Adding value to grain through hogs hit a snag when corn prices escalated, but this Grundy County, IA, cooperative is in it for the long haul.
In the mid-90s, Bruce Hayes and his brother, Sid, left the hog business to concentrate on growing crops. With only 200 sows and outdated facilities, the Parkersburg, IA, brothers didn't feel competitive with the big integrators operating nearby.
The Hayes brothers briefly considered contract finishing, but they weren't too crazy about returning to daily pig chores. Besides, grain production has always been their first love. “That's what we feel we do best,” Bruce Hayes says.
Still, taking all of their chances in the grain market wasn't comfortable either. “We wanted to find a way to diversify and get involved in a value-added enterprise,” Hayes says.
The Hayes brothers joined a group of area grain farmers, mostly from Grundy County, to establish Value First Cooperative (VFC) as a means to raise livestock using member-grown grain. “We put together our resources to gain some of the advantages of the large operators without all of the risk,” Hayes says.
In 2001, 29 farmers invested $2,500 per share to join VFC. Fifty shares were sold; no investor was allowed to own more than 15% of the total shares.
Initially, VFC considered buying an egg-laying operation, but eventually they settled on hog production. Proceeds from share sales, along with a revolving loan from a local bank, were used to buy pigs and set up production contracts. Bruce Hayes was elected president, and the Farmer's Cooperative Company (FCC) in Dike, IA, was enlisted to manage VFC's operations.
VFC pigs are started in nurseries and moved into 1,000-head, grow-finish facilities built to the cooperative's specifications. All of the production facilities are owned by VFC members who provide contract services. They are paid a yardage fee to cover housing, utilities and pig care, with bonuses based on performance. VFC purchases about 1,000 weaned pigs per month from a commercial sow unit. FCC's Fred Diers works with the contractors to oversee management of the pigs.
Hayes says part of the appeal of starting VFC was the potential impact on Grundy County's economy. “The owners of the buildings are local patrons of the co-op and members of VFC. This keeps our money in the local community,” Hayes says.
Corn Deliveries Required
Each VFC member is required to deliver 500 bu. of corn quarterly, per share owned. Corn is delivered to FCC's locations in Parkersburg, Dike or New Hartford, where the grain is weighed, tested for moisture and pooled with other VFC members' corn.
Members are paid for their corn deliveries each quarter. Price per bushel is calculated from the net income for all groups of pigs sold during the quarter, divided by the number of bushels of corn fed to those pigs.
Costs include feeder pigs, feed (less corn since that is not purchased), veterinary care and medicine, trucking, yardage, bonuses (paid to contractors), interest (for revolving loans that have not been paid off), insurance, a management fee ($1/pig sold; paid to FCC) and other administrative costs.
Income is derived from the sale of finished pigs (VFC has a marketing agreement with Cargill) and any proceeds from hedging and market options for hogs and soybean meal.
“We hedge our market hogs when prices on the futures get up to a level we think will give us a satisfactory return,” says Jim Hawkins, who serves as VFC's secretary-treasurer. “We also buy bean meal on the board. So we have a hedge gain or loss (to add to the live hog income).”
More recently, VFC's marketing strategy is to use marketing options. “We are now doing option spreads to try to give us more upside,” Hawkins says. “We expect some liquidation (of hog inventories) and as time goes on, we expect hog prices to improve. If we hedge, we are locking ourselves into what the profit could be. If we do options and the markets trend higher, we'll be able to get higher prices.”
Hayes and other board members meet quarterly or as needed to monitor production and financial performance and discuss overall business strategies. Although many of VFC's members have raised livestock in the past, the cooperative relies on Hawkins and Diers to make day-to-day decisions.
“Some people are hands-on and want to have the control to make the decision to do this or that. But as a member of VFC, you have to feel comfortable with someone else managing your investment,” Hawkins says.
Understanding the Cycles
Hawkins admits the financial summaries looked better when corn was $2.00-2.50/bu. vs. today's all-time-high prices. “A few years ago, there was a time when our return was 30 to 35 cents above the average corn price,” he explains.
For pigs sold during the first quarter of 2008, VFC netted an average of about $2/bu. less for corn than the average market prices during the feeding period. Hawkins says higher feed costs have caused VFC's profits to slip in the past year, but the larger issue affecting the cooperative's comparative financial performance is the fact that alternative corn bids have been so high.
“The whole logic is to add value to our corn,” Hayes says. “It was easier to do that with corn at $2 than it is now, with corn at $4-5.”
Some members questioned whether to continue the cooperative as grain prices rose. “When the corn market first started rallying, some of the guys asked, ‘What do we do? Maybe we ought to get out of the business,’” Hawkins says. “But others have the thought that when corn goes high, hogs will go high. Because most of the members have had livestock themselves, they were in it for tough times and good times as well, so they understand it.”
“This is not a get-rich-quick deal,” Hayes agrees. “We are all aware of the cyclical nature of the livestock business. We have decided to weather the storm.”
Undoubtedly, patience to wait for better times comes easier when you are diversified. “Our biggest plus is that most of us, if not all of us, are not dependent on Value First for our mainstay of income. We can give up a little bit for a while and easily survive given the prices on the grain side are so good,” Hayes concludes.