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Volatility is the New Normal for the Swine Industry

Date: 
Author: 
Steve Malakowsky
Educational Opportunities: 
Articles
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Swine
Home > Education & Events > May 2019 > Volatility is the New Normal for the Swine Industry
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News of African Swine Fever (ASF) is everywhere. You can’t pick up an industry magazine or visit an agriculture website without information on how it will impact China and their need for pork.  This event has changed the landscape of the world pork industry faster than any single occurrence in my career in the pork industry

How is this new normal affecting decision making in your operation?  That single question has been all consuming in my discussions with clients and industry colleagues over the past 90 days. Over the first quarter of 2019 the average producer experienced substantial losses that put real stress on some operations. Discussions on managing risk and survival were replaced by the euphoric realization that the U.S. pork industry was given a gift – via the situation in China – to recoup first quarter losses and turn 2019 into the their most profitable year since 2014.

With ongoing volatility, it can be a challenge to not second guess every move. In my experience, second guessing is a given, unless you have a crystal ball and always pick the highs in the market!  Since we all have to work for a living and cannot outguess the markets, the only option I see is to make sure you have an actionable marketing plan that you revisit regularly, perhaps even daily. 

The best advice I can give to my clients is to revise their budget to see what impact it has on the operation’s balance sheet. The realization of seeing the impact to their balance sheet typically has more of an influence than you’d expect. The possibility of achieving goals and dreams sooner than expected can make this different approach more palatable and lessens the appeal of getting hung up on always hitting the highs in the market. 
With the recent retracement of the market, profits for the next have year dropped about $15 - $20 per head.

Remember, it wasn’t long ago we were looking at negative margins for 2019. As recent as February the average margin was a negative $5 per head for the year. Now $35 per head profits are well within reach and the opportunity for $50 - $55 per head profit for the next 12 months is a real possibility. I fully expect we’ll have another chance at locking in those types of margins (if not higher) again this year.  

You might have hit the high in the market recently and it looks great today. However, are $130 hogs around the corner like in 2014? It’s a possibility. Either way, 2019 will be profitable – even though it may take until mid-July to offset losses through March. But unless you have an actionable marketing plan you are ready to execute that opportunity might pass you by.    

We’ve all seen the numbers. There’s simply not enough available pork in the export market to make up for an estimated loss between of 20 and 30% in Chinese production. This doesn’t even address the pork needs of Vietnam, Cambodia and most recently in Hong Kong which all have reported ASF. 

To take advantage of this opportunity, review your marketing plan internally. If you’re considering an options or futures strategy, make certain your Lender understands your plan before you execute and is willing to fund the margin. The last thing you want is for your Lender to flinch when margin calls are required. 

Planting Progress. Your marketing plan should not only consist of locking in hogs. You also need to look at your input costs. Recent USDA crop progress reports were bullish for corn. This may mean considering an option strategy or owning your corn with a futures strategy for the corresponding hogs you’ve sold. As of May 12, the ten largest corn producing states (which produce over 75% of corn in the U.S.) have only planted 28% of corn acres as of May 12th. This compares to an average of 68% of corn planted year-to-date for these states over the past 5 years. Illinois had only 11% of their corn planted as of that date. 

Watching the next two weeks’ progress will be key. We are currently more than one standard deviation below the normal range. If this continues over the next two weeks, we’ll see a shift in acres to beans and shorter maturity corn, which will impact yields.  
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