To calculate an end price per carcass hundredweight (cwt.), Sills uses historical basis and a 74% conversion. “I'm a salesman,” he admits. “When I tell someone something, I want it to come back better. I'm not looking for a one-time transaction here. I'm looking for continued business.”

Using the conversion and Table 1 as a benchmark, Sills knew carcass prices between August 2007 and April 2008 ranged between $67.50 and $75/carcass cwt. The average live price from August to March 27, 2008 was $57.25 on the Iowa-southern Minnesota market (Figure 1).

“We put hundreds of thousands of dollars in producers' pockets using this information for a hedge/cash flow contract,” he continues.

“The cash flow contract we are using works as a hedging program, but producers don't have to pay margin money and they don't have to put in big money up front. They pay 50 cents/carcass cwt. or $200 for a Chicago Mercantile Exchange (CME) futures truckload of hogs. That breaks down to about $1/head.”

The cash flow contract is simply an extension of the hedge contract. “In the hedge contract program, you can hedge increments of 5,000 lb. (carcass). In other words, you can hedge from 25 head to infinity,” he continues. “The beauty of the program is, if you are a small producer and you feed 500-head groups, you can top off the 50 heaviest barrows. Or maybe you want to hedge 400 head and do two full contracts (80,000 lb.) You do not have to deliver 40,000 lb. at a time in this program. If you want to take 10,000 lb. off this contract (50 hogs at 200-lb. carcass weights), you can because we do an extraordinary volume of these.

“It's a very good program for all producers. You could even make eight deliveries of 50 hogs if you wanted to. The minimum cash flow contract is 5,000 lb. (25 pigs), so we're literally giving everybody an opportunity,” he points out. “You can speculate in your own account. It's a hedger's program — period.”

Lenders, Please!

Sills appeals to lenders to stick with producers during this rough time. “If you have clients who have weathered '94, '98 and 2002, they've weathered some heavy duty storms,” he argues, “I'd like to believe that a lender would especially stick with an independent producer who raises his own corn, because he is in absolutely the best position of anyone in the pork industry today.”

The recipe for survival falls on everyone, Sills continues. He admonishes pork producers to cull more sows. “When the money is flowing and pork production is in a fat, dumb and happy mode, producers just put that sow back in the crate and keep going. When you are paying $6 for corn, that sow had better be an excellent producer. If she's not, you really can't afford to keep her. In reality, a deep culling appeals to me a great deal more than mass liquidation,” he adds.

“No doubt, we have too many hogs. As an industry, we have done that to ourselves. We will not survive this industry if we don't sell this thing down and get it into a manageable position,” he warns. “To get them culled down and processed is not going to be easy. As people cull sows and send them to slaughter, and they pull hogs ahead to sell them at lighter weights, this could be a bumpy road.

“I would talk to any lender at any time. I would plead with them to keep these guys out here. This thing will, in fact, turn around. Will it be fun and easy? No, it will not be,” he assures.

“But if we sell mass quantities of hog producers down the river, we will end up with a supply short of the current slaughter capacity, and then we'll have to wonder which pork processor will close a plant.

“Understanding that things could change, along about the July-August timeframe, I think we'll see a light there at the end of the tunnel. At least by the end of the year, I think the light will be brighter,” he predicts.