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Sources of Risk for Hog Producers and Their Responses
Amy Peiter, George Patrick, Alan Baquet, Keith Coble and Tom Knight
What risks do hog producers face? How do hog producers respond to risk?
The current risk environment is a challenging one for hog producers. Changes in the industry have forced producers to reevaluate their business and management practices. Risk management is receiving increased attention. However, there is limited information regarding hog producers' perceptions of risks they face and the effectiveness of risk management strategies. This paper examines these issues drawing on data obtained from a survey of hog producers in Indiana and Nebraska supported by a grant from the USDA's risk management education initiative.
Survey Procedures
In the spring of 2000, hog producers in Indiana and Nebraska were surveyed as part of a risk management education study. The sample of producers was a stratified random sample of producers. The percentage of producers included in the sample was higher for producers with larger hog operations to obtain sufficient representation of large-scale producers. Operations involved only in the ownership of hogs, rather than direct hog production, were excluded. Producers selected for the study were initially mailed a questionnaire with a cover letter. A second questionnaire was sent to non-respondents about three weeks after the initial mailing. Finally, telephone calls were made to the non-respondents to solicit their participation. A substantial number of operations indicated that they no longer were involved in hog production. Excluding those operations resulted in a response rate of about 27%. The number and size, measured as the larger of the number of hogs owned or hogs on the operation, of the 630 respondents are indicated in Table 1.
Producers' Perceptions of Sources of Risk
Producers in the sample were asked rate sources of risk in terms of their potential to affect the operation's income from hogs on a 5-point scale (1=low, 5=high). The distribution of responses, average rating and whether there are statistically significant differences by size of operation or by state are indicated in Table 2. The top-rated sources of risk are summarized in Figure 1. Of the 14 sources of risk considered, producers perceived hog price variability, with a mean rating of 4.28, to have the greatest effect on their hog operation's income. There was no statistically significant difference by size of operation; but, as indicated by the "IN higher" in the state effect column, Indiana producers rated price variability significantly higher than Nebraska producers. Other risk sources in Figure 1 which were rated moderately high were changes in environmental regulations, 3.92; disease in hogs, 3.90; market access (having a place to sell hogs), 3.71; and changes in input costs, 3.66. Environmental regulations have become prevalent in the production of hogs, with changes necessitating expenditures to ensure hog operations are in compliance. In Table 2, the "S larger" in the size effect column indicates that larger scale producers were more concerned about the environmental regulations than smaller hog operations and Indiana producers were more concerned than Nebraska producers. Disease may have a major effect on an operation's sole source of income as some diseases may require depopulation of the operation. Thus, it is understandable that producers rated disease as one of the top sources of risk. Again, larger scale producers rated disease higher than smaller scale producers, but there was no difference between states. Size and location did not affect the ratings of market access or input costs. Larger scale producers gave a higher rating to changes in the arrangements with purchasers of their production, but there was no difference between states. Size and location did not affect the 3.29 rating of variability in hog performance.
The other sources of risk all rated less than 3.0 on the 5-point scale. The possibility of a contractor failing to fulfill the terms of a contract rated the lowest at 2.11. This low rating probably reflects the small percentage, about 12%, of producers involved with production contracts. However, larger scale producers and those in Nebraska gave this a significantly higher rating. Labor and personnel concerns also rated quite low at 2.34, with larger producers giving a higher rating. Larger scale producers and producers in Indiana gave higher ratings to the possibility of environmental accidents and the changes in social or community acceptance of hogs than smaller scale producers or producers in Nebraska.
Producers' Perceptions of Effectiveness of Risk Management Strategies
Producers were also asked to rate the effectiveness, on a 5-point scale (1=low, 5=high), of 13 management strategies in reducing risk in their hog operation. The distribution of responses, average rating and whether there are differences by size or location of the operation are summarized in Table 3. Producers rated two risk management strategies as highly effective (over 4.0), five risk management strategies were rated moderately (3.0 _ 3.9) effective, and six strategies were rated as relatively ineffective (less than 3.0).
The two strategies rated highly effective were maintaining good herd health and being a low-cost producer, with average ratings of 4.26 and 4.17, respectively. These strategies relate directly with the top sources of risks affecting the operation, disease in hogs and input costs. Location did not affect these ratings, but larger scale producers gave greater importance to being a low-cost producer. Other top risk management strategies shown in Figure 2 and their mean ratings were maintaining financial/credit reserves, 3.62; diversifying farming enterprises, 3.51; and having non-farm investments, 3.23. The strategies of being involved in value-added pork production, 3.09, and contracting feed requirements, 3.05, were the only other strategies rated over 3.0. Smaller hog operations gave greater importance to diversifying farming enterprises and having off-farm investments than larger scale operations. Larger scale producers gave higher ratings to maintaining credit/financial reserves and to contracting purchased feed requirements. Location affected only the Indiana producers' ratings for maintaining reserves.
Those strategies rated as relatively unimportant (under 3.0) were hedging hog production with futures and options, 2.87; use of marketing contracts with packers, 2.82; having off-farm employment, 2.64; producing pork under production contracts, 2.54; specializing in one phase of hog production, 2.51; and specializing in hogs only, 2.47. Location did not have an impact on these ratings. Larger scale producers gave higher ratings to specialization in hogs and use of market contracts with a packer than smaller scale producers.
Conclusions
Relatively little information is available regarding hog producers' perceptions of the risks which they face and the effectiveness of various risk management strategies. Given the extremely low prices faced by producers in 1998 and the variability of prices, it is not surprising that hog price variability was the top-rated source of risk. Environmental regulations, disease in hogs and market access were other highly rated sources of risk. Use of production contracts by producers responding to the survey was quite limited and the possibility of a contractor failing to fulfill the terms of the contract was the lowest rated source of risk. Large-scale hog producers tended to rate several of the sources of risk higher than the smaller scale producers. There were similar results for location, with Indiana producers rating several sources of risk higher than Nebraska producers. Several of these higher ratings of sources of risk appear related to Indiana's greater population density and the potential adverse impact on hog producers.
Of the risk management strategies, only maintaining herd health and being a low-cost producer were rated above 4.0. Both directly relate to highly rated sources of risk. Several of the strategies rated as effective were financially related, indicating that producers perceive financial management as an important aspect of their operation. Use of a market contract with a packer and producing pork under a production contract were rated at 2.87 and 2.54, respectively. These ratings put them among the strategies which producers considered least effective in reducing risk.
Overall, the results of this survey are not surprising. Results are consistent with the views of many producers and others involved in the hog industry. However, confirmation of these opinions and understanding of differences among producers provides insights which can aid those working with hog producers to be more effective.
Amy Peiter is a Farm Loan Officer, in the USDA, Farm Service Agency at Macon, MO and former graduate student at Purdue University; George Patrick is a Professor in the Department of Agricultural Economics at Purdue University; Alan Baquet is an Associate Vice Chancellor in the Institute of Agriculture and Natural Resources at University of Nebraska; Keith Coble is an Associate Professor of Agricultural Economics at Mississippi State University; and Tom Knight is a Professor in the Department of Agricultural and Applied Economics at Texas Tech University.
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