Ken Doyle's role as director of marketing for Hog Inc., gives him the opportunity to delve deep into the hog market. Hog Inc., a marketing and purchasing co-op of family farmers based in Greenfield, IL, sells 400,000 hogs a year into a wide range of different markets. They use their combined volume to negotiate for better prices.
But even Doyle throws up his hands in trying to deal with the markets of the last year. "It's a pretty tough gig today," says Doyle. "We feel we don't have a very good idea of where things are headed. A lot of things are very confusing."
In the face of the confusion, Doyle, like many in the industry, is evaluating all of the various alignment opportunities available and is trying to see if any make sense.
"I have aligned myself, long term, with Hog Inc., on the marketing side, so in that sense I'm not truly independent," says Doyle. But for now, he has not committed long term to a packer on a contractual basis. He admits, that may change.
"Long term, one of our strategies is to get into a vertically aligned situation. But, I don't think right now is a wonderful time to do that. I've alwa ys felt it's fairly difficult to negotiate when you're on your knees and that's where I think the production sector is at this juncture." In evaluating contracting with a packer, Doyle says, "We're not in a hurry to go out here and do anything foolish."
Take A Step Back And Wait Producers may be best advised to take a step back and wait in looking at long-term marketing decisions, says Doyle. "My personal philosophy is when you're in a situation of severe economic stress, which I think is where you can put the producer side, by and large, it's very difficult to make sound, long-term business decisions."
There's no question in Doyle's mind who will come out with the upper hand in producer-packer negotiations in today's economic climate.
"If you're a packer, you're in a position of having economic strength," says Doyle. "You're dealing with a weak supplier side or opponent side and you are writing the rules. I can guarantee you how I'd write the rules if I was on their side. I don't think a lot of people are thinking clearly enough to really look at that.
"We are not jumping up and down to get anything done," says Doyle. He thinks there are better times ahead for considering alignments. "We feel there is going to be a contraction in numbers in this industry. Yes, we have concerns about slaughter capacity and aged facilities and all those things, absolutely. But this economic stress is going to create some changes on the supply side. We think this will give us a window of opportunity on the marketing side. It may not be a big window but it may be a window large enough that at that point in time we're much more interested in negotiating with packers."
The "don't negotiate from your knees" philosophy crosses over to some degree when considering hedging opportunities in the futures market.
Don't Miss Windfall Gains University of Missouri agricultural economist, Glenn Grimes, says use caution in looking at pricing opportunities in the futures market.
"The risks are high that you will miss some windfall gains at this stage of the cycle," says Grimes.
" When we are at the point of starting to reduce numbers, the futures market understates how much the cash increases," he explains.
Looking at history, Grimes says, confirms that only a few producers use the futures market in times like the fall of '97 when the market started to slide. But, a number of producers turn to the futures approaching times like June '99, after the market starts turning up.
Grimes points out that in recent hog cycles, reduction in hog slaughter is yielding a bigger price jump than in the past.
For example, Grimes says look at the numbers for the three productivity cycles between 1974 and 1986, where the average production decline in the big year of reduction for each cycle was 10.6% and the average deflated price increase was 19.7%.
For the last three production cycles ending in 1996, the average decline in production was 2.7% for the big year of reduction in each cycle and the average price increase was 15.8% in deflated prices, notes Grimes.
If the price flexibility of the last three production cycles holds for the current cycle, hog prices in the year 2000 are likely to be higher than most people forecast if production is down as much as now seems likely, says Grimes.