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Forward Pricing Allows Pork Producers to Minimise Risk

by 5m Editor
30 August 2013, at 7:16am

CANADA - The general manager of [email protected] Marketing Services says, in today's volatile market place, it's more important than ever for pork producers to manage as much economic risk as possible, Bruce Cochrane writes.

Last month [email protected] Marketing Services launched a new Fixed Forward Price Program to allow pork producers who market to Thunder Creek Pork in Moose Jaw to price hogs up to ten months in advance of delivery.

The program, which has been offered in Manitoba since 1995, allows the producer to look out into the future to predict cash flows and lock in hog prices at any given point in time.

[email protected] general manager Perry Mohr says the program allows producers to eliminate as much risk as possible in today's market place.

Perry [email protected] Marketing Services

We use the lean hog futures and, because lean hog futures are quoted in U.S. dollars, we have to factor in a risk factor for the currency as well.

We take the lean hog futures and we convert them into a Canadian version and we eliminate the currency risk by locking in the currency at the same time.

We will post prices 10 months out in advance.

Producers that know what their cost of production is can actually look at this tool.

We've got a program as part of our offering that allows producers, if they know your cost of production, you plug it into this program and then it actually populates, based on the number of months and the prices that we're offering, it will populate and tell you what kind of a margin you can lock in throughout that period of time.

Of course if you decide to execute the trade then you are essentially guaranteeing yourself that price.

You're a price maker versus being a price taker over that point in time.

Mr Mohr notes typically producers will lock in between 20 and 40 per cent of their production on an annual basis.

He says the 20 per cent usually comes in years when hog prices look like they'll be good and the 40 per cent usually comes in years when it looks like hog prices are going to be poor.