What’s the plan? · – Regional weather and natural occurrences affecting ... Not comfortable...
Transcript of What’s the plan? · – Regional weather and natural occurrences affecting ... Not comfortable...
What’s the plan? PAT JOYCE, CEO/CFO
Disclaimer The information contained in this presentation is
intended solely for informational purposes only. Any opinions contained in this presentation are those of the presenter and not those of the Kerber Companies. The information is intended to be reliable but in no way guaranteed. The information presented is hypothetical or simulated and has inherent limitations. No representation is being made that the reader of this information will or is likely to achieve profits or losses similar to what is presented.
IF ASKED, “HOW DO YOU MANAGE RISK FOR YOUR BUSINESS?” - WHAT IS YOUR RESPONSE?
•DO YOU BELIEVE THERE IS A NEED TO MANAGE RISK?
•DO YOU HAVE A CLEAR RESPONSE?
•DO YOU HAVE A DOCUMENTED PLAN SUMMARIZING HOW A STRATEGY IS DESIGNED AND EXECUTED?
•DOES YOUR PLAN PROVIDE FOR REPORTING NEEDS?
•DOES YOUR PLAN PROVIDE A PLATFORM OF ACCOUNTABILITY?
•COULD YOU FORWARD A COPY OF YOUR PLAN (IF YOU WERE SO INCLINED TO SHARE)?
Opening Comments:
Overview of discussion
• What is risk management?
• Is risk management essential?
• “I am ready to define a plan, but…”
• How do I get started? …a brief example.
• Execution: science or art?
• Summarizing “Elements of Change”
• Related risk considerations
Risk Management: What is it?
“…the identification, assessment, and
prioritization of risks followed by coordinated
and economical application of resources to
minimize, monitor, and control the probability
and/or impact of unfortunate events or to
maximize the realization of opportunities.” Wikipedia
Wikipedia goes on to say…
• “Methods, definitions and goals vary widely…”
• “The strategies to manage risk include
transferring the risk to another party, avoiding
the risk, reducing the negative effect of the risk,
and accepting some or all of the consequences
of a particular risk.”
…please go on, Wikipedia.
“Certain aspects of many of the risk management
standards have come under criticism for having
no measurable improvement on risk even
though the confidence in estimates and
decisions increase.“
An interesting statement to find in Wikipedia – a profound statement
relative to the dilemma when establishing a plan.
Volatility
$-
$20
$40
$60
$80
$100
$120
Lean Hog Market $-
$1
$2
$3
$4
$5
$6
$7
$8
$9
Corn Market
$-
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
1/1
0/1
980
1/1
0/1
982
1/1
0/1
984
1/1
0/1
986
1/1
0/1
988
1/1
0/1
990
1/1
0/1
992
1/1
0/1
994
1/1
0/1
996
1/1
0/1
998
1/1
0/2
000
1/1
0/2
002
1/1
0/2
004
1/1
0/2
006
1/1
0/2
008
1/1
0/2
010
Soybean Meal Market
If you study futurists, 90% of the time
they are wrong…
At the end of the day, the market will win.
Is managing risk essential?
Managing risk is essential! • Volatility over the past 5 years has increased to
unprecedented levels. Overriding factors: – Domestic and foreign political policy
– Domestic and foreign economic policy
– Changing global supply and demand balance
– Regional weather and natural occurrences affecting supply and logistics
• The equity and working capital necessary to operate the same volume of business has nearly doubled.
• MORE IS AT STAKE!: greater potential for profit, greater risk of substantial loss
There is more at stake than your
equity. It goes beyond the assets…
• Owners: emotional connection to a business
that has been built for years.
• Employees: livelihood, expectations that their
daily efforts contribute to a successful, ongoing
business.
• Lenders/Investors: trust and credibility
Why does the emotion of risk management
trump the other emotions tied to our
business?
The notion of emotion.
• Risk management should exist to take emotion
out of the equation and allow leadership to
focus on people, operations, vision, re-
investment, etc.
When do good decisions get made?
…when acting with confidence?
…when reacting to fear?
Margin Management
• Margin: “a measure of profitability”
• Risk management, if used to manage margin in
a proactive and disciplined manner, can reduce
the emotional investment tied to risk.
• Emotion is reactive…
“I am ready…but”
Top reasons a plan is not implemented:
1. Conviction that the right plan has been formulated.
2. “We are in uncharted territory.”
3. The desired profitability doesn’t exist (“greed”).
4. Herd mentality (what is everybody else doing?).
5. Financial limitations.
6. Not ready for accountability.
7. Not comfortable with tools to manage risk: futures
contracts, options, forward pricing, etc.
8. Not comfortable managing margin that far out in
advance.
Starting a plan… 1. Define margin.
– LH – Corn – SBM = Margin
– LH – Corn – SBM – Other Growing Costs = Margin
NOTE: the market, in general, does not care about your other variable or fixed costs. You may choose to include them for reference purposes.
2. Study history. – Evaluate margin opportunities for specific periods
of time.
– Reconcile how history has performed to your expectations. Be realistic.
Starting a plan… (Cont.) 3. Test a plan against history
– Run scenarios for entry point
• The entry point is key to understanding how conservative or aggressive you may want to be
– A conservative plan will have a higher success rate at limiting substantial loss, but reduces potential for larger gains
– An aggressive plan will allow for more profit when available, but will also increase the risk of substantial loss when markets do not allow a minimum margin if the entry point is too high.
– Run scenarios for incremental margin targets
• The incremental target is the amount of margin you desire to trigger execution beyond your entry point.
• Considerations to selecting incremental targets should be consistent with the desired outcome
– Conservative: lower risk of loss
– Aggressive: allow opportunity for more profit
$(1.19) $(0.57) $(0.48) $0.40 $0.90 $1.07 $1.14 $0.26 $0.92 $0.73 $0.33 $0.32 $(1.91) $(2.85) $(3.23)
$(5.40)
$(30)
$(20)
$(10)
$-
$10
$20
$30
$100 $101 $102 $103 $104 $105 $106 $107 $108 $109 $110 $111 $112 $113 $114 $115
2011 2010 2009 2008 2007 2006 2005 Average
Entry Point Scenarios
Studying a specific plan…
DEC lean hog period: Oct.15-Dec.15
For the example above, margin was defined as lean hog price less corn/sbm costs for each year (on a wean-to-finish basis).
Therefore, each entry point represents a starting point of a specific plan. Although $105-$106 entry points resulted in the highest
average, $108 is used for this study as it is performed very well and is more aggressive. Incremental targets were established at
every $2.50 over the entry point requiring an additional 20% of coverage at each target until 100% covered.
Estimated Profit / Head
…more data from the study
Averages: 1YR 2YR 3YR 4YR 5YR 6YR 7YR
Crush $ (0.11) $ (11.66) $ (16.92) $ (19.25) $ (22.09) $ (20.15) $ (16.57)
Plan Results $ 4.62 $ 0.27 $ 6.97 $ (1.33) $ 0.08 $ 0.02 $ 0.92
Plan vs. Crush $ 4.73 $ 11.93 $ 23.89 $ 17.92 $ 22.16 $ 20.17 $ 17.49
To review: •Calculated lean hog (LH) revenue for each of the last 7 years for the DEC lean hog period.
•Calculated corn and sbm (C/SBM) costs based on today’s inclusions in the diet and applied to
each of the last 7 years’ markets for the same period (i.e. DEC).
•LH – C/SBM = Crush (or Margin)
•Subtracted all other costs (other feed costs, pig cost, variable and fixed costs) to summarize on a
“per head” basis (for reference purposes only).
NOTE: utilizing today’s non-corn/sbm grow-out costs vs. prior year crush may exaggerate prior
losses actually realized if today’s costs are higher (i.e. CWG at $0.53/lb today vs. under $0.30/lb
historically); however, applying the plan design to the same cost structure illustrates how effective
the plan would have been using today’s cost structure.
Starting a plan… (Cont.)
4. Define plan.
– Approve margin targets
• Finalize an entry point and incremental targets
• In addition to the example, entry points can also be
defined based on:
– Percentile of margin vs. history
– Profit level
– Return on Investment
Starting a plan… (Cont.)
5. Execute Plan
– Utilize tools to track margin for the specific
period(s) daily.
– Execute strategy to secure desired quantities and
prices of inputs and output.
LH – C/SBM
Margin/HD Target %
Tier 1 $ 108.20 20%
Tier 2 $ 110.70 20%
Tier 3 $ 113.20 20%
Tier 4 $ 115.70 20%
Tier 5 $ 118.20 20%
Planned 100%
NOTE: If the DEC market
provides for greater than $118 of
margin, then the plan would have
achieved a minimum of a $113
average.
Crush (LH-C/SBM): $113
Pig and all other costs $105
Max. Net Profit $ 8
Executing the plan…
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
$60.00
$70.00
$80.00
$90.00
$100.00
$110.00
$120.00
$130.00
Targ
et
% (
Pla
n)
LH
– C
/SB
M C
rush
Market & Plan Summary
LHCS Crush Cum Target %
Executing the plan…
$100.00
$105.00
$110.00
$115.00
$120.00
$125.00
$130.00
$135.00
$140.00
$145.00
$150.00
$155.00
$160.00
$165.00
$170.00
$175.00
$180.00
$185.00
$190.00
6/15/2010 7/27/2010 9/7/2010 10/19/2010 11/30/2010 1/11/2011 2/22/2011 4/5/2011 5/17/2011
Lean Hogs Plan vs. Actual
LH Plan LH Actual LH DEC.11
Executing the plan…
$3.00
$3.20
$3.40
$3.60
$3.80
$4.00
$4.20
$4.40
$4.60
$4.80
$5.00
$5.20
$5.40
$5.60
$5.80
$6.00
$6.20
$6.40
$6.60
$6.80
$7.00
$7.20
$7.40
6/15/2010 7/27/2010 9/7/2010 10/19/2010 11/30/2010 1/11/2011 2/22/2011 4/5/2011 5/17/2011
Corn Plan vs. Actual
Corn Plan Corn Actual
Executing the plan…
$220.00
$230.00
$240.00
$250.00
$260.00
$270.00
$280.00
$290.00
$300.00
$310.00
$320.00
$330.00
$340.00
$350.00
$360.00
$370.00
$380.00
6/15/2010 7/27/2010 9/7/2010 10/19/2010 11/30/2010 1/11/2011 2/22/2011 4/5/2011 5/17/2011
SBM Plan vs. Actual
SBM Plan SBM Actual
6. Monitoring the Plan…
Performance: Per Head Est. Total
Plan vs. Crush $ 3.88 $ 31,026
Actual vs. Crush $ (1.70) $ (13,608)
Actual vs. Plan $ (5.58) $ (44,634)
Breakdown: Plan vs. Crush Act. Vs. Crush Act. Vs. Plan
Lean Hogs $ (1.46) $ (1.70) $ (0.24)
Corn $ 5.13 $ - $ (5.13)
SBM $ 0.20 $ - $ (0.20)
TOTAL $ 3.88 $ (1.70) $ (5.58)
Measures the
performance of the plan
vs. the market and vs.
what got executed.
Shows the components
of the managed margin.
Calculated gross impact on
number of head expected to
market (e.g. 8000hd).
Execution: Science or Art? • In an industry so dominated by science and
information, is it feasible to think that managing risk should be an “art”? How do you hold “art” accountable?
• The journey to accountability for risk management – Uncertainty only of timing for each organization
– Not direction
• For some, this line of thinking changes the business model: – a redirection of working capital to risk management,
– a redirection of resources and technology advancements to administrate business
A fundamental shift in
how risk is managed.
Element of Change Today Future
Price/Margin
Management
“Talk margin”, but do not
necessarily “walk
margin”.
Defined, disciplined,
information-based,
aligned with
organizational objectives
Basis Risk Management What is that? Value-Added Strategies
Reporting Accounting needs only Daily position and
monitoring
Forecasting/Projecting Fragmented / Time
Intense
Efficient / Real-time
Accountability Difficult to define
expectations / evaluate
decisions
Review and document
variances from plan and
results of decisions.
Execution Reactive Proactive
Don’t forget…
• Are you planning for physical procurement of inputs
if you are solely managing price risk with paper?
• Consider how much of your system’s production
you are comfortable exposing to risk management.
– Does your flow have the potential to flex?
– Are there concentration risks that could impact a high %
of your production?
• Basis risk can be managed; however, if you are not
disciplined in managing price risk, you may not be
ready to manage basis risk.
Don’t forget…
• Disease and global threats are playing a greater
role not only in your profitability, but also the value
of your existing inventory and assets.
• Your lender needs to understand your plan. A well
executed plan may require considerable capital.
Your lender is a supporter of protecting collateral
value.
• Someday you will want to (or need to) transition
risk management responsibilities. Will you cross
your fingers and say “good luck”, or will you lay a
foundation of disciplined performance?
Parting thoughts: • You are responsible to someone for your performance in this area.
It may be your CFO or CEO, a committee, a Board, or your family.
• There is greater business risk in retaining the status quo than moving forward with a disciplined management risk plan.
• It’s not about what outcomes need to change, it is more about what behaviors need to change or be managed.
• Guidelines, plans, or policy aren’t necessary for the broker or trader. They are necessary for the CEO, CFO, and the system to allow planning and proper allocation of time and resources.
• Imagine your answer to the question, “Do you have a plan?” Following is an example response.
STAKE HOLDER:
Do you have a plan? (Cont.) •YES!!!
•OUR RISK MANAGEMENT PLAN OPERATES ON A DISCIPLINED APPROACH TO MANAGE THE QUANTITIES AND PRICE OF INPUTS RELATIVE TO SELLING OPPORTUNITIES IN A WELL-BALANCED, MARGIN FRAMEWORK. QUANTITY AND PRICE TARGETS ARE SET TO ACHIEVE DESIRED RESULTS AS CALCULATED USING OUR KNOWN COST STRUCTURE AS COMPARED TO MARGINS FUTURE MARKETS ARE ALLOWING. ENTRY POINTS AND TARGETS ARE SET BASED ON HISTORICAL AVERAGES FOR DEFINED TIME PERIODS IN AN ATTEMPT TO OPTIMIZE MARGIN AND MINIMIZE RISK OF LOSS. WE MANAGE PRICE/MARGIN RISK FIRST – THEN WE WORK TO ADD VALUE BY MANAGING BASIS RISK.
•OUR PLAN IS MANAGED AGGRESSIVELY THROUGH DAILY REPORTING OF CURRENT POSITIONS VERSES THE PLAN. DEVIATIONS FROM THE PLAN ARE ALLOWED, HOWEVER, SUCH DEVIATIONS MUST BE DOCUMENTED AND A NEW PLAN ESTABLISHED. WE ALLOW FOR DEVIATIONS AS FACTORS SOMETIMES EXIST THAT MAY NOT BE PRESENT HISTORICALLY. HOWEVER, WE ALWAYS TRACK THE PERFORMANCE OF OUR PLAN DEVIATIONS VS. THE ORIGINAL PLAN.
STAKE HOLDER:
Do you have a plan? (Cont.) •THE PLAN IS DESIGNED BY A TEAM OF OUR FINANCIAL AND OPERATIONAL
MANAGERS AND IS APPROVED BY THE CEO AND BOARD IN AN EFFORT TO
MEET ORGANIZATIONAL GOALS. THE OFFICER OF OUR COMPANY THAT IS
DESIGNATED THE RESPONSIBILITY OF MANAGING RISK IS EVALUATED ON
ACHIEVING THE PLAN’S RESULTS AS MARKET OPPORTUNITIES ALIGN WITH
PLAN TARGETS.
•BECAUSE THE PLAN IS CLEARLY DEFINED AND MONITORED, THE EXECUTION
OF THE PLAN IS EASILY ABLE TO BE DELEGATED OR TRANSITIONED AS
NECESSARY TO PROFESSIONALS INTERNALLY OR EXTERNALLY.
•WE HAVE INTEGRATED THE TRANSACTIONS CREATED THROUGH OUR RISK
MANAGEMENT PLAN WITH OUR ACCOUNTING AND FORECASTING SYSTEMS.
THIS IS AN INTEGRAL STEP TO BEING ABLE TO EVALUATE THE IMPACT OF
VOLATILE MARKETS ON OUR BUSINESS, FORECAST EFFICIENTLY AND
ACCURATELY, AND PLAN AND COMMUNICATE EFFECTIVELY WITH INTERNAL
AND EXTERNAL STAKEHOLDERS IN A TIMELY MANNER.