Pork Risk Management Strategies for the Alberta Hog Industry

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  • The structure of the Alberta hog industry has changed drastically over the past several decades. Historically, Alberta hog production was mainly comprised of many small and privately owned operations. Most hog farms continue to be privately owned and operated but the structure of Alberta's hog industry has trended towards largeer scale production. Prior to the 1970's, hog production was relatively inefficient in its use of resources compared to current production efficiency. Genetic improvement programs and research on hog growth and feed requirement characteristics were largely undeveloped. As a result hogs were less efficient in feed conversion efficiency and took more days to reach finishing weight. The hog industry in Alberta has become highly focused on efficiency, with hog genetics displaying huge gains in reliable growth performance and feed conversions due to intensive research. These gains in hog growth and feed efficiency allow producers to know with greater certainty the growth performance they will get from the animals produced in their herds. Improvements in the knowledge of genetics, growth performance and feed requirements of hogs has been accompanied by impressive gains in hog production technology and facilities. Hog farms, prior to the 1970's, required more labor and resources to produce a finished hog. Improvements in farm housing technology, medicinal knowledge, farrowing technology, and feeding technology have allowed a single unit of labor to produce more finished product than previously possible. Studies have indicated that returns to scale, increases in the demand for pork, technological advances being made in hog production, low feed costs, a solid swine industry infrastructure, relatively easy access to capital, and the progressive and cooperative nature of hog producers have led to the pork industry becoming more intensive and competitive. Thirty years ago, a hog farm housing fifty sows was considered large in size; today single production units can house several thousand sows. This has led to a huge expansion in hog farm capacities and correspondingly large gains in production efficiency. The strides made in hog production knowledge and capabilities have resulted in a significant restructuring of the Alberta hog industry in terms of farm sizes and numbers. The number of hog farms reporting hog production has decreased dramatically over the last four decades while the number of pigs per farm has increased over this time period. The Alberta hog industry has been very dynamic in its structure over the last four decades, and it seems that this trend will continue. Despite the improvements in hog production techniques, hog producers in Alberta have historically faced several challenging time periods when marketing their hogs. This is largely due to the volatile nature of the Alberta hog market, which is a major source of risk to Alberta hog producers and can seriously affect the income stability of enterprises producing hogs. This volatility is caused by a high elasticity of supply coupled with a low elasticity of demand in North America. It is important that hog producers identify the sources of risk in hog production and deal with those risks to remain in operation. Failure to manage price risk can result in significant losses and affect the operation's ability to meet its financial responsibilities. This therefore necessitates a marketing program, which allows for price risk to be managed in order to meet financial responsibilities. This study explores several different risk management strategies in terms of their ability to reduce the price risk faced by hog producers while maintaining average returns. Marketing tools such as forward contracts, futures contracts and options contracts are available to hog producers for the purpose of stabilizing hog farm incomes and reducing income variability. This study explored the potential benefits or shortcomings of using hog market-based derivative contracts for the purpose of price risk management from the beginning of 1981 to the end of 1995. The objective of this study was to investigate the effectiveness of using different derivative contracts such as hedging with futures contracts and window contracting, in reducing price risk. Any results at the farm level have direct application for pork marketing organizations.

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    Attribution-NonCommercial-NoDerivatives 3.0 International