The harvest is coming along fast in the upper Midwest with corn and soybean yields all across the board. In southern Minnesota where I live, farmers are pleasantly surprised with near normal yields. In other parts of the country, that is not the case due to drought conditions that persisted across the Corn Belt.
The USDA has put the corn crop at 10.779 billion bushels, pushing the December contract to a high of $8.49/bu. As I write this, the December contract has fallen approximately $1.00 off the intraday contract high in August. Even with the price of corn falling, pork producers are still staring at negative margins of almost $10/head, on average, for the next 12 months, with the negative margin peaking at a $35/head loss in December. The important thing to remember when discussing your options with your lender is to provide a cash flow that will reflect the “burn rate” of cash for your operation through April 2013.
Understanding Burn Rate
The burn rate is the amount of cash necessary to continue operations uninterrupted. I have seen several projections from pork producers that have mitigated the excessive losses we are looking at today based on risk management decisions they made over the past several months.
Some of these plans have evolved over time. They may have had futures positions on corn that were converted to option positions recently. In that case, the cash taken off the table is already in your cash flow, and you will need to buy the corn you need at current market prices. As a lender, I can look at a projection that could potentially show a profit or smaller loss for a period of time, yet the revolving line of credit use will increase based on this type of management decision. This may be the case with your operation, too.
Here’s another scenario: You may also be on the open market with hogs and have not procured any feed. Either way, you will be looking at a negative cash flow over the next several months. With the potential $35/head losses this fall, it would be prudent to start working with your lender today to provide updated cash flows so you can develop a workable plan. This exercise will also help you make the proper management decisions regarding the optimum weight to market your animals.
With the sea of red ink coming over the next six months, the second quarter for 2013 appears more promising with margins approaching $15 to $20/head in June through August. The difficult decision will be – if you are on the open market today, will you be willing to mitigate some risk going forward by locking in a profit? This is an independent decision each producer will have to make. However, with the volatility in the markets today, can you afford to not mitigate some risk?
It wasn’t that long ago that this industry was standing on the edge of the cliff. I vividly remember in August 2009, we could not forecast profits for the next 12 months and most producers’ working capital was rapidly depleting.
The question for everyone in the pork industry is – what will be the cause of the next downturn? We have gone through the hard knocks of the H1N1 influenza virus and, now, have followed that up three years later with a drought that pushed input prices to record highs. Are we assured that the Corn Belt will have enough moisture over the winter to regenerate and produce a trend line yield? These are questions that only you can answer. Your tolerance for risk will drive your management decisions.
More industry insights are presented in our weekly Hog Blog at www.agstar.com/swine.