In the last two weeks, I attended the World Pork Expo, coordinated by the National Pork Producers Council, and the Pork Financial Conference, sponsored by the National Pork Board. What a difference a year makes. Producers and most everyone involved in the pork industry have smiles on their faces – put there by profits most haven’t seen for quite a long time. May was the best month that we have seen for profits in almost three years. From a lenders' perspective, operating loan balances are coming down and producers are finally getting an opportunity to help get some improvement in their working capital. We have a ways to go to get balance sheets back to where they were, but we are heading in the right direction.
Capital Availability – I have had an opportunity to speak to a couple of pork producer groups this past month regarding capital availability. I reviewed some items that lenders are looking for as they review producer portfolios. Following are a few items that I would like to point out:
• Balance sheets rule. You will be measured on how fast you can improve your balance sheet. In looking at some financials, year- to-date, we have producers who are barley in the black, while others are reporting profits of $15 to $18/head. This is all on an operational profit perspective. Lenders are taking out the hedge gains and/or losses and focusing on your margins from an operational standpoint. This will be monitored closely over the next 12 months to see how fast you can improve your balance sheet.
• Capital is available for producers who still have relatively strong balance sheets. They will get better rates and terms for their financial needs. The capital will not be for expansion, per se, but for capital improvements and overall operational financing.
• Capital available for empty sow barns. I have heard the rumors about empty sow units being filled. From a lender’s point of view, many of the units that are empty are empty for a reason. From a size or biosecurity standpoint, they may not be the right fit to be put back into operation. An example might be a 1,500-sow unit located in a very pig-dense area. This unit may be able to produce 650 weaned pigs/week, but it has a history of porcine reproductive and respiratory syndrome (PRRS). If a unit is continually plagued with disease issues, the operation may have limited potential. Even if you can buy or lease the facility cheap, it might not be cheap enough if you continually run into pesky disease problems.
• What about expansion? I have already been asked this question several times. I think capital will be very difficult to get for any new sow expansion for a period of time. I want to stress that we cannot go back to the same levels of production that we were at back in 2008. We need less supply. In addition to that, we have one less packing plant in operation. Slaughter capacity could be a problem if we the industry expanded. So, in my opinion, we need to be very careful about any expansion.
Pigs Sold on the Spot Market – Currently, we have very few pigs that are being negotiated on the open or spot market. Lenders have encouraged producers to have packer agreements, but I think we also need to encourage producers to sell a certain amount of pigs on the open market. Most packer agreements are based on the negotiated market. I think it is in the producer’s best interests to sell at least 5-10% of their pigs on the open market. Currently, we have too few producers doing this. If we could get more producers to sell some of their pigs on the open market, it might help us with some market transparency. It is something we all need to think about.
AgStar Financial Services