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Time to consider alternative business practices?

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There may be a better way to market animals and refine business operations.

Vulnerability is not winning or losing.  It’s having the courage to show up when you can’t control the outcome.  -Brene Brown

Hog markets continue their trek higher, and all eyes will be tuned into Thursday’s “Hogs and Pigs” report that will be released after the markets close. This will – hopefully – mark the first report since the onset of COVID that things are quiet enough to get an accurate count of inventories and weights. I do not blame the USDA for the previous whiffs as they had an impossible task, given the unprecedented decline in harvest through last summer and the displacement of animals due to the industry trauma. Now, however, we have stabilized enough of the moving parts to allow return to normal and to potentially identify an upcoming hole in marketing that several suggest is on the horizon.

Dr. Steve Meyer did a very good job of articulating that the recent runup in values has had little/nothing to do with a shortage of animals up to this point as weekly slaughter numbers have been very seasonal and predictable. To wit, we have had two less slaughter days this year, and on an equal-day basis, pork production is up 1.4%. The genesis of the strength has been demand, and that is a much better underpinning of values for the pork producer as opposed to a temporary decline in head count. Which brings us to the upcoming “Hogs and Pigs” expectations.

General expectations are for a reduction in the breeding herd in the 1-1.5% range. That seems sane and reasonable. The key numbers will, in my opinion, rest in the market hog category where we will get either a confirmation or denial in the oft-cited excess space observation.

Here is the good thing about a demand market: it does not matter as much relative to relying on a supply shortage as your crutch. This is the point that Dr. Meyer was sharing and is good news for those wishing to participate in a rally. It also positions the savvy for a positive negotiating posture for the future. Woe to those that ignore facts and data, but unless this report has an overwhelming bearish surprise component, I suspect we will trend higher on neutral or better numbers. A good demand-led bull market is not dependent on production problems to generate an updraft. 

The oxygen has returned to the room after a long absence for pork producers, with profits on the horizon for as far as the futures string will give us a glimpse. How is that for a change? Higher revenue has been mitigated a bit by higher input prices, and the same demand market that I reference in the pork sector is present in the grain market. We may see a cooling off of Chinese corn demand given the reports of an African swine fever (ASF) reemergence, but the trajectory of increasing sow inventory with diets that more closely resemble a western corn/soy matrix should keep more inventory and diets.

This balance between the revenue and the cost is exactly what is addressed by the recently augmented insurance product offered by the USDA Livestock Gross Margin. This allows a pork producer an opportunity to protect against a negative event at a cost that is subsidized by the government.  Essentially, you are buying a call on corn and soybean meal while purchasing a put on hogs and not paying the premium until you market the animal. This, and its close cousin Livestock Risk Protection, are almost in the category of “too good to be true.” I can’t imagine they will live on in their current form when a politician from a non-ag state gets a handle on how good of a deal this is for pork producers and makes an amendment. Being aggressive in participation may be a good idea. Please contact me if you have any questions, and I will explain the program to you in detail.

I opened this article with the mention of vulnerability. The very nature of the word implies some level of discomfort. Most people recognize that getting uncomfortable is necessary for growth and progress whether it is an exercise regimen, a new diet or learning a new skill. It is to this end that I am suggesting it may be time consider an alternative to current business practices. Namely, understanding and recognizing that there may be a “better way” to market animals and refine our business operations. The utilization of a specific legal entity, an agricultural cooperative, is a known entity for most readers of this column. Using this structure for the marketing of animals is less common than for the marketing of grain, but the concept is the same. The Minnesota provisions read as follows (emphasis added):

A cooperative may be formed and organized on a cooperative plan for any lawful purpose, including: (1) to market, process, or otherwise change the form or marketability of products, including crops, livestock, and other agricultural products, the manufacturing and further processing of those products, other purposes that are necessary or convenient to facilitate the production or marketing of products by patron members and others, and other purposes that are related to the business of the cooperative; (2) to provide products, supplies, and services to its members; and (3) for any other purposes that cooperatives are authorized to perform by law. History: 2003 c 105 art 1 s 9; 2004 c 228 art 1 s 51

Do we need to consider amalgamating animal numbers to create a critical mass to bring to the market?  Swallowing your pride and recognizing that your strengths may be in production rather than marketing is a consideration for some. The power of focusing on where we provide the most value within our production systems and an understanding of where we can use the expertise of others is a defining factor of success. Perhaps the time has come to approach the market with an open hand and not so much independence. Let’s use the tools available to sustain our operations and thrive into the future. 

Comments in this article are market commentary and are not to be construed as market advice. Trading is risky and not suitable for all individualsFor more information, contact Joseph Kerns

Source: Joseph Kerns, who is solely responsible for the information provided, and wholly owns the information. Informa Business Media and all its subsidiaries are not responsible for any of the content contained in this information asset. The opinions of this writer are not necessarily those of Farm Progress/Informa.

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