5 Steps for Developing a Risk Management Plan
“If you fail to plan, you are planning to fail” –Benjamin Franklin
Earlier this month we had the opportunity to attend the National Pork Industry Conference (NPIC) in Wisconsin Dells. As usual, it was another well-run event and an opportunity to interact with pork sector participants from around the country. A common theme in discussions with producers and allied industry stakeholders was the concept of risk management. Risk management is an approach to managing “pure” risk. While our column often focuses on price and margin risk management, it is true pig farmers face a myriad of risks to navigate. These challenges involve herd health, dealing with Mother Nature, and farmworker safety, among others. Regardless of the type of risk we are trying to manage, a sound strategic planning approach generally involves this 5-step strategy:
- Risk Identification
- Risk Analysis
- Designing the Risk Management Strategy
- Implementation of the Strategy
- Strategy Review and Modification
Managing a business requires leadership and decision making. Sometimes the results of decisions can be emotional. By having a sound plan in place ahead of periods of distress, risk managers can make more objective and rational decisions over time. As such, they can remove some of that emotion from the equation in the process.
Building a Price Risk Management Strategy
At CIH, we are in the world of price and margin risk management. When working in the commodities space, some may confuse the idea of hedging, or reducing risk, with the concept of speculation, or the introduction of risk to make a profit. This misconception sometimes creates unrealistic expectations on how involvement in insurance, futures, or options should perform.
In our realm, a hedge simply involves using an instrument to reduce risk exposure(s) by taking an opposite position in a related asset. For example, pork producers have a natural risk to lower prices on the pigs they will sell in the future. If the price of lean hogs falls, the farmer will be worse off financially. To mitigate, or hedge, this risk, the farmer may wish to use an instrument that will gain in value if the market falls to offset the expected drop in value of pigs at delivery. The instrument(s) a producer chooses to use to hedge this risk will be determined by the individual producers’ cash flow needs, costs of production, profit objectives, and bias about the market.
As business owners, the objective is generally to earn consistent and reliable profits while growing their business to bring the next generation into the fold. While every farmer and operation are unique, there are commonalities among pork producers when it comes to applying the 5-step strategy to identify and manage risk.
1. Risk Identification
Identifying and quantifying risk exposure is the first step in a sound risk management strategy. The most straightforward risk, as outlined above, is the risk to lower prices on hog sales. To produce those pigs, the farmer faces risk to higher prices on his or her inputs.
Lean hogs, corn, and soybean meal have active and liquid futures and options markets to assist hedgers in offsetting risk. Because these futures contracts tend to be highly correlated with the cash price the producer will receive or pay, we can use them as benchmarks for cash flows down the road. Holding certain fixed cost assumptions static and using futures market prices to represent both input costs and revenue values together, forward profit margin opportunities can be identified in deferred time periods to indicate how profitability is projected to change from one period to the next.
2. Risk Analysis
The next question that must be answered is whether these projected margins are “good” or “bad”. While this is a difficult question to answer, we can use a more objective approach to determine where the opportunity ranks from a historical perspective. One such tool to examine margins is looking at percentiles. The open market margin percentile indicates what percent of the time (in the past 10 years, for example) margins have been below what the market is currently offering. Below is a screenshot of Q3 2025 margins on a demonstration hog farm.
Figure 1. Q3 2025 Percentiles
With a 90th percentile margin opportunity, a swine producer might be more inclined to secure their profitability with contracting choices that offer a higher degree of protection against potential margin deterioration. They may also choose to execute these strategies on a larger share of their production for that period. By contrast, if the margin opportunity ranks at only the 50th percentile of historical profitability, the producer may choose a more flexible approach to managing their risk on less production if they choose to do anything at all.
3. Designing the Risk Management Strategy
Once risk has been identified and quantified, it is necessary to develop a plan of attack known as a margin management plan. While a margin management plan cannot promise that you will “hit the highs” or “catch the lows,” it can bring much more structure and objectivity to the decision-making process. The plan oftentimes outlines the goals and objectives of the organization, profitability targets, and tools to be used to achieve these targets. Below is a chart of historical Q3 margins for a demonstration operation over the past decade.
Figure 2. Q3 Historical Margins
As you can see, margins often move and those movements can be volatile. It is important to remember margins could turn to lower levels based on one of three scenarios:
- Feed costs increase more than hog prices
- Hog prices fall more than feed prices
- A combination of lower hogs and higher feed prices
For this reason, margins are often the trigger for risk offset rather than nominal price levels of either individual leg. Regardless of the simplicity or complexity of the plan, it serves as a roadmap on how to arrive at the farm’s goals.
4. Implementation of the Strategy
Once a plan is developed, it is time for implementation. Consistent and periodic check-ins, whether daily or weekly, to ensure opportunities to protect favorable margin levels (or minimize losses) are not missed are crucial to ensure the gameplan is used effectively. Margin risk management is not a “set it and forget it” endeavor. Implementation not only involves initiating coverage, but also involves making adjustments to coverage over time as margins and price levels move.
5. Strategy Review and Modification
As production expectations, global markets, trade flows, and geopolitical regimes change, it is prudent to periodically review the margin management policy to ensure it remains applicable in today’s environment. A margin management policy is a living, breathing document and should be reviewed at least annually to ensure it remains valid in today’s environment.
Farmers put a lot of care and attention into their operation. Similar attention should be paid to securing forward profitability to continue operating successfully into the future. Mike Tyson once said, “Everyone has a plan until they get punched in the mouth”. While he was referring to a boxing match, the same is true in the risk management world. Having a gameplan to lean on in times of distress can help successfully navigate difficult periods. Contact CIH Hog Team to learn more about the tools available to help pork producers take control of their bottom line.
