Purdue Pork Page Archive

Risk Awareness Checklist: Marketing Risk

1. Do you have a year-round marketing plan? Yes or No

Question 1: The correct answer is Yes.
You should have a marketing plan covering costs and improving your price year round, to cover changes in the hog cycle, and any unforeseen changes in the market. Consider the use of futures, options, and formula contracts when they have value as price risk management tools.

2. Do you use professional marketing services? Yes or No

Question 2: The correct answer is Yes.
Using a professional marketing service may increase your marketing cost, but you will probably increase your chances of receiving a higher price for your hogs and paying a lower cost for your feed inputs.

3. Are you a member of a "marketing club" or marketing coop? Yes or No

Question 3: The correct answer is Yes.
Joining a "marketing club" or "marketing coop" improves your negotiation power for marketing contracts. It is also a way to share and compare information about production and marketing performance with others in the pork industry.

4. Are you familiar with various marketing contracts that may be available? Yes or No

Question 4: The correct answer is Yes.
Staying up-to-date on available marketing contracts increases your ability to lock-in a good opportunity when it arises. Some farms continued to receive good prices even during very low price periods in the hog cycles by employing alternative marketing mechanisms.

5. Do you use futures hedges and options in your marketing plan? Yes or No

Question 5: The correct answer is Yes.
Using futures hedges and options to protect against volatile prices can prevent major financial losses should prices drop, with typically lower losses if prices should rise. Futures and options can also be used to control feed cost.

6. Are you involved in contract production? Yes or No

Question 6: The correct answer is No.
Producing hogs under contract greatly reduces a producer's business risk. For this reason, most lenders are willing to lend more to a contract producer. This will increase financial risk, perhaps offsetting the decrease in business risk. Independent producers have more business risk, but usually less financial risk, as they are usually less leveraged than contract producers. One should also realize that the reduced risk under production contracts is typically accompanied by lower opportunity.

7. Do your pigs have a "market" -- with the opportunity of getting a competitive price? Yes or No

Question 7: The correct answer is Yes.
Stay current on the status of the buyer for your pigs. Ideally, you should stay in touch with at least one alternative market for your pigs so that you can assess the competitiveness of the price you receive.

8. Do you know how to read kill sheets from packers? Yes or No

Question 8: The correct answer is Yes.
Kill sheets from packers list how your hogs cut out. By reading these, you can check the quality and consistency of your hogs, and work toward making improvements in your herd through genetics and feeding programs. You may also find that various packers reward different carcass attributes so that switching markets may pay a dividend without making changes in genetics.

9. Do you know the optimum live weight range where you are selling? Yes or No

Question 9: The correct answer is Yes.
If you don't know the optimum weight range where you are selling, you may be getting a discounted price for pigs that are too heavy or too light.

10. Are you familiar with seasonal price patterns? Yes or No

Question 10: The correct answer is Yes.
Seasonal price patterns reflect the higher prices in the spring and summer due to fewer farrowings in the fall. Familiarizing yourself with these patterns will help you to account for them when you are hedging.

11. Are you familiar with the hog price cycle (e.g., length, timing, etc.)? Yes or No

Question 11: The correct answer is Yes.
The hog cycle is approximately a 4-year cycle of extremely high prices, extremely low prices, moderately high prices, and moderately low prices, which has been occurring for the last 60 years. You should be familiar with the timing and length of the hog cycle in order to account for it when hedging and making other strategic decisions.

12. Do you understand basis risk? Yes or No

Question 12: The correct answer is Yes.
Basis risk is the risk created by the difference between the cash price and the futures price nearing the expiration date of the futures contract. Understanding this risk will improve your hedging skills. Historical basis charts will help you predict changes in basis when you are hedging. You may have access to these charts through your broker or from Cooperative Extension personnel.

13. Is your income diversified (e.g., do you have non-hog income sources)? Yes or No

Question 13: The correct answer is Yes.
If you have no income other than hogs, you are risking severe losses if prices drop, with nothing to offset those losses. Ideally, a family farming operation will have other sources of income that are perhaps even negatively correlated with hog profit over time.

Production Risk | Marketing Risk | Financial Risk | Legal Risk | Human Resources Risk