Evaluation of Business Risk Management Strategies for Hog Production in Alberta (2008-2012)

 
 
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  Economics and Competitiveness
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Executive summary
This paper assesses the magnitude of margin losses by Alberta hog producers in 2008-2012 that could have been reduced or avoided had they used certain business risk management strategies. Three price risk management strategies are analysed and compared to selling hogs in the cash market: routine hedging, selective hedging, and forward contracting. In addition, the Hog Price Insurance Program (HPIP) offered by Agriculture Financial Services Corporation (AFSC) is evaluated for the September 2012 hog contract settlement.

To simulate cash flows of a hog enterprise, a model of a typical (representative) hog farm in Alberta is developed. The model is designed to incorporate impacts of selected price risk management strategies on the bottom-line of a typical hog farm in Alberta.

Analysis conducted shows that forward contracts (with up to 75% or 100% of contract volume) and routine hedging produced the highest average mean margin per head given specific market conditions (i.e. mostly negative margins in cash market in 2008 to 2012). Essentially using any form of price risk management was better than selling hogs in a cash market in 2008-2012.

Price risk management strategy
Margin, $/ head sold
Mean
Standard deviation
Minimum
Maximum
Cash marketing
-5.24
6.01
-24.12
12.21
Hedging (routine)
2.06
6.01
-16.81
19.52
Selective hedging ($0 target margin)
0.08
6.88
-19.76
20.96
Selective hedging ($5 target margin)
-0.16
6.78
-19.90
20.75
Selective hedging ($10 target margin)
-0.25
6.69
-20.38
18.97
Forward contracts (50%)
-0.47
5.60
-17.92
16.25
Forward contracts (75%)
1.43
5.58
-15.74
18.03
Forward contracts (100%)
3.54
5.61
-13.59
20.01

Participating in HPIP mitigates some price risk. Depending on the timing of purchasing HPIP coverage, and had the insured price been chosen at the 140 $/c kg level, the hog producers would have mitigated around $9-$14 of losses per head in September 2012. In general, producers would have mitigated around $0-$20 of losses per head at the different levels of insured prices.

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For more information about the content of this document, contact Olubukola Oyewumi.
This document is maintained by Shukun Guan.
This information published to the web on May 1, 2014.
Last Reviewed/Revised on February 23, 2017.