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Volatility to the extreme

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When starting at $8 corn the high profit levels are now looking like breakeven at best for the next 12 months.

Living with volatility as a swine producer seems to be normal. We have lived through 1998 and 2008-09 wondering if markets would ever turn around. It was just a matter of seeing if you could last long enough to get there.

Today, besides the markets, we have had recent weather events that have added another level of volatility. A couple of years ago, we all learned the term derecho. It was devastating storm that transformed the landscape in vast parts of Iowa wreaking havoc if you were in its path.

Over the past few weeks, it seems this havoc with storms has returned with a vengeance across the Midwest. Just last week I saw pictures coming from Sioux Falls, South Dakota that were reminiscent of the dust bowl years.

Now, not only do you need to deal with erratic markets, but inflation and devastating storms thrown on top!

Insurance policies
By now you are probably wondering how these all tie together. First, think about insurance. When looking at your property insurance policies, spend more time than usual determining levels of coverage. This isn't because of the recent weather-related storms we have had, but because of the high inflation rate we have experienced over the past year.

It wasn't that long ago that we thought $300 per space to build a finish barn was an extremely high price. Everyone would jump at the chance to see those construction costs today. I have recently seen bids in the $400-$450 per range for wean/finish barns and there aren't any signs prices will retreat anytime soon.

If you have a sow farm, you most likely built the farm for $1,500 to $2,000 per sow, depending on the age of the facility. Today, you are looking at double those costs. I have seen recent bids in the $3,500 to $4,000 per sow range.

With this type of inflation, it is imperative you have the appropriate coverage for replacement costs of your farms.

Just as important as having the appropriate coverage for your property, you should have adequate levels of business interruption insurance. Anyone building a farm today knows firsthand the difficulties within the supply chain. Delays could cost you several hundred thousand dollars if not more in downtime.

Assume you lost a 5,000-sow farm in a weather-related event or fire. For every 30 days that farm is down and you need to replace the production, it could cost approximately $500,000 to buy wean pigs at today's market prices of approximately $42 per head. Only two months ago this number would have been 2-2.5 times higher.

You also need to review your cap rate on your business interruption policy. As most good producers, you are looking for ways to reduce costs especially in the inflationary period we are experiencing. However, if you have an additional 90-day loss of production because of supply chain issues and you hit your business interruption cap can your operation withstand an additional $1 million plus hit? My strong recommendation is at a minimum review your coverage levels for both your property and business interruption insurance.

Market volatility
Unfortunately, as a producer you need to manage and live with market volatility daily. Second-guessing decisions from the past doesn't help, but might give you some insight when implementing your plans going forward. Over the past 45 days we have seen the summer futures markets drop $20 cwt. When starting at $8 corn the high profit levels are now looking like breakeven at best for the next 12 months.

My only recommendation is to continue to revisit your marketing plan periodically and utilize LRP or other strategies to place a floor price on production. This is where volatility can work for you and give you another opportunity to lock in margins that provide you with a reasonable return. Once that opportunity presents itself just be ready to execute. With all the lurking unknowns in this industry reducing volatility will be vital to your success.

Steve Malakowsky is director of swine lending, with over 24 years of experience at Compeer. For more insights from Malakowsky and the Compeer Swine Team, visit Compeer.com.  

Source: Steve Malakowsky, 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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