Volatile Times Can Provide Opportunity
Looking back at the past two years we have seen more volatility in the pork industry than I can remember in my lifetime. I believe “lifetime” is the key word here as I was just starting to farm myself in 1981 when we were coming out of the last very high inflationary time in the U.S. My first loan had an interest rate of 18.5% and costs (based on the Consumer Price Index) due to inflation were coming off a high of 13.29% in 1979 and dropping to 12.52% in 1980. The point is, very few individuals have experienced high inflationary times in their lifetime. For those that did, experiencing and surviving those high inflationary times helped shape their business acumen for years to come.
Just looking back at the past two years here is what pork producers have had to endure:
- Covid-19, which impacted everyone in the world.
- Some areas and industries differently than others, but it tested our will to work though the challenges.
- Market disruptions in all sectors with one of the most detrimental being in meat processing. Pork producers were forced to deal with no market access and barns full of pigs. It’s an experience I hope no producer ever has to work through again.
- Worker shortages across all sectors of commerce in the US.
To add on top of that and not diminish any of these challenges, we are now seeing inflation levels that we haven’t had in the US since 1981. Unless you are older than 60, until now, you haven’t experienced lower levels of inflation and the impact it will have on your business.
With the extreme volatility we’ve seen recently, how do you not only survive the unknowns but thrive? I know many producers today are not only looking to stay the course, but also look for opportunities. Inflation and the volatility that came with it is partly what drove consolidation in the farming sector in the early 80’s. There will be operations that have producers that simply just want to move out of the industry because of the level of uncertainty. There will also be continued attrition due to owners retiring. This will leave opportunities for those that can manage the higher than normal levels of risk better than their peers.
My first recommendation is to build as much working capital into your operation as possible. If you have the availability to access working capital through restructuring your operations debt, it’s worth looking at. Those with access to available capital quickly will have more opportunities. Second, know your cost of production in these volatile times. You need to have a very dynamic model to track your true cost of production in both a rising and lower cost environment. The last recommendation I would have is to reevaluate your marking strategy to determine what strategies give you the best flexibility to manage your margins. This can partly be done by utilizing Livestock Risk Protection (LRP) which is a single-peril insurance policy offered by RMA through the USDA. In addition, if you meet the USDA limits on LRP work with your market advisors to develop a suitable plant for your operation that may consist of futures and options strategies.
Remember, in extreme volatile times the market will provide opportunities. Just be prepared to execute once your targeted margin is available. The last bit of advice I have is to make sure your lender knows and agrees with what your strategy is and that they will support that strategy when margin calls are necessary. Without a lender that understands your marketing plan and the volatility in implementing that plan it could leave both and your lender in a precarious position.
Our swine lending team works with many op hog producers in the country. Check out their other insights and information.