Defining Opportunities for the Independent Hog Producer

Transcription

1 Defining Opportunities for the Independent Hog Producer Pat Von Tersch, Jeff Hoogendoorn Jordan Reker, Kim Arends, Nick Bork, & Mike Fitzgerald Professional Ag Marketing, Inc. Phone: (507) Toll Free: (886) Fax: (507) Professionalagmarketing.com

2 Risk Management for Growth Who is Pro Ag Risk Management guiding principles Producer / Packer relationship 2017 Strategy Summary

3 Who We Are Risk Management Brokerage Business Located in Luverne, MN Established in 2006 Operated branch office for Advance Trading for 6 years. Managed multiple grain facilities for Cargill for 10 years. Today we have 5 individuals that assist livestock and grain producers with managing their commodity risk. All 5 individuals actively involved in their own ag production businesses Your partner and resource for good marketing decisions

4 Risk Management Guiding Principles Why do we manage risk Managing the dynamics of multiple decision makers What is your risk tolerance? Keys to success What & How History of crush Managing Margins today and tomorrow

5 Why do we manage risk? Manage cash flow Obvious benefit of more comfortable relationship with creditor Creates the opportunity for you to run when everyone else is walking.. Protect from Black Swan event Creates better opportunity to grow your business Legacy

6 What are the keys to successful risk management? DON T have a risk management plan based upon predicting price. Know your cost of production and execute based upon decisions that make sense for your business. Have a back up plan!! A contingency plan.. Example: If we have been unable to execute targeted margin for Dec hogs by July 1 st, execute sales / crush based upon seasonal tendencies. Change your strategy based upon margin opportunity Manage secondary opportunity cost. Switch from futures to puts if/when equity in position. Buy back sold options on market movement.

7 What are the keys to successful risk management? Engage with someone that is not intimately involved in your operation. Creates opportunity for less emotion and unbiased. Schedule 1 hour per week to review. Create mechanism to keep all individuals in your operation who have financial interest to be apprised of what is going on.. Establish goals from the onset in terms of what you want to accomplish. Based upon ROI Increasing net worth by x% every year

8 What?... And How?

9 Risk Tolerance Level

10 Pro Ag History to Managing Hog Margin Risk Started with options based strategy challenging with tight margins Decoupled Inputs and Hogs; Then Coupled since 2008 (Crush) Last couple years crush has largely been decoupled utilizing the lessons of the crush strategy.

11 Pre 2008 Hog Margin

12 Post 2008 Hog Margin

13 Historical Corn

14 Traditional Crush Model Hog Margin Worksheet January 23, 2017 Target weight: 280 All expense minus corn,ddg and meal Yield 75% $94.00 per head DDG Corn Meal Annual Targeted Margin $98.00 $3.64 $ $ lbs ($0.43) basis Today's CME Price Hog Basis Estimate Cash w/ Basis Today's Target Corn Price Meal Price Cost of Production Column1 FEB'17 $65.00 ($0.65) $64.35 $71.58 $3.49 $ $68.79 $4.50 ($9.32) MAR'17 $67.78 ($1.97) $65.81 $74.46 $3.44 $ $68.59 $8.19 ($5.85) APR'17 $67.78 ($2.24) $65.54 $75.25 $3.55 $ $69.11 $8.19 ($7.51) May '17 $76.75 ($2.77) $73.98 $80.45 $3.55 $ $69.11 $18.00 $10.23 June '17 $76.75 ($0.20) $76.55 $80.85 $3.57 $ $69.22 $24.00 $15.39 JULY '17 $77.05 $0.70 $77.75 $78.43 $3.62 $ $69.42 $20.40 $17.50 AUG'17 $76.83 $0.70 $77.53 $78.89 $3.68 $ $69.59 $21.00 $16.66 SEP'17 $66.63 $5.01 $71.64 $68.30 $3.68 $ $69.50 $8.00 $4.48 OCT'17 $66.63 $1.73 $68.36 $69.65 $3.75 $ $69.62 $3.70 ($2.66) Nov'17 $63.00 ($0.62) $62.38 $70.46 $3.75 $ $69.61 $0.50 ($15.18) Dec'17 $63.00 ($2.03) $60.97 $71.87 $3.75 $ $69.61 $0.50 ($18.14) Jan'18 $66.00 ($2.82) $63.18 $74.12 $3.82 $ $69.87 $3.00 ($14.04) 12 Month Avg $69.43 ($0.43) $69.00 $74.53 $3.64 $ $69.34 $10.00 ($0.70) Historic Target Margin/Pig Today's Market

15 Today s Pro Ag Approach to Managing Hog Margin Risk Volatility is lower; less opportunities for crushing pigs Buy Grain/Feed options in the Winter to protect against future weather problem (or South American crop challenge) Look for opportunities to forward spread crush pigs

16 Drought Strategy for Feed Coverage

17 Current challenge Intermediate opportunity Long term relationship Independent Producer / Packer Relationship Threat of vertical integration Mimic poultry industry?

18 Cutout VS Cash Market $ Nearby LH Futures Prices vs CME Index vs. Cutout Futures Price Cutout $90.00 CME Index IASWMN $80.00 $70.00 $60.00 $50.00 $40.00 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17

19 Packer Margins

20 How much capacity growth and WHEN? US packing Capacity Under Construction Fall 2016 Fall 2017 Fall 2018 Daily Hd Annual HD Daily Hd Annual HD Daily Hd Annual HD Windom, MN 9,500 2,500,000 9,500 2,500,000 Pleasant Hope, MO 2, ,000 2, ,000 Sioux City, IA 12,000 3,000,000 20,000 5,200,000 Coldwater, MI 10,000 2,500,000 10,000 2,600,000 *Prestage Plant* 10,000 2,600,000 Total 34,000 8,625,000 52,000 13,525,000 Head per week Pct of 2016 avg million hd 7.4% 11.6%

21 Managing Packer Relationships in a Changing Industry Use this opportunity to drive value into your working relationship with your packers Encourage you to open communication up with packers outside of your usual working relationship see what's out there. Not telling you to serve notice on your agreements but start to build on your relationship at a packer that you choose to work with Goal would be when they call in the future with an idea to help the pork chain drive more value that we will be able to work more closely and share in cost and returns Be better stewards for the pork industry

22 Threat of vertical integration Concerned about movement towards poultry model Independent producer /packer model is very competitive Challenge is accommodating changing needs Challenge is value transfer How can we mimic vertical integrator? Dynamic pricing relationship Trust / Relationship DEFEND CASH MARKET! We must do our part to create more liquidity in the cash market. In the event of further integration is your production system adaptable?

23 Negotiated Cash Market

24 Risk Management for Growth 2017 Strategy

25 Pro Ag Firm Offer Worksheet FIRM OFFER WORKSHEET % hedged 65% All in cost Target weigyield Corn lbs Meal lbs DDG lbs Marketed annual basis $ % ,800 Marketing Hog px Corn px Meal px COP Margin Jan '17 2,400 $65.00 $3.40 $ $ ($3.30) Feb '17 2,400 $65.00 $3.40 $ $ ($3.30) March '17 2,400 $69.00 $3.40 $ $ $4.80 April '17 2,400 $ $3.40 $ $ $6.82 May '17 2,400 $ $3.40 $ $ $27.07 June '17 2,400 $ $3.40 $ $ $27.07 July '17 2,400 $ $3.40 $ $ $27.07 Aug '17 2,400 $ $3.40 $ $ $27.07 Sept '17 2,400 $ $3.40 $ $ $6.82 Oct '17 2,400 $ $3.73 $ $ $4.40 Nov'17 2,400 $ $3.68 $ $ ($3.33) Dec'17 2,400 $ $3.68 $ $ ($3.33) 28,800 $71.75 $3.47 $ $0.669 $9.82

26 Play Offense in a Defensive Year! No question the industry is expanding. Crucial to manage margin structure during market appreciation. Know your cost of production have inputs defined Execute on revenue targets that make sense for your business. Have a contingency plan! We have established an internal time line by mid Feb. If targets aren t hit by mid Feb Force coverage.

27 Summary Huge opportunity! Manage short term and long term risk. Take advantage of volatility Create relationships vs. transactional Trump Bump! Trump Dump!

28 Pork Exports

29 World Population Growth

30 Cultivation Intensity

31 Thank You! Copyright 2017 Professional Ag Marketing, Inc. Reproduction in any form without the expressed written consent of Professional Ag Marketing, Inc. is strictly forbidden. This data is provided for information purposes only and is not intended to be used for specific trading strategies without consulting Professional Ag Marketing Inc. No guarantee of any kind is implied or possible where projections of future conditions are attempted. Past results are no indication of future performance. All information is based upon data that is believed to be reliable, but its accuracy is not guaranteed.