With economists forecasting losses of $40 to $50 per hog marketed through year’s end, U.S. pork producers are anxiously awaiting a return to profitability. However, expectations are that producers will face losses into the second quarter of 2013.
Lenders to the pork industry will be in a challenging situation and will need to determine how long they will work with producers, says Chris Hurt, Purdue University agricultural economist.
Pork magazine asked Kent Bang, vice president, client solutions, AgStar Financial Services, about factors the lender considers when making credit decisions for clients who face an extended period of financial loss.
“Clients may be facing difficult decisions as they may have significant implications to the family, business, employees and even the community,” Bang says. Here’s more of what he had to say:
Pork: What factors do you consider when determining whether or not credit will be extended to an operation facing financial losses for the next two quarters?
Bang: Primarily, our clients would have a monthly borrowing base that is required to be maintained with positive margin. In other words, the short-term assets we secure, advanced at 65 percent to 75 percent, must exceed the short-term liabilities, including the revolving credit. When the industry is under stress and producers lose money, that margin can erode quickly.
The lender also needs to understand how the company can withstand the losses for extended periods. Futures indicate losses through April 2013; your lender needs to understand how the borrowing-base margin looks at the end of next April. This is a comprehensive and individual farm process. Every producer has different costs, different markets, and many would have other assets to contribute, leverage or sell if they had to, which contribute to this picture. Bottom line, the lender’s job is to understand how quickly the borrowing base margin erodes before profitability is expected to return.
Pork: How might a producer improve his/her chances of receiving additional credit?
Bang: Knowing what debt financing is required to get through the difficult cycle. The best advice for all producers is to understand their numbers. This includes knowing when financing is needed and for how long.
The first step is for a producer to put together a realistic forecast for the next 12 months. Your monthly changes in inventory, receivables, payables and short-term debt should be included. Your lender’s understanding of grain and feed on hand, risk-management positions, historical production and cost are all paramount.
Pork: Do you have any recommendations for producers who need more credit than circumstances allow?
Bang: First, they need to explore if there are assets inside or outside the swine business that they are willing to leverage, contribute or sell to support the pig business. These are tough questions
Another strategy may be to determine whether the business should be scaled back to make it through the difficult time. If the working capital can support smaller business, it can make good business sense to make those adjustments. Clearly, this may be a difficult time to sell certain assets, particularly an older sow farm, for example. However, bare land or finishing sites seem to have strong values.
Pork: How about those producers who are under contract?
Bang: In many instances the business may have contractual obligations for farrowing, contract finishing or packer delivery. These situations will need to be addressed individually if significant changes are being considered. Engaging outside help may be a good idea to build a forecast as well as understand possible strategies and obligations, including tax ramifications, of any ultimate decision.