Gearing Up For A Down Market

Concrete was being poured and lumber was going up at Bob Dykhuis' hog operation at Holland, MI, in early January while hog prices were going down. While a lot of people who are expanding when price drops would wonder if they ought to shift gears, Dykhuis hardly gives it a second thought."We aren't backing off expansion," he says. "We will just continue to work through our long range plan."National

Concrete was being poured and lumber was going up at Bob Dykhuis' hog operation at Holland, MI, in early January while hog prices were going down. While a lot of people who are expanding when price drops would wonder if they ought to shift gears, Dykhuis hardly gives it a second thought.

"We aren't backing off expansion," he says. "We will just continue to work through our long range plan."

National Hog Farmer asked four producers to share what they're doing to gear up for a down market. A key word used by the producers in the interviews was "opportunity" in a time when you would expect a fair amount of pessimism.

Time To Expand "Usually when you have some deep lows in the market, they're followed by some nice highs," says Dykhuis. "Therefore, I see low prices as a good time to expand. That way, we have the lower prices while we have low numbers to sell and the higher prices in the cycle hit later when we're going full force."

His last go-around of expansion was from 900 sows to 2,500 sows in 1995 and 1996. "It paid off when we hit some really good markets last year," he says. This time, his expansion is taking the family corporation's hog operation up to 5,500 sows.

Dykhuis could have pulled the plug on some of the expansion expense last fall. But he has enough faith in his 3-year business plan to keep going.

"In our plan, we had figured the drop in prices would hit about next fall and into early 1999 when we would be up to full production," Dykhuis explains. "While we take a big hit on cash flow with low prices at the same time as we"re spending big on expansion, we maintain a good enough financial position to be able to borrow the money to make it through. We expect to make it up with those highs about the time we're in full production."

His way of looking at it is that he will be getting the low prices on about 4,000 head marketed per month. The cycle should result in higher prices when he's marketing about 10,000 head per month a year from now.

Whitley Stephenson's plan for expansion this year was to help a couple of his key employees get set up with finishing facilities where they would contract finish hogs for Stephenson.

His family owned corporation, Spring Meadow Farm at Smithfield, NC, farrows and finishes about 80,000 hogs from 4,000 sows.

The idea is that these employees would become his next contract growers.

"Rather than going with a contract grower that is a complete unknown, I would prefer to do it with key people I already have here and know their abilities.

"We're in the information gathering stage right now," he says. "We may progress at a little different pace than if hogs were selling for 60 cents. We're not scratching any dirt, yet." But if the right existing facilities come on the market, he could be ready to expand with those key employees that way.

Belt-Tightening It's belt tightening time at Spring Meadows; but not squeeze-till-it-hurts time.

"We try to do belt-tightening all the time rather than saying, "Oh, oh, we need to re-do all these things," when we get into a down market," says Stephenson. "You can't cut out things that are going to cost you later.

"It might be easy to cut down the number of employees," Stephenson explains. "We want to maximize production so we can spread the costs over more animals rather than cutting out something essential and winding up with 18 pigs marketed per sow rather than 20."

You hear the same tune coming from Dennis Liptrap, president and CEO at IPKY, Inc., at Cox Creek, KY. They market hogs from an 1,800-sow operation.

"It's fine-tuning, not major changes," says Liptrap. "It's things like getting those non-pregnant sows moved on to market even a little faster so you're not feeding a non-productive sow.

"You have to be low cost and efficient all the time," he adds. "The low cost, efficient operator is the last one to get squeezed as the market goes down and the first to get relief when the market recovers. That's true no matter what size you are."

It's pretty plain and simple: You can't control the market. But you can control the costs.

Market lighter Linden Olson, Worthington, MN, normally markets at 240-260 lb. His is a 320-sow farrow-to-finish operation.

Olson's market decisions are driven by space in his facilities, market outlook and weight. He won't change that much this year.

"I'm not going to change market weight by more than 20 lb. per head," he explains. "In late 1997, we marketed them a little lighter in anticipation that the market was going to drop. But we make sure we don't get them too light and take a sort loss."

Sort losses can get real expensive, he stresses. Some packers keep their sort loss at the same dollar amount when the market drops, making the percentage loss even bigger.

Unless you can put 20 lb. on from a weight of 230 to 250 lb. for $3.40 (17 cents per pound), it's pretty easy economics to figure it pays to sell 230 lb. at 42 cents per pound than 250 lb. at 40 cents. Feed alone is probably costing 30 cents or more per pound of gain at that weight.

"Right now (early January), we think the market is going to pick up some," he adds. "Therefore, we may carry some hogs a week longer and put on a few more pounds holding for that stronger market."

There is, of course, another side to the weight picture.

"Obviously, our price problem right now is over supply," says Liptrap. "We can all help that some by reducing slaughter weight. Even 10 lb. per head can make a big difference."

Revisit Everything When a strategy has cured a problem, it's easy to keep using it even though you may not need it anymore. Your herd health program and feed additives could be good examples.

"Are you still dealing with the same problems and conditions as the last time you looked at your vaccination programs and your total herd health programs?" Olson asks. "Maybe there are vaccines you can delete or treatments you are making that can be eliminated because those conditions have changed or aren't present anymore.

"The return for using a certain feed additive may be different if hogs are $35 or $40 than when they were $60," he adds. "You need to revisit the cost:benefit ratio to make sure they fit your present conditions."

Time Your Cull Sales You may not be able to use Linden Olson's strategy this time around. But it's worth keeping on file for the next up and down cycle.

"Last year when we felt prices were going to go lower, we sold a lot of old sows and replaced them with gilts," Olson explains. "We were able to get a pretty good chunk of money out of those old sows because the market price was still high.

"But there was an income tax angle, too," he adds. "A lot of those sales qualified for capital gains tax treatment which is helpful in a high income year. It looks like ordinary income (rather than capital gains) won't be a huge problem this year."

Work With Lenders "Our lenders are knowledgeable about the hog business and that we are going to have market swings and cycles," says Dennis Liptrap, from Kentucky. "But when the magnitude is such that a semi load of hogs is worth $6,000 to $7,000 less than it was only about three months ago, we want to know that they realize that.

"That's off the top of your cash flow and it is substantial. You don't want to take any chance the lender isn't aware of something like that. So, tell him."

The "no news is good news" doesn't work. This is a case where even bad news is better than no news because one of the things lenders dislike the most is surprises.

"We try to build relationships of cooperation with our lenders and our packers rather than a relationship of antagonism," says Bob Dykhuis. "When a down market comes, you want to know they are going to be there for you."

Prepare For The Next Round A lot of Dykhuis' strategy is to be ahead of the problems. It's a strategy to keep in mind from now on. There will be more up and down cycles in the hog business.

"We try to buy equipment and upgrade facilities and equipment during the good times," he says. "That way, we don't get burdened with repairs and working with poor equipment when the times get bad and you end up holding off on buying new things for awhile.

"Another thing that has worked for us is to stay paid up during the good times," he adds.Some people get behind in paying bills and even loan payments and then when the low market hits, they're in trouble."

The bottom line is that lower prices are here for awhile. They're going to put pressure on cash flows. But it's a time to think smart rather than panic.

No matter how bad you think your numbers look, the worst thing to do during a down market is avoid your lender. Lenders don't like surprises.

"We understand there will be losses," says Randy Huewe, vice president for Norwest Agricultural Credit in Des Moines, IA. "What we want from a producer is an idea of what it's going to do to his financial position.

"When a down market hits, the key is to have the liquidity to get through it," Huewe adds. "That has always been the case; always will be. In down times, you need to have the staying power. Staying power means liquidity and liquidity will protect you until you get to the better time."

Like producers, lenders understand there are always going to be up and down cycles. It's how you deal with them that counts.

"We want producers to put numbers down in front of us that say, "Here's what we expect for prices in the next six months to a year and here's how we are going to deal with it,'" says Huewe. "If his line of credit is going to need to be increased, we want to know that ahead of time."