There are many sources of information available to pork producers these days. The challenge is to determine what is important to your operation and what the information may mean to your bottom line.
One risk management specialist recommends you limit your focus to those things you can do something about. “Keep the focus on the things you control,” says Joseph Kerns, vice president, International Agribusiness Group, Ames, Iowa.
“Understanding the parameters of where to apply risk management tools such as hedging is becoming more and more important,” says Kerns. “Is there an immediate correlation between the cost of corn and the selling price of a hog?” The answer is no. “This is where risk management and forward pricing play important roles,” Kerns explains. “Here is an area where producers have a degree of control."
There are many variables we cannot control, says Kerns. For example, the ethanol era has ushered in a new principle in governing corn price. “More and more of our corn crop is moving to ethanol,” says Kerns. “What used to be a ceiling on corn cost is now a floor.”
Corn for ethanol production will likely continue to increase, according to Kerns. “Essentially, livestock feeding and ethanol production each take about 40 percent of our corn crop with the other 20 percent going to export. Oil price, as well as other commodities such as cotton and soybeans, also influence corn price," says Kerns.
As the U.S. dollar weakens, our corn becomes more of a bargain for the export market which provides an incentive for importing countries to come to our shores for product. "So, the strength of the dollar is another key factor bearing on corn prices but it is something over which we have no control," says Kerns.
Acreage is another important determinant of corn prices. “Corn and soybeans will be in an epic battle for acres from now until the next growing season gets underway,” says Kerns. The price of corn as compared to the price of soybeans will have a critical influence on acreage.
Cotton acres are also having an increased influence because cotton is competing for acres. “We haven’t traded cotton at these levels since the Civil War,” says Kerns.
The world’s appetite for corn is growing. “We do not have the surpluses of corn we have had in the past,” says Kerns. “The market volatility offers peril if you're not paying attention to price activity.”
China’s role in influencing world demand will continue to increase. Chinese demand plays a major role, notes Kerns, especially in the soybean complex. “Fundamentals of the markets support firm prices for the next three years,” he suggests.
There is a long list of those things you cannot control that influence your profitability including political events and weather. “Worrying about those influences will not benefit you,” says Kerns. “Instead, focus on the numbers and what they mean to your bottom line. Then, focus on the risk management tools that are available to you.”
"It's no longer good enough to be a top notch production operation,” says Kerns. “Some bankers are now asking producers to provide comprehensive risk management plans as part of their lending covenants.” As a result, Kerns develops risk management plans for producers that demonstrate the bank’s assets are protected, too.
Kerns may be contacted at (515)689-0522 or at email@example.com