When Football & Hog Marketing Strategies Overlap

by 5m Editor
4 January 2012, at 7:28am

US - For those of you who may not know, I am a loyal alumnus of Oklahoma State University. As such, the past few months have been a fun ride – save for that one evening when my other alma mater, Iowa State, played a wonderful game and pulled the college football season’s biggest upset, writes Steve Meyer in this week's "Market Preview" featured in National Hog Farmer magazine.

So, I was proud last night as the Cowboys won their Fiesta Bowl game in very improbable fashion. All of that is to preface the question "What can we learn about marketing hogs from the Cowboys?"

Lesson #1 – Inaction can dig a big hole. Sleep-walking through the first quarter left the Cowboys down 14-0. It is my observation that many hog producers do the same for any specific marketing period – frequently getting a late start and sometimes missing opportunities. There are some good reasons to not get too involved in Lean Hogs futures and options markets too far in the future. Liquidity in deferred futures contracts is low and the time value of deferred options is frequently very high.

But not getting “too involved“ and not getting involved at all are two different things. Begin watching futures contracts as soon as they come on the board and watch them closely once the sows are bred to produce pigs for a given month. Further, don’t think you have to sell them all! If board margins look good for December next week, lock that margin in on some hogs and scale up as the year progresses. Always ask "Which is greater – the factors that could make markets fall or the factors that could make markets rise over the next [fill in the number] months?"

Lesson #2 – Climbing out of a hole is hard work and can take a while. The Pokes led once in last night’s game – when the overtime field goal sailed through the uprights. It took them more than 45 minutes to overcome the bad start, but they kept plugging away. Many hog producers see a bad start, especially in futures and options markets, and proclaim: "I’ll never do that again!" What’s worse, they seem to have memories like elephants when it comes to these bad outcomes. I’m the first to say we should learn from our mistakes, but it is vitally important to define “mistake.“

If the lowest corn price possible and the highest hog price possible are the goals, you are very likely to fail. But if realizing a return on equity of "X" per cent is the goal, you may stand much better odds of succeeding. Defining "X" per cent is key. Only you can specify the most realistic, comfortable and attainable figure to use.

Lesson #3 – Sometimes an unusual strategy pays off. With just under a minute left and the score tied, Stanford had a first down and goal and OSU had one timeout left. Those watching the game at my house debated the proper strategy. One said, "Let Stanford score so you have 45 seconds or so and one timeout to try to tie the game again." (Stanford could have obviously doomed that strategy by falling on the ball and refusing the touchdown in order to try the field goal.) Another said, "Use the timeout early and make them run at least one more play and risk a mistake?" OSU coach Mike Gundy chose a rather unusual strategy – save the timeout to ice the kicker. What were the chances of that working? I would think pretty slim, but the strategy turned out to be a pretty good one. Whether that extra 30 seconds to think played a part in the missed kick we will never know. But miss he did and the rest is history.

I don’t recommend using exotic strategies with futures and options, primarily because I don’t understand them very well. But there may be strategies beyond "hedge with futures" or "hedge with options" that make sense. One that I think is reasonable is buying options to establish cost ceilings and price floors and writing deep out of the money options to cover the costs. This method makes sense provided you stay on top of your obligations under the options you write. If you are forced to take a position, quick action to exit it is likely the best strategy but it is one not available if you are asleep at the wheel.

Finally, regardless of what you do, luck may make you look like either a genius or a buffoon. Gundy’s "ice-the-kicker" strategy paid off for the Cowboys. Stanford’s "pass-on-the-touchdown and kick-the-field-goal" strategy did not pay off. The former was kind of a stretch while the latter was by-the-book football. Why did it not work as most would expect? Skill? Luck? Some of both?

Even if you know the historical behavior of a price, know its mean and variance, its seasonal pattern, etc., there are still extreme values that can be realized. There are even outliers that have never been seen before. You might get bitten by them (H1N1 influenza virus) or helped by them (Blue Ear disease and earthquakes in China in ’07-’08, foot-and-mouth disease in Korea last year). Does that mean that all is folly? No. It just means that even when you do your best, stuff happens.

Don’t dig yourself a hole. Keep working toward your realistic, attainable goals with which you are comfortable. Consider different strategies as long as you fully understand them. Realize that your best efforts may be undone by luck and your worst efforts may be covered up by luck.

Happy New Year!

I truly hope 2012 is a year of great success and joy for each of you. While we will focus primarily on business matters in the next 50 or so Weekly Preview editions, always remember that we are talking about your livelihood, not your life. Make sure to devote yourself to living this year, it is ever so much more important.