Six months ago discussions focused on how growth in the North American breeding herd was inevitable and expansion would be the biggest issue we faced in the near term.
During much of first-quarter 2012, the pork industry’s margin outlook was strong, with opportunities to lock in excellent profits as far out as you could see. Through the summer much of the Midwest faced the driest conditions in at least 23 years. Many producers now find themselves in survival mode. Some took advantage of opportunities earlier this year to lock in future profits, but for most of the industry this will be a “game-changer” as the world rations available corn supplies.
For the most part, the industry is in a bit better shape financially than prior to 2008-2009. Working capital for many is stronger and risk-management strategies are better today than four to five years ago. However, this is never true for all and many were caught looking for a seasonal spring or summer rally to hedge hogs. With about 96 million acres of corn planted, waiting for an opportunity to capture good returns that never materialized seemed reasonable.
For many producers, the goals will be to survive the current situation and to develop a leaner, more cost-effective operation. The objectives will be to conserve cash, reduce costs, improve efficiencies and protect assets. For producers in that position, here are some items that served us well in prior stress periods and are generally sound business principles for all times.
- Regular analysis of financial position: Do this to help determine whether the business remains viable and is positioned to survive. It also provides information as to how drastic the changes need to be in operations.
Pay attention to the key ratios—liquidity ratios and leverage ratios-- and their trends from month to month, or even week to week.
- Maximize your cash flow: Typically in tough times, the biggest problem is poor cash flow. Some ideas to understand and improve cash flows include:
- Prepare regular financial statements.
- Focus on maximizing margins on each pig raised.
- Control costs as best you can with help from your managers and employees.
- Improve space utilization.
- Eliminate poorly performing assets, barns, pig flows and such.
While controlling cost is critical, it’s tempting sometimes to cut costs so deeply that it impacts the profitability. To me, this is a downward spiral that’s hard to recover from once margins improve.
- Improve your profitability given the circumstances: It’s critical that as you work to improve cash flow you keep your eye on the business’ profitability. Ideas to improve profitability include:
- Critical business analysis: While some producers do a good job of analyzing their business and comparing to peers, many are operating under a false sense of where they are relative to the rest of the industry. This can prove disastrous if you’re wrong and the industry remains negative longer than expected.
An honest evaluation through a peer group, or trusted industry expert/financial advisor, should help you understand how you compare in production, cost, revenue, margins and other key metrics.
- Adopt appropriate risk-management strategies: Risk-management strategies may need to be re-evaluated when times get more difficult. Hedging a loss to limit exposure is difficult to do and could be hard to finance, but it can be the best available action in certain market scenarios. Overall, the target profitability may be lower, assuming that the business is under stress, simply because you cannot afford not to hedge profitable periods.
A risk-management strategy that may become important is physical ownership of feedstuffs. As this corn crop becomes known and certain areas are short of grain, having the corn in your bin may become critical.
In general, if your business happens to be in a tough position, there are things that you can do to offer the best chance of survival and recovery. To review, having financial information to make management decisions from cash flow projections to compare to actual cash flow and knowing how your farm business compares to peers are the most critical things you can do going forward.
The pork industry has a better opportunity to get through extreme feed costs than other species in the protein sector, but that will not eliminate stress on its financial well-being.