Volatility is here to stay; what does it mean to you?

July 23, 2015

4 Min Read
Volatility is here to stay; what does it mean to you?

Volatility in the hog markets continues to keep producers on their toes. Mark Twain told us, “If you don't like the weather in New England now, just wait a few minutes.” While we can be confident tomorrow will be a different day, we won’t know if we’ll like it better.

Industry outlook
From Thanksgiving through St. Patrick’s Day, the market flipped from forecasting another record year to a point where producers began preparing to lose $8 to $10 per head for the following year. After opening up the West Coast ports and getting a good jump on corn planting, profit margins rallied $20 to where you could again lock-in $10 per head for the next 12 months. However, in the past four to five weeks we’ve given that all back and producers are again preparing for rough waters.

While a number of producers have faced extreme porcine reproductive and respiratory syndrome virus pressure in recent months, as a whole, producers across the country have successfully strengthened their balance sheets to a point many have never seen. As of late, operating loans remain at record-low levels with AgStar’s average swine operating loan being only 18% used. With strong balance sheets and a war chest of working capital, the industry is moving forward with a wide array of plans.

Varying degrees of change

Some are expanding and will continue to do so. Others are renovating existing facilities to maximize biosecurity and enhance the quality of their weaned pig. As land prices have shown some softening in values, some have diversified into more land ownership. Others yet have made the decision to own a larger segment of their finishing barns or feed milling facilities. No matter the course of action across this spectrum, the common theme evidenced by 18% use on operating loans, is that these plans are being completed in a manner that maintains a solid working capital position.

There are a number of factors in play as we look to where the markets will trade in the months and years ahead. We have all heard the announcements of the new packing plants. Until they begin operations at the end of 2017 or early 2018, we’ll likely face tight shackle space due to expansion within the industry and continued productivity gains at the sow farm.

The Upper Midwest was blessed with an early spring, which many believed would keep the lid on feed costs and possibly give some operators the chance to buy cash corn that started with a “2”. The summer corn rally, if sustained, will drive feed costs higher than recent projections. However, feed costs remain low relative to prices we’ve experienced in recent years.

At the same time, many states across the lower Midwest and Eastern Corn Belt have seen significant rainfall. The forecasted weather pattern calls for conditions that build near record yields in areas across the Upper Midwest, but it is not in the bin yet. Marketing advisers I talk with all say that their clients are embracing their local “Backyard Bias” stronger than ever this year. From Missouri to Ohio, the bulls are trudging across the unplanted bean stubble and corn stalks. At the same time, the bears can be found hiding in their 10-foot corn fields that tasseled a week ahead of schedule.

What does all this mean to your operation?

At the end of the day, it’s important to know how your operation will be impacted by either scenario and to manage feed cost risks according to your risk profile.

Porcine epidemic diarrhea virus has moved from the forefront of conversations. At the National Pork Industry Conference a few weeks ago, it was interesting that while PEDV was a scheduled topic within a number of sessions, participants didn’t want to acknowledge it as a key issue. Attention was instead focused on antibiotic use and finishing barn design that is needed to accommodate larger market weights. The big question is will PEDV resurface this fall? Biosecurity has been enhanced across the industry; however, replacement rates indicate we have a sow herd that has largely been turned over. Depending on gilt acclimation procedures, the U.S. herd could be considerably more naïve to the virus than a year ago.

Know your costs and own your plan
The message in all of the volatility referenced above speaks to the need for accurate records that enable producers to have a firm grasp on their cost of production and risk management plans. Through the cycles, it is always important to drive down current costs and to forecast future costs that can be incorporated into the foundation of your risk management plan. Strategies and biases will differ. It is important to take ownership of your own scenario and to proactively implement and execute the plan that is right for your family and your farm.

Timmerman is a senior financial services executive for AgStar Financial Services. For more insights from Timmerman and the AgStar Swine Team, including their video Hog Blogs, visit AgStarEdge.com.

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