Margin-Based Approach for Risk Management

by 5m Editor
17 January 2012, at 8:42am

CANADA - The Managing Director of the Alberta Pig Company encourages hog producers to adopt a margin based approach to managing the economic risks associated producing pork, Bruce Cochrane writes.

Hedging Your Bets: Financial Risk Management will be among the topics discussed this week as part of the 2012 Banff Pork Seminar.

Frank Novack, the Managing Director of the Alberta Pig Company, the company that manages the Sunhaven Group of Farms, observes over the past few decades we've seen more active use of a variety of risk management tools especially among the lager operations who have more capital at stake.

Frank Novack-Alberta Pig Company

One of the things that we'll be talking about in Banff is that risk management is more than just futures and options which is the area that people always go when they think about risk management.

It's really a whole farm thing that comes down to everything from managing financial structure, dealing with government programs that we commonly talk about as business risk management programs with the government, things like AgriStability for example and then a variety of market risk management tools that are the futures options, forward contracts kind of things that people normally think of as risk management.

The risks we can cover, pretty much every risk that we can run into.

The thing that everybody needs to focus on is not necessarily a price level but what it comes down to in terms of profitability.

It's not enough to talk about receiving a good price for your product, in our case hogs, if the cost of producing them is extremely high and you actually end up with a negative margin from producing them so we talk about having very much a margin based approach in terms of looking at the situations and what your opportunities are for risk management and dealing with opportunities to lock in margins as opposed to prices.

Mr Novack stresses producers need to have a really good handle on cost of production, be able to calculate expected profitability and find the opportunities to lock in workable profitable margins.