Everyone’s looking for advice or insight during these times of low hog prices.
For farrow-to-finish producers, Gene Schnitkey, University of Illinois Extension farm management and planning specialist, offers these four options:
1 Liquidate part of the sow herd
“Liquidation will reduce current cash flow needs and will reduce future cash flow pressure,” he says. “Liquidation is not advisable except for producers with severe cash flow problems who cannot obtain funds to replace culled animals.”
2 Hedge all or part of future market hog sales by using futures contracts
“A pork producer who faces bankruptcy at long-term live hog prices below $30 per hundredweight should strongly consider this strategy. In most cases, it’s preferred over a partial sow herd liquidation.”
3 Use put options to place floors under cash prices
“That’s the advantage of using put options,” he points out. “The disadvantage lies in the cost of buying the put, which effectively adds to production costs.”
4 Purchase or hedge feed
“Purchasing or hedging feed will lock in relatively low costs. Of course, purchasing or hedging feed eliminates the gains that may occur if corn and soybean oil meal prices move down.”
Those who finish hogs face a different situation, according to Schnitkey. He believes they can: Hedge hog production using futures contracts, use put options to place a floor under prices, and lock-in feed costs.