Hedgeable Returns for Pork Producers
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Pork producers were only able to hedge a price with futures that is greater than the expected breakeven price approximately 60% of the days during the 6 months prior to slaughter during 1999–2000. However, some months offer hedges greater than breakeven more than 80% of the time. Since 1995 the hog market has become much more volatile and hedging opportunities less certain. Therefore, the need for a good risk management plan is more apparent.
Producers can use the results of this study to evaluate hedging opportunities. The information provides an estimate of the percentage of time that futures prices are expected to offer greater returns than the current quote. For example, if futures prices currently offer a return of breakeven of +$6, there is little likelihood that prices will improve in most months.
In some years, such as in 1998 and 1999, producers may need to focus on protecting a reasonable loss, rather than pursuing a profit. Although using futures markets does not guarantee a profit, they can, if used properly, offer an opportunity to lock in acceptable returns and reduce much of the price risk that producers face.