What benchmarking information is needed for swine expansion?What benchmarking information is needed for swine expansion?
Without a doubt, I have never seen healthier balance sheets, the levels of working capital and the average production system in place today.
June 21, 2016
I have been working with AgStar Financial Services ACA for 19 years, and when I started in 1997, I saw tremendous growth over a very short period of time. The realization of 1998 quickly taught me a lesson in the swine industry, that whatever profits it gives, it can quickly take back.
After 1998, it took most owners a few years to build their balance sheets back to respectable levels and in 2007, I thought I saw the healthiest balance sheets I had ever seen. That was until now!
Last week I had the privilege to speak at the National Pork Board’s annual Management Conference on this topic. Without a doubt, I have never seen healthier balance sheets, the levels of working capital and the average production system in place today.
A couple of benchmarks that I like to look at are the owners’ equity percent and working capital per sow. From an equity standpoint, the average producer has over 70% equity in their operations today. Even more impressive, is the working capital per sow.
For this number, we use the number of pigs marketed divided by a reasonable number of pigs a sow would produce to come up with an equivalent number of sow for each operation (X pigs marketed ÷ piglets produced per sow) = (sow base). Then you simply take your working capital and divide it by your sow base (Working capital ÷ sow base). As a target, we would like to see this target be over $600 per sow. Today the average number we see is over $1,300 per sow. There is a tremendous amount of working capital today for most operations.
My recommendation to anyone looking to expand is make sure you maintain a minimum $600 per sow working capital after you expand. Now is the time to structure your balance sheets to maintain as much working capital as possible. Interest rates are low and balance sheets are very strong which gives you more leverage with your lender today. Looking back in 2008 and 2009 we all remember on how that can change over in a hurry.
With the meeting by the Federal Reserve last week, Fed Chair Janet Yellen acknowledged there needs to be more signals of economic growth before raising interest rates. What does this mean for your operation both long and short term? Even though the Fed didn’t raise rates during their June meeting, they are still committed to a couple of increases yet in 2016. The next two meetings will be at the end of July and September.
The decision was deferred at this meeting for a couple of reasons. First, with a British vote looming on the uncertainty of exiting the European Union did weigh into the decision. If Britain decides to leave the EU, it will create unknown consequences for global financial markets and create possible economic concerns for other EU member countries and trading partners. If you remember, for the first time in nine years the Fed did raise the Fed Funds rate last December by 25 basis points. However, since that time long-term rates have continued to drop in response to market conditions. Secondly, with the growth rate slightly lower than 2% (the Feds target), any increase could restrict maintaining growth at targeted rates.
As for what is the best decision to make for your operation on interest rates, I believe that depends on several variables. With rates near historic lows again, looking at a restructure to lock and mitigate interest rate risk is worth considering. The first analysis I do when looking at a client’s current loan structure is to understand their cash flow needs. It is vital long term for all operations to have a payment structure which is reasonable and competitive on a per pig basis. Second, if your rates are within reason and you are not growing your business you might want to just keep your loan structure as it is.
For example, if you have $1,200 debt per sow with a fixed rate amortized over 10 years, a 0.05% drop in rate will only reduce your cost by $0.14 per pig assuming 26 pigs per sow per year. However, if you are looking at expanding your operation and currently have an accelerated debt structure, visit with your loan officer to determine your best payment structure to keep you competitive in any economic environment.
Malakowsky has over 19 years of experience with AgStar Financial Services. For more insights from Malakowsky and the AgStar swine team, including their weekly video Hog Blog, visit AgStar.com. If you’d like more information on AgStar’s Margin Manager Tool check it out at AgStar.com/MarginManager.
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