Gaining Market Clout

Pork producers around the Villisca area in southwest Iowa have always had four packer buying stations within 10 miles of town. Marketing was nothing beyond a few phone calls.But several producers in the area knew such a luxury was short lived. And it was. Buying stations in the area have closed leaving them few options.In the meantime, producers like John Kernen and Jim Herzberg of Villisca cover

Pork producers around the Villisca area in southwest Iowa have always had four packer buying stations within 10 miles of town. Marketing was nothing beyond a few phone calls.

But several producers in the area knew such a luxury was short lived. And it was. Buying stations in the area have closed leaving them few options.

In the meantime, producers like John Kernen and Jim Herzberg of Villisca cover their marketing risks in a group organized through Moorman's, Inc. The two producers first met with other producers in late 1996 to talk about marketing together. Sandy Smith, Moorman's sales representative for the area, was on hand to help organize the group.

These three, plus five other producers, started the group now known as Southwest Iowa Swine Enhancement. The first hogs were sold in October 1997.

Today, the group includes 25 producers who sell a total of 3,000-4,000 hogs/month. Marketing larger numbers gives the group more clout with packers and it's reflected in the prices the group receives. They average about $3-5/cwt., including group and quality premiums, above the previous day's plant-direct, top price.

Kernen and Herzberg are happy to receive the higher prices, especially in today's low hog market. Kernen sells about 7,000 hogs/year from a farrow-to-finish operation. While he produces enough hogs to have pursued a contract directly with a packer, he didn't want to be tied to just one packer.

Herzberg just expanded his herd to 125 sows. "Being able to market at a decent price is a big benefit of this system," he says.

It's producers like Herzberg and Kernen who Moorman's wanted to help when they offered marketing services, Smith explains. Three years ago, Moorman's created an alliance with Hackney and Associates, Omaha, NE, to negotiate packer buying agreements for Moorman's customers. Group marketing helps the independent producers "act like a large producer" when they talk to a packer, she explains.

Hackney and Associates is run by Walt Hackney, who for several years now, has negotiated packer agreements for many producer groups in the Midwest. He is paid on a per cwt. basis.

How It Works Producers in the Southwest Iowa Swine Enhancement group have several obligations they must meet as part of this group. They must complete Pork Quality Assurance level III. Hackney requires this. He says it is an advantage when negotiating with the packer to have all producers at this level.

Each producer commits to selling a certain number of hogs through the group. Then they are obligated to meet this commitment. Hackney recommends producers sell 50-60% of their annual production this way.

Smith schedules the marketings. Producers must notify her by Friday how many hogs they plan to sell the next week. She then contacts Hackney by Friday noon with the number of hogs going to market. Hackney's office, in turn, notifies the packer.

The group collects hogs at two different locations in their area. Both are loading areas only.

Hackney negotiated a formula for the group's hog price. The formula is based on the previous day's Iowa-Southern Minnesota plant-direct top price plus a negotiated premium. Producers receive quality premiums above that price. The packer agreement lasts one year and then is renegotiated.

Kill sheets from all the producers in the group go to Hackney's office. They compile the sheets into one report giving average kill information for the month for each member. Numbers of hogs slaughtered by each producer is not indicated. The information is coded by farm numbers, assuring confidentiality.

Each producer also receives their own kill sheet detailing the cutout information on each hog.

This information tends to push the producers to improve. "Overall as a group, they've improved lean by about 1%. The group average is 51.5%," Smith says. "And they have cut their sort loss. That has been the biggest advantage. Most producers have almost no sort loss now."

Kernen adds, "I think it helps guys when they see somebody else under a 10-cent sort loss and they are at $1/cwt. sort loss. I'd never been able to compare figures with other producers. So this lets you know where you stand."

Herzberg agrees information sharing pays off. Comparing his kill sheet information to other producers in the group made him realize he sold his hogs too light. "I was marketing them at 245 lb.," he says. "I had the genetics to go heavier. Now I'm pushing them to 250-255 lb. and getting 51.1-52% lean and a 0.8-in. backfat."

Joining the group also pushed Herzberg to qualify for PQA III. He says he just didn't take the time before to do it. Now the group schedules PQA III meetings for the members to attend.

The group holds monthly meetings, which Jeff Ramold of Hackney and Associates attends to discuss the kill sheet data. The meetings are also used to cover other issues important to their business like the environment and rations.

Kernen and Herzberg have different feelings about relinquishing the job of marketing hogs. Kernen is glad he doesn't have to do his own hog marketing. "One thing I hated was going back and forthover price from one packer to another," he says.

Herzberg, on the other hand, enjoyed visiting with the different buying station managers. "It's a little different putting your trust in somebody else's hands," he admits.

Smith says giving up control over marketing is probably the most difficult thing for producers to accept when joining the group. "If you've had your hands around everything, it is tough to give that up," she explains. "But like one of our members said, 'I think we have to give up something to remain independent.'"

In July when hog prices skidded well below $40/cwt., John Kernen and Jim Herzberg were selling a portion of their hogs for $43.25/cwt. And he wasn't accumulating debt under a packer's window contract either.

Instead, the two Villisca, IA, and three other area producers received this guaranteed price on 25-50% of their hog production. They signed a 6-month contract with a packer last winter guaranteeing the price.

The contracts these producers entered represent one of several creative tools producers now use to cover marketing risk. These producers used Walt Hackney who operates Hackney and Associates, Omaha, NE, to negotiate the contract.

In a separate deal, Hackney also markets hogs for Kernen and the producers as part of the Southwest Iowa Swine Enhancement marketing group. (See story above.)

The contract Hackney negotiated was for a guaranteed fixed price for a certain period of time, regardless of cash price. This is quite different than the price formula negotiated for the marketing group.

The impetus for the fixed price contract started last winter. "We did this because we felt hog prices were going down," Kernen explains. "We were protecting ourselves."

Working with Hackney, the producers set a narrow price window they wanted to lock in with a packer. They wanted the contract to run six months, starting in March. When setting the window price, the producers considered their own cost of production and an average of the futures hog market for the time period they wanted covered.

"We gave them a window to work with because the price was really going up and down," Kernen says.

The negotiations between Hackney and the packer took place in late December and early January. Based on the futures hog prices then, the price looked like the packer was making a good deal.

Usually the packer will then cover his exposure in the agreement with a hedge on the futures market. The advantage of this situation is the producers have no margin calls. They also know from one delivery to the next what they will receive for their hogs in the contract.

For the Villisca-area producers, the contract paid off big. "Now we are way ahead (with $43.25/cwt.)," Kernen says. "There has been a lot of $34-35/cwt. hogs during this time frame. In March, April and May, we averaged $7-8/cwt. over the actual market."

Today, the group is looking for another opportunity to negotiate another contract with the packer. However, the futures prices and cash market are so low, they are unable to lock in anything above $38-39/cwt.

In addition, packers aren't as aggressive about negotiating when prices are low.