As a pork producer, what are my options to protect my farm against border closure?
Category: Markets | Topic: Market Disruptions
Answered On: September 09, 2020
Answer by: David Derwin, PI Financial
I’ve had this discussion with cattle producers. It’s more of an operational issue, but there are some financial hedging techniques you can still employ to protect against a big drop in hog prices. Keep in mind that a border closure could have a far more negative impact on Canadian hog prices than in the US. Depending on what caused the border closure, it’s possible that Canadian hogs prices drop while US prices rise.
Options trade on the Chicago markets and are linked to US hog prices. So, using an option protection strategy that is based on US hog prices is not a perfect hedge for a Canadian producer. However, it may provide some general price protection in the event hog price disruptions from a border closure.
Here’s a link to a short video that explains a very straightforward option hedging strategy.
Establishing a Floor Price by Buying Put Options
While the video talks about grains, the ideas apply equally to livestock.