With 2014 year end financials fully wrapped up, pork producers across the country are finding themselves in the best financial position since 2007. In fact, this is the best position some producers have experienced in the entire history of their family farms. With record levels of working capital and minimal balances on revolving lines of credit, the industry is eager to explore expansion as we head into what is anticipated to be an environment of low feed costs.
Everyone engaged in the swine industry is clearly aware of the extreme swing in profitability that occurred over the past 12 months. The end of the first quarter in 2014 had cash hogs trading at $125.75 per hundredweight supported by a $132.58 per hundredweight carcass cutout. For producers who had hogs without any risk management positions in place, the market was presenting the opportunity to lock-in an average of $56 per head over the next 12 months.
A short year later, we have cash hogs trading at $54.92 and a cutout at $65.36. We all realize that these prices are less than half of what we were receiving a year ago. The opportunity to lock-in profits at the end of the first quarter in 2015 wasn’t possible with crush margins forecasting a $2-per-head loss over the next 12 months.
The industry continues to face challenges with slaughter up 6% over a year ago and weights only recently falling below 2014 levels. This again leads to concern about slaughter capacity, something not talked about over the past 18 months as the industry dealt with the porcine epidemic diarrhea virus. The West Coast ports are open again, but the strong U.S. dollar continues to create challenges for U.S. pork exports. The potential effect of the avian influenza continues to be an unknown. The export challenges the poultry industry face could place additional competition in meat cases across the United States.
Preparing balance sheets for growth
Pork producers across the country are fully aware of issues that could significantly impact their bottom line and how losses impact their balance sheets. While concerned, many farms still have long-term goals to grow their operations to provide opportunities for the next generation returning to the farm. In an environment like this, it is especially important to stress test the balance sheet and assess where working capital is positioned after a potential expansion.
As producers updated their cash flow projections and revisited their risk management coverage levels after year-end, a common theme emerged. Farmers are eager to rebalance their balance sheets to maximize the liquidity that their asset base can support in times of need. Several producers have experienced incremental growth without needing lender financing. Others have made significant progress in paying down debt. In extremely profitable environments, it is common to use a higher amount of cash and/or operating loan proceeds to finance capital improvements rather than using long-term financing that mirrors the expected useful life of the asset.
It is important that the balance sheet is fully balanced. Beyond being balanced in terms of assets, liabilities and owners’ equity, it is important to ensure that current, intermediate and long-term assets are funded by commensurate levels of current, intermediate and long-term liabilities with the balance capitalized by net worth. The interest rate environment continues to provide great opportunities to move debt to the appropriate categories. At operations with little or no debt, conversations often focus on establishing appropriate levels of available commitment on revolving loans to ensure sufficient funds will be available when needed in the future.
It’s best to position the balance sheet and loan structure for flexibility into the future now. Many producers we work with appreciate the ability to focus on managing their businesses rather than working through new credit requests with their lenders when they have capital needs in the more challenge times.
Timmerman is a senior financial services executive for AgStar Financial Services. For more insights from Timmerman and the AgStar Swine Team, including their weekly video Hog Blog, visit AgStarEdge.com.