This southern Minnesota producer chips away at his highest input costs — sow and pig diets.
One of the best in the nation” is how AgStar's Mark Greenwood describes Bob Taubert's risk management program.
Taubert, managing partner of New Horizon Farms headquartered in Pipestone, MN, approaches risk management with a systematic discipline, which he says may be a throwback to his civil engineer training from the University of Minnesota. Details, fractions and benchmarks are important to him.
He uses pigs weaned/sow/year as a primary measure of productivity, along with adjusted 21-day litter weight, percent sows bred by Day 7, wean-to-first service interval, farrowing rate and sow mortality. He's constantly challenging conventional thinking to squeeze maximum performance from New Horizon Farms' 11,000 sows.
Thinking back to “when things started getting crazy” (late August, early September 2006), Taubert first challenged the recommendation that feed should be ground to 700-750 microns.
“We have pushed that down to around 400 microns, leaning toward a little bit smaller, if possible. The finer the feed particle size, the easier it is for a pig to digest and absorb the nutrients,” he argues. “We have been able to lower feed conversion by doing that.” Granted, all credit doesn't go to micron size, because other dietary changes were also made.
Concerns about ulcers with finer grinding didn't materialize. “One reason may be that the finer-ground corn did not have an inordinate amount of ‘fines’ (i.e., corn was very consistently ground),” he says. “And monitoring the conditions of the rolls in the Roskamp roller mills has been increasingly important.”
The inclusion of alternative ingredients such as distiller's dried grains with solubles (DDGS) and bakery meal increased the fiber level, and are slightly higher in micron size than the finely ground corn.
Another move to economize gestation and lactation diets was the addition of 30% DDGS and initiating a step-up, step-down program of DDGS inclusion in finishing rations. “Eighteen months ago, we weren't using any DDGS. Last week, alone, we used 20 semi-loads,” he explains. “That's anecdotal to how much things have changed as far as feeding these animals more economically. We've actually dropped our overall corn usage by nearly 25%.”
All DDGS products are sourced from a single plant, which is monitored for quality variation. In addition, DDGS is a good source of available phosphorus, an additional cost savings.
Bakery byproducts currently make up about 5% of all rations. “To be quite honest, this has not resulted in a savings in corn price, but it hasn't been a cost either. Part of our strategy is displacement of corn, thereby making the corn we do own last longer. My view was I was buying bakery byproducts against the current cash price of corn vs. some unknown, but anticipated higher price in the future. It's somewhat of a backwards risk management,” he explains.
Taubert also quit using choice white grease as an energy source in rations. “Historically, we were paying 11-13 cents for fat; today, choice white grease trades for 42 cents or higher, so we literally can't afford the energy source. We were able to take the fat out, decrease the micron size and keep about the same feed conversion as we had with added fat,” he says.
Additionally, he has ratcheted down the “old standard amino acid ratios,” which allows him greater flexibility to use synthetic amino acids in diets and take out a little soybean meal, resulting in another cost savings.
New Horizon Farms owns and operates four, 1,200-head research barns, which are operated under the direct supervision of Kansas State University (KSU) nutritionists. “Based on trial results, KSU nutritionists formulate the nutritional requirements for our pigs, in our environment. Anybody can give you a growth and intake curve for their pigs, but can you duplicate that in your environment and repeat it day in and day out?” Taubert asks.
Cargill Animal Nutrition staff serves to challenge the KSU baseline nutri-tional guidelines and provide laboratory services “to make sure we are really feeding what we think we are feeding,” he notes. Cargill is also responsible for diet reformulation, ensuring that the diets are “best cost” for a given set of nutritional specifications.
Taubert also buys soybean meal from Cargill. So, rather than using the 46.5% guaranteed protein level, laboratory testing might confirm it at 47.5% protein. “We can then formulate the ration using 47.5%, which is not a lot of cost savings, but we're able to capture something that we otherwise might not.”
A third nutritional consultant, Noel Williams with PIC, advises on sow diets. “We feel all three nutritional advisors help us maximize our feeding program. They challenge each other, ask tough questions and help us get changes implemented,” he explains. “I think I have frustrated them somewhat by asking and pushing to do things for which there is not a lot of data. This is where the research farm has been critical.”
Taubert also believes owning a feedmill is a huge advantage. “The biggest thing is having control of the feed quality. That's not a statement about other millers. It's just that I have control over what goes in and what comes out. I can change things whenever I want. I don't have to ask 25 other customers whether we can change DDGS suppliers, for example,” he says.
“I like being in the market and knowing what the market is for everything, because opportunities present themselves, and I'm there to take advantage of them. If I didn't own the mill, I don't know how I'd keep track of it,” he adds.
“Vitamins are a good example. In part due to the temporary closing of manufacturing plants in China ahead of the Olympics, vitamins, particularly vitamin E, have increased in price quite dramatically. Since we were in the market for vitamins, we were able to buy 8-10 months worth ahead at a nearly constant price. Now the price has more than doubled,” he says.
All corn for New Horizon Farms is purchased from local farmers, which has made Taubert a student of the corn market. “I think we've done a very good job of understanding the market, understanding our costs, and how to use the futures market to mitigate some risk,” he says.
“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.
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.”