Two Minnesota farm families share their risk management strategies.

Without a risk management program, the Becker family of Fairmont, MN, admits they wouldn't have made money on hogs in 2008.

Put another way, using trades on the Chicago Mercantile Exchange (CME) resulted in a positive cash flow for the three partners, whereas relying on selling on the open cash market would have sunk them in red ink.

“The last couple of years, our risk management program has made our production enterprise profitable. Because the cash market for hogs has been so lousy the last couple of winters, and we protected a profitable margin in our hedge account, the hedges more than offset our losses on the production side,” says Lynn Becker, past president of the Minnesota Pork Board.

Lynn and older brother Lonny and dad Larry form LB Pork, Inc., a 3,800-sow, farrow-to-finish operation that markets 75,000 hogs annually. The home farm includes the nursery operation, corn storage, a 2-ton-capacity feedmill, gas and diesel fuel storage facilities and the trucking operation. Breed-to-wean sow farm sites in Minnesota and Iowa are managed by outside staff, but LB Pork retains ownership.

Lynn manages the physical aspects of the hog operation and calculates the amount of feed and other inputs they will need, plus keeps track of how many hogs they will have on hand to market next week, next month and next year.

Lonny coordinates the risk management duties, charts feed prices and other inputs and projects the potential return on their hogs through marketing.

Larry is nearing retirement, but still helps manage the 1,500 acres of cropland, typically planted to corn. The three-man team meets to finalize the annual plans for the operation, including major purchases.

Lynn says sharing the group decision-making process helps ease the burden and the stress in a family-run business.

“It's been one of our assets in being able to delegate part of the responsibilities to someone else instead of thinking that you have to do it all yourself,” Lynn says.

Making Trades

Being a traditional crop-hog farmer normally has only brought a slight advantage — up until recently, Lynn notes.

The Beckers' risk management program led them to add grain storage capacity so they would have a full year's worth of storage.

“Having the storage to be able to buy all of our corn in the fall of 2007, when we saw prices rising, vs. the summer of 2008, when prices skyrocketed, was a huge advantage ($3 vs $7 corn),” Lynn recalls.

Similarly, the trio has “pulled the trigger” on numerous CME hog trades since 2004, when their Hormel packer contract expired and left them vulnerable to the open cash market.

Lonny figures during the first few years selling hogs on the CME (2004-2006), they left some money on the table, since they didn't hit the top prices offered. But they could still sleep at night knowing they locked in a small profit. That more than balanced out in 2007-2008, when they locked in much better returns on the futures market.

The key is to stay consistent with trades and not be afraid to look farther out to lock in better profit margins, Lynn says. “There are opportunities there. Don't be afraid to take them; what part of black ink don't you like?” he asks.

Trusted Advisors

The Beckers' farm team relies on a number of outside advisors to guide their decisions. The Beckers were one of the first hog farms in the area to sign on with Commodity & Ingredient Hedging (CIH) back in 2004, a consulting service based in Chicago.

The Beckers hedge an average of 70% of their hog sales on the futures market, more in the winter and less in the summer, when cash hog prices typically are higher.

They also buy options on their futures contracts as an insurance policy that locks in any possible gains on their contracts, Lonny says.

Those futures prices are locked in after their costs are established for all three major production factors — corn, soybean meal and hogs. “It is so important to start by knowing what your costs are,” Lonny reminds.

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