As a pig producer, it seems normal to live with volatility. We lived through 1998 and 2008-09 wondering if the markets would ever reverse. It was just a matter of seeing if you could hold out long enough to get there.
Today, alongside the markets, we have also seen recent weather events which have added another level of volatility. A few years ago we all learned the term derecho. It was a devastating storm that changed the landscape across much of Iowa and wreaked havoc if you stood in its way.
Over the past few weeks, that chaos seems to have returned with storms full force in the Midwest. Just last week I saw pictures from Sioux Falls, South Dakota that reminded me of the Dust Bowl years.
Now you not only have to deal with unpredictable markets, but also with inflation and devastating storms!
insurance policies
By now you’re probably wondering how all this is connected. Think about insurance first. When you look at your property insurance policies, you spend more time than usual trying to determine coverage amounts. That’s not because of the recent weather-related storms we’ve had, but because of the high rate of inflation we’ve experienced over the past year.
It wasn’t long ago that we thought $300 a space to build a finished barn was an extremely high price. Anyone would jump at the chance to see this cost of construction today. I’ve recently seen bids in the $400-$450 per area range for demountable/prefab stalls and there are no signs that prices are going down any time soon.
If you have a sow farm, you most likely built the farm for $1,500 to $2,000 per sow depending on the age of the facility. Today you expect the costs to be twice as high. I’ve recently seen bids in the $3,500 to $4,000 per sow range.
With this type of inflation, it is imperative that you have adequate coverage for the replacement costs of your operations.
Adequate business interruption insurance is just as important as adequately protecting your property. Anyone building a farm today knows firsthand the difficulties in the supply chain. Delays can cost you hundreds of thousands of dollars, if not more, downtime.
Suppose you lost a 5,000 sow farm to a weather event or fire. For every 30 days that the farm is down and you have to replace production, it could cost about $500,000 to buy weaned hogs at today’s market prices of about $42 per head. Just two months ago, this number would have been 2-2.5 times higher.
You must also review your cap in your business interruption policy. Like most good producers, you’re looking for ways to cut costs, especially during the inflationary spree we’re experiencing. However, if you have an additional 90 days of lost production due to supply chain issues and you hit your business interruption limit, can your operations withstand an additional $1 million+ in damage? My strong recommendation is to at least review your coverage amounts for both your property and business interruption insurance.
market volatility
Unfortunately, as a producer, you have to deal with and live with market volatility on a daily basis. It doesn’t help to question past decisions, but it can give you insight when implementing your plans for the future. In the last 45 days we have seen the summer futures markets fall $20 cwt. Starting at $8 corn, the high earnings levels now look balanced at best for the next 12 months.
My only recommendation is to revise your marketing plan regularly and use LRP or other strategies to set a floor price for production. This is where volatility can work for you and give you another opportunity to lock in margins that give you a decent return. As soon as that opportunity presents itself, just be ready to take it. With all the unknowns lurking in this industry, reducing volatility will be critical to your success.
Steve Malakowsky is Director of Swine Lending and has over 24 years of experience at Compeer. For more insights from Malakowsky and the Compeer Swine team, see Compeer.com.
Source: Steve Malakowsky, who is solely responsible for the information provided and who fully owns the information. Informa Business Media and any of its affiliates are not responsible for the content of this information resource. The opinions of this author are not necessarily those of Farm Progress/Informa.
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