Economists' predictions that 2008 would be a tough year for pork producers turned out to be an understatement. The meltdown of the financial community and the resulting loss of investment funds in the commodity markets have made the situation even more dire for every American businessperson, including U.S. pork producers.

In effect, the financial stresses continue into 2009 because of the loss of credit and the losses of the investment community, which supplied massive funds to the futures trading of livestock, grains and crude oil, as well as other commodities, inside and out of agriculture.

We can be critical of Congress for having created the regulatory atmosphere that caused the sub-prime mortgage debacle, and in turn made massive amounts of investment dollars available to Wall Street and the commodities markets.

Still, to some extent, we should be thankful for the mountain of investment dollars, though the trading of grains and livestock became a mixed blessing for the American hog farmer.

Without the government mandate to produce and use ethanol and the availability of index funds money, corn would never have hit a high of almost $8/bu. Of course, one can rightfully argue that it never was worth $8/bu., because neither the hog farmer nor the ethanol producer could afford it.

As an offset, without the availability of the index investment funds, June (2009) hogs never would have hit $100/cwt., nor would all of the other opportunities to sell hogs at high prices been available.

All of these circumstances have set into motion a financial volatility that has engulfed not only the United States, but world markets as well. This volatility certainly has, does and will affect the profitability of hogs well into the future.

The extreme volatility is not just a flash-in-the-pan, and it's not going to end with a new administration in Washington.

To survive, we must all learn to live in a very volatile world, and that means doing a better job of managing risk.

In my 35 years of working with agricultural business clients, I have learned that the majority of producers are focused on the daily tasks of raising and caring for the well-being of their animals. Therefore, I try to apply that daily focus to risk management.

Many producers, including some of the largest, have chosen to manage marketing risk simply by having hogs for sale every week of the year. Some have even invested in a packing plant. Sadly, that often turns out to be a false interpretation of basic economics.

Marketing is Everything

The most important mantra for pork producers to learn is — marketing is absolutely everything.

Without a plan to assure your marketing objectives, it doesn't make sense to spend time and money on finishing a hog to 265 lb.

And, any attempt to control the cost of feed ingredients during a period of sharply rising prices is futile. Cost control requires a long-term approach and the use of commodity futures to offset rising prices.

With a good set of financial and performance figures, completing a plan is not that difficult, but a systematic approach is extremely important. The plan must include three fundamental factors:

• Knowledge

  Evaluate the risk present in your business. Know your costs (variable and fixed). Have a sound knowledge of the tools available and packer/investment community terminology.

• Structure

  Develop and complete a well-designed and structurally sound, written plan. Anticipate hog and grain price changes as much as 18 to 24 months into the future. Design a strategy to counteract any adverse volatility.

• Discipline

  Have the professional discipline to execute the plan as designed. Review the results. Keep records that will help make management decisions in the future.

Once you've spent the time, energy and money to develop a structurally sound business plan for managing the risk of marketing and price protection, there is always the nagging question about whether it will work.

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