Seeing Red in October

Mark Greenwood
November 2007

Seeing Red in October
This month will not be a good month for pork producer’s balance sheets. In a cost vs. revenue comparison, most systems will lose $10-$15/head during October. Some producers locked in some margins back in August, but most producers did not lock up a large percentage of their hogs with those margin opportunities.

Perhaps the reason more producers didn’t lock in more profits can be explained by reviewing the following December futures chart. You can see the volatility in this month. Many clients that I work with started to hedge for the fourth quarter right around the end of July. As you can see by the chart, it spiked up to $74 in early December. We had a massive amount of margin call money that went out and people stopped hedging because producers struggle with paying margin calls. The market went down and some people hedged a little more. Then the market bounced back up to nearly $70 again in early- to mid-September. Since, it has been a free-fall spiral downward.

AgWeb Pork Price Data Chart

It’s easy to say that you should have hedged all of your December pigs at $74. Managing risk is very hard – but it is easy to second-guess your decision. It’s also important to remember that since April 2004, if you hedged your hogs, you paid margin calls.

A point I try to stress to the producers that I work with is that they only look ahead, not back. Make decisions that you know will help improve your bottom line. Don’t second-guess your decisions.

Harvest Update
After a very long wet spell in Minnesota, it is good to see combines back in the fields. Based on what I have heard, yields in Minnesota are all over the board and dependent upon the amount of moisture received over the summer. In just a 30-mile radius of where I live, I have heard of corn yields over 200 bu./acre and I’ve heard of yields less than 100 bu./acre. This is reflected in the corn basis posted in area elevators. One of my central Minnesota clients had a drought in his area. His basis is $0.10 under to get corn bought. But, if you go to southern Minnesota, where they are getting very good yields, the basis is $0.35 to -$0.40 under.

Ethanol is also affecting the basis in southern Minnesota. If there is an ethanol plant nearby, basis is $0.10 less than if you don’t have one. I was in North Carolina last week and their basis is $0.40 over and they are paying over $4/bu. for corn. There is a spread of almost $0.70-$0.80/bu. on corn costs between the Southeast and the Midwest.

Doing Your Job Better
Fall is my favorite time of year. I am a runner. Every Sunday is my long run day where I run 8-10 miles. It’s when I reflect on what happened last week and what I need to do in the week ahead. When I reflect on the swine industry, I see many changes, but there is one common truth – if you do your job better than everybody else, you will be successful. That holds true in any business, of course, but it is a thought and a goal you should carry with you every day. Successful people are always working at ways of doing things better and I encourage all of you to work on maintaining that mindset.

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