Analysis of alternative marketing strategies for slaughter hog producers in Tennessee

Avoiding risk associated with adverse cash price movements and improving overall profit level are assumed objectives for the market hog producer. This research evaluated various marketing strategies for finish and farrow-to-finish hog operations to determine their impact on price risk and profit levels. These strategies were simulated with the use of models to represent the Tennessee finish and farrow-to-finish hog producer's operations during the 1972-79 period. The strategies simulated included variations on cash contracting, futures market hedging, and the typical cash sale. Simulations were also used to evaluate the effectiveness of using production criteria in conjunction with selected marketing strategies as a method of avoiding production during unprofitable periods. The mean and variance of profitability were used as criteria for comparing the effectiveness of the strategies simulated.

The primary results of the simulations showed that selective hedg-i/ ing and selective cash contracting strategies could give larger mean and lower variance of profitability than the full-cash, full-hedge, or full-contract strategies. This would indicate that a producer using the full-cash strategy could increase profits and reduce price risk by switching to one of the more selective hedging or cash contracting strategies, assuming similar production and market conditions to those of the simulation period. Analysis for hogs marketed before 1976 and after 1975 separately, showed no substantial changes in the ranking of the marketing strategies between the two periods. The use of cash and futures market price signals as criteria for production did not have a positive impact on mean profit for the hog finishing operation.