MANKATO, Minn. — Over the last year, margins in the pig business have been terrible! When this happens, it’s common for industry publications and experts to write and speak in great detail about all the things producers are supposed to be doing to survive in a down market. Quite often, the speaker or article offers obvious management practices or business administration advice such as improving pig efficiency, optimizing diets for best cost per pound of gain, focusing on health to lower drug and vaccine costs, and working diligently on margin management practices that should be done even in times of good market prices. This can be very frustrating for producers since many may be focusing on these very practices every day. This E-Solutions will take a different approach and not address the downturn we are currently in but instead look ahead three to five years and help producers be better prepared when low prices occur. The information is based on three philosophies that I have strived to implement and many times failed to execute in my business life. I think they are extraordinarily valuable for the next downturn our industry will face in the future.

Equity + Lending
In my past 10 years of livestock production, I have experienced both lending extremes. One extreme being the difficulty of starting with little equity and the banks’ unwillingness to expand credit lines; the other extreme of offering too much money that if used would lead to businesses detriment. I’ve landed on always maintaining a 40 percent equity position on all assets or held commodities. However, I prefer operating with a greater than 50 percent equity position. You may ask why is this important? Because it changes how we make business decisions. We make better management decisions when healthy equity positions insulate us during a downturn. It also makes us grow slower and more intentionally. If we grow slower, we tend to get the right people to manage and supply the business. Additionally, when mistakes are made they are not fatal. In the reverse, if we max out our credit limit and double our business within a year, we likely won’t have the right managers and suppliers, and any mistake may be fatal in a downturn. Moreover, if we maintain healthy equity positions it also lets us buy undervalued assets in a downturn. This is a huge advantage! Having the ability to grow in a downturn is a goal worth reaching.

Managing the Margin
Hubbard Feeds has developed a margin management model aptly named “The Crush.” The Crush program is free to customers and is regarded as one of the most accurate and easy-to-use margin management tools available to the pig industry. Use tools like The Crush to know your financial standing one and a half years beyond today. Now for the difficult part of margin management: You need to make decisions and take positions. However, you are not expected to hit a home run every time you’re at bat! The psychological pressure I see producers put themselves under when marketing is unnecessary and quite damaging. If a good hedge is made that protects an adequately profitable margin and the price subsequently goes up, the trepidation that follows is incredible. The reverse is also true. When holding on an open position and the price goes down, a stubborn fear tends to set in. Stop it! Enjoy the profit you hedged or calmly make the best decision when prices retreat which sometimes means hedging a loss. Focus on the next group or month of pigs coming in. We can’t change the past or hope for an unrealistic future.

Focus on Your Competitive Advantage
Focus on the aspects of your business that give you a cost or efficiency advantage versus the next guy. A smaller producer generally needs better production than a larger producer and/or an integrated business model. A diversified farming operation that uses manure as fertilizer can usually raise corn more cost effectively than a producer that needs to buy much of their corn. A larger producer often needs lower costs and better business deals and perhaps even ownership in a packing plant to stay competitive. Spend most of your time focusing on the tasks that will increase your competitive advantages.

Learning as We Go
Think about where you would be today if five years ago, you bought into the three philosophies presented above. If the answer is a better place than where you’re at today, it is time to implement the above philosophies for the downturn that will inevitably happen in the future.

— Jamie Pietig M.S., Hubbard Feeds

For more on pork, click here.