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Risk management is important tool for pork producersDuring challenging economic times, risk management can be an important tool for pork producers. "Risk management should be used all the time in order to protect assets," said Tom Clark, associate director of commodity products for the Chicago Mercantile Exchange. Clark discussed risk management strategies for pork producers during a seminar at the World Pork Expo held recently in Des Moines. "We have health and auto insurance all the time, in case something happens; risk management needs to be looked at the same way," he added. "It needs thought of as a structured approach to managing uncertainty." Clark said recent economic events have led to producers needing to lock-in prices at profitable levels, instead of speculating what might or could happen. "Know your situation and your market, and take the appropriate action in order to remain profitable," he added. The first thing producers should do is to develop a marketing plan. This means knowing what you need to do based on where you are in your production cycle. Clark suggested looking at the big picture and evaluating the overall business for financial exposure and risk. Know where you are vulnerable and how you can manage the factors such as feed and labor. "A marketing plan adds discipline to your operation and critical break-even information on your operation," he said. The factors, which can make a marketing plan successful, include knowing your cost of production, determining break-even levels, utilizing sound market information, setting target prices, evaluating pricing alternatives, executing when target prices are hit and reviewing results to determine what worked best for your operation. "The worst thing you can do with a marketing plan is to do nothing at all," said Clark. "Instead, use the factors involved in the marketing plan to improve your operation." With so many factors involved in price determination--supply, demand, politics, psychology--he suggests learning how to use other marketing tools to help with profit levels. Using the futures contracts as well as options can help producers with profitability. Hedging or taking the opposite position in the futures market from your present cash position is another tool that can become useful. "Hedging consists of defining your open cash pricing risk, the corresponding futures contract to offset the risk, the futures contract month closest to cash risk and an estimated basis in marketing," said Clark. He added that all who are involved in the production cycle--producers, co-ops and elevators, manufacturers and processors and food/restaurant companies--should have some type of risk management set up in order to protect their investment. "Lenders are also more apt to help producers when they are using risk management," he said. For more information on risk management, visit: www.cmegroup.com/elivestockquotes.
Jennifer Bremer can be reached at 515-833-2120 or by e-mail at jbremer@hpj.com.
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