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Managing Both Market Risk and Feed Cost in Swine Production

Shane Ellis

Summary

Continued volatility in the corn and hog market has left swine producers with compounded exposure to increasing costs and falling revenues. Protecting only the cost of corn or locking-in only the market value of hogs is not enough to ensure profitability, therefore swine producers must formulate a multifaceted risk management plan. In an effort to teach producers the strategies that can manage their market and cost risk through these turbulent times, Iowa State University has worked to instill and reinforce the concept of protecting the margin between the cost of corn and the value of market hogs. A workshop was developed to educate producers in risk management strategies to protect against a decline in market hog prices and increases in the cost of corn.

Workshop participants are first instructed in the basics of using futures hedge positions and options to control not only market hog prices but also the corn costs. Livestock insurance products are also described. Participants are then given the opportunity to utilize these strategies in a time stop computer based simulation. Under the simulated scenario the participant manages a 2400 space swine finishing operation for one year and can use any combination to risk management strategies to control net hog and corn prices and protect their hog-to-corn margin. There are two turns of hog inventory through the year with two specific marketing dates, but corn may be cash purchased physically delivered through out the year. Decisions are made on allotted dates when participants can evaluate the current market and adjust their marketing positions just as in a real world scenario. At the conclusion the participants discuss their strategies and how they impacted profitability.

Details

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