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Consultants: Consultants Come Of Age In The Hog Business

Tom Pitstick is a strong believer in bringing in outside consultants before making changes in his hog operation. So, four years ago as he began entertaining thoughts of doubling his sow herd, outside specialists were called in.The plan was to expand his Fairborn, OH, operation to 800 sows. He's more convinced than ever that the consultants he hired during the expansion was money well spent."We knew

Tom Pitstick is a strong believer in bringing in outside consultants before making changes in his hog operation. So, four years ago as he began entertaining thoughts of doubling his sow herd, outside specialists were called in.

The plan was to expand his Fairborn, OH, operation to 800 sows. He's more convinced than ever that the consultants he hired during the expansion was money well spent.

"We knew we were under-utilizing our farrowing crates," says Pitstick. "We wanted to expand and also best utilize our existing facilities."

His consultants began by helping refine sow and pig flows. In the end, even though he added 400 sows, only 16 more farrowing crates were needed.

"We had to change the whole system to make everything flow," Pitstick explains. "We didn't have enough nursery capacity and things just didn't match up."

A new nursery was added, plus breeding and gestation facilities for 800 sows.

Pitstick can only finish about 5,500 head so the balance is sold as 50-lb. feeder pigs.

More than just expanding in size, they were making other major changes. They switched from a pasture breeding system where sows were bred in groups to an inside breeding-gestation system with about 95% of sows bred AI.

They also converted from continuous flow to all-in, all-out production. "We were learning a lot of new things and needed experts to guide us," he explains.

Since they did the construction themselves, Pitstick believes it was essential to hire an engineer to design the facilities and to draw up the plans. The engineer and a consulting veterinarian designed the ventilation system.

"Because we were bumping up against 1,000 animal units, we decided to go ahead and get an EPA permit for manure handling," Pitstick adds. "We wanted absolutely no risk there so we hired another consultant to prepare everything for EPA. They put together a book that was about 31/44 in. thick. It documented everything."

Other areas Pitstick has used consultants include: crops, genetics, nutrition, management, business structure (legal), estate planning and taxes.

While he wouldn't recommend having a life insurance agent do estate planning, he isn't afraid to use the nutritionists or breeding and management specialists his feed company provide as a service.

"You might be a little skeptical of them because they're selling feed," says Pitstick. Here's the difference: "With insurance, you can't buy a policy from two different companies and try out them side by side. With feed, you can try it for awhile or even do a side-by-side test."

Is the return from using consultants worth the cost?

"It's really hard to measure the results," says Pitstick. "We just know we don't have the expertise to handle every problem or decision that comes along. Therefore, the only solution is to bring somebody in who does.

"Without that, we probably wouldn't be able to stay in business, (particularly) as competitive as the hog industry is now."

You can probably find a consultant for about anything you can imagine - and maybe for some things you'd rather not even think about.

We asked some individuals who work as consultants to pork producers to talk about their work, some of their philosophy, what they do and some tips for you.

Legal Consultant Clark Wright is an attorney in New Bern, NC. He and each of the other approximately 54 attorneys at the Ward and Smith firm specialize. Wright's area of expertise is environmental and agricultural law.

"Most people think of a lawyer as somebody you hire only when you are already in trouble," says Wright. "The original mission of the profession was counseling - keeping people out of court - rather than representation in court.

"There's nothing I would like better than to be put out of the litigation business," he says. He says it's like the mechanic in the old oil filter commercial, who says: "You can pay me now or you can pay me later." In other words, hiring a consultant is preventative maintenance.

"Unfortunately, a big percentage of my work is defending farmers who have been sued by neighbors or environmental groups and enforcement actions filed by state and federal regulators," says Wright.

The route to that reduced litigation goal is just what Wright does when he works as an environmental consultant. He makes sure a new or expanded hog operation is going to meet the EPA and other environmental laws and regulations.

That doesn't guarantee somebody isn't going to sue you. But it sure should decrease the likelihood that you'll be sued and, if you are, improve the odds of winning the case.

"We also help avoid that fatal first step," says Wright. "That would be to commit to a major loan or a contract to build facilities that wouldn't comply with the laws."

He cites a North Carolina case. An agent with one of the local government agencies that deals with environmental issues informally told the farmer that he didn't "think" a regulation applied to his situation.

Based on that, the farmer started construction and plowed a good amount of money into it. Some neighbors who were opposed to the facility sued and won a permanent injunction. They shut him down. The money he had already spent was wasted.

"That's not a knock against the agent," says Wright. "It is a warning that there are some well intentioned people out there who will give advice that is well intentioned - but they are not licensed to practice law.

"The legal landscape is changing so fast - literally every month - that you often have to go 'chase rabbits' to see what the new rules are," he adds.

"If you can't settle a lawsuit early on, you can easily spend $30,000 to $100,000 defending yourself," says Wright. "A lot of those things are not covered by insurance."

There are, of course, other legal matters beyond environmental issues that can affect your business.

You might, for example, hire a consultant just to analyze all your contracts.

"How many producers ever have a lawyer review contracts before they sign them?" Wright asks. "Is the language clear as to who takes responsibility for environmental liabilities?"

Every time you sign something with your lender, with somebody you rent from or to, or your insurance agent, it's a contract.

"Another key issue is farm ownership," the North Carolina attorney says. "Should your farm be placed in a corporation or a Limited Liability Company (LLC)? Or, are you better off staying as you are?"

Tax Planning It's not too unusual for Dan Peregrin to bring a hog producer $100,000 or more income tax savings just by reviewing the last three year's income tax returns. The last three are the ones that can still be amended and refunds claimed.

He has had cases where the savings was more than $300,000. Peregrin is an attorney and a Certified Public Accountant (CPA) with the Moore, Stephens, Frost CPA firm in Little Rock, AR. His firm does a lot of financial statement auditing for pork producers - usually as requested by lenders.

"I routinely analyze the tax returns when we do those audits," he explains. "If I can't find enough tax savings to more than pay the cost of the audit, I'm disappointed."

It's a combination of mistakes and poor tax planning that makes Peregrin successful in his fine-tooth combing of tax returns.

"In either case, you show the farmer the things he can take advantage of," says Peregrin. "Then you fashion the planning to put him on the same playing field as other producers.

"If you have too much outflow for taxes, it cuts your cash flow and doesn't let you grow as fast as you otherwise could."

Peregrin says farming has always been sort of a "favorite son" in the Internal Revenue Service Code. Used correctly, cash basis reporting of income is one of the most favored tax provisions. He says even some of the biggest-of-the-big hog producers use it as a huge tax savings tool.

"While you're making money and expanding, you defer income forward by increasing your inventory and investing in expansion," he explains. "When the market goes South, you eat up that deferral."

One problem Peregrin encounters is the way producers handle hedging transactions. He explains that hedging feed ingredients for finishing hogs can be treated for tax purposes as either an investment or as a business expense.

Hedging expenses are ordinary tax deductions. However, if the hedging transaction is mere market speculation, it is treated as an investment and generates less desirable capital loss deductions. Should a tax preparer or the producer report the transaction in the wrong way, it could cost the producer significant tax dollars.

As both a lawyer and CPA, Peregrin says he considers all aspects of the business. Should you be incorporated, a LLC company, a limited partnership, or some other form? Somebody needs to look at your business to make sure you are structured right for income taxes, civil liability and estate planning.

"There's no one plan that fits all," says Peregrin. "Your plan ought to be designed specifically for your situation and your goals."

Consulting Engineer An engineer will evaluate existing facilities and how they fit in with the addition of new facilities.You want to believe that every existing building has some value. But sometimes you just have to bring in the bulldozer. The cost of renovating may outweigh the cost of new construction. As a consultant, you have to tell them what they need to hear, not what they want to hear.

"In some cases, the old facilities are just not compatible to good performance," says Bynum Driggers, an engineering consultant at Raleigh, NC. "I don't hesitate to be totally honest because people are paying me to tell them what I think and why."

He has worked with some who are now among the biggest producers in the country. "Since producers tend to replicate things over and over, most of my work is with 250 to 5,000 sow operations that are expanding," Driggers says .

"As an engineer, my area of expertise is in buildings, ventilation and manure handling," Driggers says . "I put a lot of emphasis on the environment inside that building, both for the hogs and for the people who work in those facilities."

Put the whole package together, he urges. If that means using various consultants, fine. It will pay off.

"I can design a great building," says Driggers. "But if you don't have good genetic stock, the right nutrition, healthy pigs and the right management, a new building won't solve your problems. Put it all together and the right building will pay off."

Herd Health If it accomplishes what you want, $1,000/day for a consultant can be a bargain, says Rick Tubbs, a consulting veterinarian at Bowling Green, KY.

But, cost should not be the first thing to consider. Think, instead, about how much more income it may bring you or expense it may save you. Any consultant is going to expect his work to return many times what you pay.

"In the past, I've seen producers spending $10 to $12/head on medication," says Tubbs. "When they had a problem, they added a new vaccine and never took anything away. Joking just a little, I have told producers to take half of it out and that it didn't matter which half.

"Producers have gotten a lot better on that," he says. "But you can still find $1/head wasted, and that is pretty big money."

But, before you spend money on a consultant, consider your need, Tubbs suggests.

"Start with your local practicing veterinarian," he says. "You need to have the basics in place first. Then, when that practicing veterinarian needs some outside input, another idea or has reached the limits of what he/she is able to provide, that's the time to bring in the specialist.

"That person might come in to take a broader look than just diseases," he explains. "Maybe the consultant will look more at pig flow, genetics, nutrition and environment and how they influence the health program. Some consultants are very narrowly specialized. You might bring in somebody who is strictly a PRRS virus consultant, for example."

What are you really looking for? "Do you want somebody to come in for a one time deal and really shake things up?" Tubbs asks. "Or do you want somebody to come in and critique the programs you have in place quarterly or annually?" You may want both.

And, get it in writing. "We only remember about 10% to 20% of what we hear," he reminds. "Therefore, be sure to ask the consultant to put his ideas and suggestions in writing. You may also want him to follow up with your own veterinarian."

How much followup can you expect?

"Some consultants do quite a bit of employee training," Tubbs says. "With a veterinary consultant, that might range from teaching pig castration and processing methods to being able to spot health problems quickly before things really go sour."

Tubbs believes consulting fees should be a budget item for large pork producers. You might choose to budget 25 cents per pig or $1 per pig. If you're producing 20,000 pigs per year, that's $5,000 to $20,000. Try to look at it more as an investment rather than simply another cost.

Manure Handling Specialist When Mike Veenhuizen gets called to consult, there can be a lot of variety in his work. Veenhuizen is owner and president of Livestock Engineering Solutions at Greenwood, IN. He describes a recent consulting project to show the challenges he faces in his job.

"One of the producer's goals was to have a high quality effluent for recycling and recharging his manure pits and gravity flow gutters," he explains. "Typical technology would be an anaerobic lagoon to give you the best quality effluent.

"However, this producer also had a sizable land base he could use for spreading manure and wanted to keep as much nutrient value as he could," Veenhuizen adds. "You lose a lot of the nutrients, especially nitrogen, with the anaerobic lagoon system."

The answer was to use an earthen settling basin. It also took longer term storage because the producer pumps the manure only two to three times a year for land application.

"It's a matter of putting all the pieces together and using the right technology to meet both the site conditions and the management needs of the producer," says Veenhuizen.

Among other things, Veenhuizen deals with site planning, sizing and design of storage and treatment systems and all the handling aspects of manure. He has to do it so there aren't water or air pollution problems.

He also does troubleshooting at existing facilities. Since options are more limited with systems that are already in use, it often takes a specialist who has seen and worked with a lot of facilities to come up with the right answers.

It takes the right combination of consultant and hog producer to get the best results. If you're not ready, it might be better to put the consultant idea on the back burner.

Here are suggestions gleaned from the consultants we interviewed that can help you figure out if you are consultant-ready.

* What do you want to accomplish in your operation that you're not already achieving?

* Are your goals and objectives in writing - or could you put them in writing fairly quickly?

* Are you willing to bare all, even if it means admitting you've made some mistakes you think are "stupid?"

* Are you receptive to making changes - to listen to the consultant - even if you don't like some things you hear?

* Are you willing to let the consultant look and think "outside the box" that contains your goals and objectives?

* Is the amount you have budgeted enough to allow your first consultant to bring in another specialist if necessary?

Nobody can develop a complete list of questions to ask a consultant you're considering. But this list will get you started:

* Do you have a resume? Request a copy

* Will you give me a client list? Check to see how many are producers with operations similar to yours or larger.

* Are you a member of my trade association?

* What training have you had in your area of expertise? What refresher training have you had?

* Will you provide a written report with specific suggestions after analyzing my operation?

* What are five things you have done for clients recently that are saving or making them money?

* Will you assist in training my employees, and me, if necessary?

* Will you do some follow-through to see that the things you recommend are done properly?

* How accessible are you if I have questions or need some further help? How long will it take to reach you and get a response?

* Do you have a network of other specialists and consultants you can call in to solve problems outside your area of expertise?

* How do you charge? Can you give me an advance estimate of what my total cost will be?

Here are some rules that consultants and producers who have used them say you ought to expect from a consultant whether his specialty is health, nutrition, engineering, genetics, law, taxes or anything else.

1. Stay within your area of expertise. I hired you because you're a specialist.

2. Keep me out of trouble.

3. If I'm in trouble, help me get out of it.

4. Tell it like it is. Tell me what I need to hear even if it's not what I want to hear.

5. Find out what is peculiar to my operation. I want a plan designed specifically for my situation.

6. Compare my operation to others you've seen like it. Then, share what they're doing that might benefit me.

7. Be willing to work with local people (ie. nutritionist, geneticist, environmental specialist, CPA, attorney and veterinarian).

8. One other tip: Just because a consultant wears the tag of "specialist" or "expert," don't let that make you feel like you can't question anything he/she says. Most consultants will appreciate having you politely challenge them. It tells them you are listening and are interested. It also gives them a chance to explain their advice, while reassuring them you're going to listen to that, too.

For more information, the following sources have agreed to take phone calls from readers if you have questions:

* Bynum Driggers (919)787-7633

* Dan Peregrin (800)766-9241

* Tom Pitstick (937)879-9770

* Rick Tubbs, DVM (502)843-9007

* Clark Wright (252)633-1000 Fax (252)636-2121 e-mail: [email protected]

*Mike Veenhuizen (314)535-1829