The pork industry and the country are looking forward to getting 2020 behind us, but it is not yet fully in the rear-view mirror. Recently spiking COVID-19 cases and hospitalizations may create significant issues in the pork chain and meat demand.
The impacts to our industry have been extensive. Meat distribution and harvest facilities slowing both majorly affected producers' bottom lines. The cost to the industry in lost opportunities for profitability, particularly in the summer of 2020, will impact many into the future.
This is the time of the year (October to December) when most producers complete projections and forecasts for the coming year or two. The things we experienced this past year bring big questions about how to approach your business strategy. Read on for some key components to building a forward-looking plan for 2021.
Production should be the place to start. Having a good animal flow model is critical to building profit and loss projections. History would say that if we are not improving productivity by 1.5% or more annually, we are moving backward. Understanding changes in inventory, revenue and costs will be a good starting point for projecting capital needs for the business.
Revenue is the most important consideration and the most difficult to project. One of the reasons that people are hesitant to put much work into a forecast is that fact. Most of our clients start with how they are paid for pigs and what is that relationship to futures. We use historical relationships to find how a price discovery agreement relates to futures in each delivery period. The forecast then is based on the futures market for the next 12 months. This also helps in setting risk management targets.
Cost of production is likely easier to project for the coming year based on historical costs and projected markets for feed ingredients. Use the same method of relationships to futures for corn and soybean meal to build a risk management "crush" program. Having a good projection of cost is critical in setting risk management strategy for a business. Costs of production between farms remain highly variable, from $62 to $72 per market hundredweight. Knowing where you are, and where you will be, is critical to making decisions about priorities to work on.
Risk management has become the difference in profit and loss for many farms in the past two years. The volatility that I would expect in 2021 will be high as we deal with COVID-19 impacts, potential trade impacts and even a potential surge in production again. The projection should be a tool to guide risk management. Use this as a tool to help solidify acceptable levels of profit.
The final point here is the most valuable. Use actual financial performance regularly to compare back to the budget (budget to actual). Couple that with a narrative on the variation and you will see the true value of projecting. Managing the business in this way can help to guide decisions that involve marketing, cost and risk management, and capital decisions for the future.