“This pricing system will enable more stable feed margins,” says Frans Stortelder, COO of Vion Pork.
The LTP system is part of Good Farming Balance, which was introduced in March 2017. That concept offers three pricing systems:
- Vion weekly quotation;
- Vion price index guarantee (PIG), linked to a basket of international quotations;
- Vion long-term price (LTP), fixed price for a certain period of time.
With the LTP system, Vion is offering a new tool for risk management. The Vion LTP price is fixed for a certain period of time. By making arrangements with feed suppliers about fixing the feed price for that same period, pig farmers can fix their margins for pigs in the pilot.
Historical feed margin
Frans Stortelder: “The Vion LTP price is determined on the basis of the historical feed margin. The Vion LTP price is based on the MAS Index - an analysis model that predicts the feed price - and the average historical feed margin, measured over a 12-year period. The MAS Index is transparent and cannot be influenced, as it is based on the quotations of the futures markets in Chicago and Paris. Vion has developed the LTP calculation model in cooperation with experts in long-term pricing, among whom Prof. Joost Pennings of Wageningen University & Research. Figures from KWIN and Agrovision form the basis of the model.”
Although the LTP price can be calculated for different periods, Vion has opted to launch the pilot for periods of 13 weeks, during which the LTP price is fixed. This is in line with the majority of the contracts Vion has in its markets.
By fixing the LTP for 13-week periods, it matches the usual seasonal pattern in feed margin and the price of pigs; there is a strong correlation between the two, historically speaking. On average, the feed margin in the first 13 weeks of the year is quite low, followed by an increase in Q2 and Q3, with profits usually dropping again in the final quarter. With a fixed price for 13-week periods, the ups and downs in feed margin will be less pronounced than if they were based on the fluctuating weekly price.
The purpose of the Vion LTP price is to eliminate the price risk for pig farmers during the production phase. Combined with a fixed feed price, the Vion LTP price will ensure a more stable feed margin. However, the LTP price in itself does not guarantee the feed margin in individual businesses. As with any other pricing system, a pig farmer's feed margin largely depends on the technical results obtained. Pig farmers may have an above-average feed margin, even at LTP prices, if, for instance, feed conversion is lower or they have a lower mortality rate on the farm.
Getting on board
Closed pig farms can participate in the pilot from week 14. Farms can get on board in weeks 18, 22 and 27. The period of participation in the pilot is at least one year for a fixed part of the pigs supplied: at least 10%, in increments of 10 to no more than 50%. Allard Bakker, project manager Good Farming Balance of Vion Pork: “The pigs supplied as part of the LTP system are not eligible for the Price Index Guarantee (PIG). The two pricing systems are complementary and mutually supportive. It is therefore not possible to register the same pigs for both systems.”
Closed pig farms
The LTP pilot applies to closed farms; the system is not dependent on fluctuating weekly piglet prices. “Based on the experiences during the pilot, we will consider how we can develop the LTP system and apply it to open farms as well,” says Bakker.
In the pilot, Vion seeks to gain experience in managing risks more effectively, together with the pig farmers. “With the LTP pilot, Vion is introducing an innovative pricing instrument, the objective of which is to decrease the price risk in pig farming and, in doing so, realise a more predictable and stable feed margin for pig farmers. For Vion, this will create a basis for making even better agreements with customers in international markets. Boosting our market positions - with the Good Farming Balance concept - is in the interests of both Vion and pig farmers,” explains Frans Stortelder.
February 26, 2018 - Vion Foods