“There's no doubt, if you go back to late August or early September 2006, clearly the market ramped up. Corn got to $2.75, then $3.00, then $3.25, and then $3.45. Most felt there was no way it could keep going up,” he reflects. “Today, corn price is much higher, but it was at $3.45 December 2007 futures when our traditional corn hedging plan ceased and a new era began.

“Historically, ‘bear spreading’ the nearby December corn contract vs. the same crop year July corn contract at $0.10-$0.12 was targeted. We would then buy out of the money corn calls, say $2.80-$3.00 call options, as disaster protection for corn at a cost of $0.15 or less. Most years, the December/July spread would ‘widen’ from $0.10-$0.12, where we entered the market, to $0.25-$0.30. At that point we would remove the bear spread at a $0.15-$0.20 profit. This in effect ‘paid for’ the call option,” Taubert says.

“At $3.45 December 2007 corn futures, we were very aggressive buyers on the board and we had a lot of corn forward contracted into the feedmill. We just kept buying physical corn and stayed long on the board, waiting for a fundamental shift that would indicate the bull market was over. So far, the market hasn't stopped. Whether the long futures position had expired or not, once we've met our corn needs for a certain period, we've been rolling the positions out to wherever we needed corn next. However long we were in, in the fall of 2006, we are long that much corn now, albeit at an ever-increasing price, but not as quickly as just buying ‘spot’ corn.

“My analogy is it is always hardest to just start something. Once we made that initial buy, or got long on the board at a certain ‘X’ amount of bushels, as we continued to move higher, buying the next few month's worth was a lot easier because we were already in the market and we could see that we were ramping this up. I don't want to call it luck, because we have spent a lot of time discussing where we are headed. What are our risks? How much physical corn do we have bought from the farmer? How much corn do we need? How long do we think this period is going to last until the price recesses? We have tried to own enough corn, one way or another, so we could get to whatever period of time that we thought things had reset.

“If we paid too much for corn, fine. If we didn't, great! At the same time we were buying corn, we were laying off risk by selling hogs on the board. At the end of the day, as long as we were selling hogs at a price where we achieved a profitable margin or an acceptable rate of return, it didn't necessarily matter to us if we ended up paying too much for corn or selling hogs too cheap because it was the margin we were after. It wasn't about the net price paid for corn or the net price received for the hogs, it was the relationship between the two,” he explains.

“Once we were able to dumb it down to that, the plan was that much easier to execute. There's no doubt that having this plan in place from 2003 through 2006 cost us some opportunity, but we also had the best 3-4 years we've ever had. We didn't take nearly the high any of those years, but we didn't take nearly the lows either. And, relatively speaking, we had little price risk.

“Had I not been doing this, I'd have never been hedged into this period. Eventually, our protection will run out. You always have a finite supply of corn unless you grow all your needs, but we've felt we have enough that the market will reset by the time we run out and we will be there establishing our new plan,” he says.

“We've got a lot of new crop corn on the books. We are still long on the board as well. We wanted to get enough corn under ownership to be able to get to the 2009 harvest or beyond. It was our hedging and marketing strategy that did it, not any divine intervention or some wisdom that no one else had. It was being able to determine what an acceptable margin was and then executing a well-thought-out plan for risk management. It was like setting a goal.

“Our goal is to get to a certain point in time when we feel like the price of hogs will reset relative to their inputs. They have to, eventually. It's just a matter of how long will it take and then have enough corn bought to get to that period. At some point we will exit all of our positions and buy put options at the average price paid for corn or better. If we were wrong and we paid too much, then we will participate as the market goes back down. That's our strategy in a nutshell,” he says.

Getting Started

Taubert acknowledges that not everyone has the aptitude or desire to master forward buying and forward marketing concepts.

“They should do what we initially did — find a marketing adviser. Ask others in the industry for recommendations. The first thing a good marketing adviser ought to ask is: ‘Do you know what your costs are?’ If he's going to advise you at all, he's going to have to know your costs,” he continues.

“Get a marketing adviser who can help you understand how to protect a positive margin and who understands what you are targeting as an acceptable rate of return. Is he going to be right 100% of the time? No. Is the market going to give you an opportunity 100% of the time? No. But, not having a plan at all — flying by the seat of your pants in the current market environment — is foolhardy.”

Taubert has hogs committed on the board out to February 2009, with a few more scattered through April and June 2009. “At some point the live hog market's going to increase,” he assures. “To what level, I don't know, but I think you will see a number with a hundred in it before 2009 is over — at least for one of the trading months. It wouldn't take much news to run to $92-100 (carcass cwt.). A corn rally would do it too, I think.”