent of all hogs. That number was up from 37 percent from last year. In 1978, there were 650,000 hog operations in the country. In 1999, that number had no sedived to less than 100,000 op erations. What would happen if the in dustry lost all the operations with less than 100 head? “It wouldn’t do a thing to hog pro duction,” said Moore. The decline in producers will continue, and “it will be mostly in the smaller operations,” said the Penn State economist. For the first quarter, produc ers selling on the cash market can look toward about 37 cents a pound. In 2000, in the midst of decreasing hog inventory, which is fairly good news to producers, according to Moore, there will be 20 billion pounds of hogs sold, down four percent in 2000. Hog production actually increased 3 percent in 1999. Meat from cattle will total about 28.3 billion pounds, down 4 percent in 2000. But in 1999, production was up 2.5 percent. Moore said he doesn’t believe the USD A figures on cattle. He believes cattle production will be down two percent at most this year. Broiler production continues to expand, projected at 31.9 bil lion pounds in 2000, up 5 per cent. In 1999, production was up 7 percent for broilers. Total meat production will be 80.9 billion pounds, down one percent in 2000. In 1999, total meat production was actually up 3.6 percent. Hog prices will be about 37 cents a pound for the first quar ter this year, better than a year ago “but nothing to brag about,” Moore said. Tough times lag ahead. Total farm income will be 7 percent less than 1999, he said. Corn prices remain low. Though 1999 wasn’t a record corn production year (at 9.54 billion bushels), for four years in a row the U.S. has had good crop years. In 1999, average corn yields were about 130 bush els per acre. Pennsylvania pro ducers grow about 74.2 million bushels, with a 1999 drought year average yield of 72 bushels per acre, yet producers use 170 million bushels of corn every year. They need to go outside the state for the additional 100 million bushels required. And the U.S. has had three really large soybean crops the past three years. In 1999, 2.67 billion bushels were harvested. The U.S. continues to spend the least money for their food, about 10.2 percent of income. Russia, on the other hand, spends about 50-75 percent of its income on food. Without their vegetable gardens, Russian people would “starve to death,” Moore said. Though the U.S. economy now has undergone the “largest period of economic growth we’ve ever had in this country,” said Moore, with the lowest un employment (at 4.1 percent) in 27 years, Russia continues to falter. No more exports are being shipped to Russia because they simply can’t afford to pay. Fuel prices will cause some in flation down the road in the U.S., but consumers, who are simply not putting money in savings, are “not worried about the future,” he said. Moore cautions, however, that an adjustment to the booming stock market will have to be made at some time in the future. Some experts believe the market is overvalued by 50 percent. At the time of the stock market crash in 1929, the market was overvalued by “only” 39 per cent. Most economists believe that the growth will continue through the coming year, at 3.7 percent for the year. All this while Russia and some of the blocks of the former Soviet Union continue to falter. Ken Kephart, Penn State swine specialist, and moderator of the educational events at the Expo, noted that three econo mists were included at the ses sion. “I think that’s a record,” he said. Odor Control Robert Mikesell, senior exten sion associate at Penn State, provided information about a recent odor survey of neighbors near swine operations. Of the 337 surveyed, 219 people neighbors of seven farms and some who drove by responded. The swine producers were asked not to spread any manure in the six-week period of the survey. The survey was used by (Turn to Pago AST)
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