We Europeans have been examining risk management closely - though it is not a new subject. Risk equates to the fear factor or the possibility of the outcome being different or worse than that expected.
Our number one threat is the increasing amount of price risk in pig production. Price volatility here is worsening, doubling every five years.
Risk management is a shock absorber. We need a risk management "tool-box."
First, examine your attitude toward risk. How much are you prepared to gamble? How much depends on how many tools you employ, how you use them, and how hard you work at risk management.
Risk Management Tool Box 1. Information is vital. How are you following the market?
- Market information;
- Herd size and growth;
- Price cycle/price trends;
- Supply and demand shocks
- Competitors' behavior; and
- Action you take on the market.
Action: Work much harder in knowing your market, your immediate purchaser's market, his buyer's market and the world market. You are much less likely to be exploited by people you sell to and buy from, even if many events are outside your control.
- Land-based diversification has costs, but it pleases lenders.
- There are higher capital costs; income is fudged; there is dilution of your specialization skills; new areas need time and experience.
- Non-farm diversification can involve the whole family. Whole family income will matter more to the medium-sized family farmer.
Action: Can you spread your sources of income? Surf the Internet for ideas. Franchising is taking off rapidly in Europe and a few hog producers are really making extra money from it.
Negative aspects are: - It is technically difficult to be good at everything you take on.
- The farm can suffer if a franchise grabs too much of your time.
- Other farmers diversifying into your specialty (pigs) also come in and out and destabilize your local market.
3. Coordinate, cooperate and integrate.
- Needs a degree of selflessness. Are you a "sharer"? You need to be.
- Relationships are more important than transactions. You need to talk, negotiate and cooperate. Think of the positives as well as the problems.
Action: Who are you talking to already? No one? You could be missing the bus.
In the U.S., sale by contracting is becoming accepted. In two years, it will be essential.
4. Consider contracts.
- Study various contract price formulas. Work at it. Become knowledgeable about other buyers' contracts.
- Consider production costs and long-term margin sharing with the packer.
- A contract is give and take. Be wary of contracts where the other side is cagey - they'll be tempted to let you down.
Action: Talk, talk, talk. Work at it. Start early on; spend more time negotiating. Once you've contracted, start looking at other options to use as ammunition to change.
5. Reduce your costs as an insurance "cushion."
Besides the usual cost cutting advice, think laterally; think more radically.
Do you have to: - Buy feed from a feed manufacturer?
- Buy breeding stock (except artificial insemination and boars) from a breeding company?
- Buy housing and equipment from the manufacturer or retailer?
- Buy rather than lease or hire?
- Explore buying some products on the Internet?
Major savings have been achieved in Europe. Suggestions are: - Enter the feed raw material market; buy for yourself and others. Independent nutritionists exist.
- Consider using an independent geneticist to design your own females; do the breeding yourself.
- Many products are as much as 40% cheaper on the Internet in Europe; the same products, too, as are available locally.
- Build or subcontract your own housing using local skills.
- Some of this may cost a little more, but it eases cash flow.
Remember, all of the above entities profit from you. Think about recapturing some of it.
Action: Do I have to continue buying from...? Explore alternatives. It will mean more time spent on buying and selling, but this can be a very useful cushion.