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)