Pork industry losses impact credit decisions

click image to zoom With economists forecasting losses of $40 to $50 per hog marketed for the balance of 2012, U.S. pork producers are anxiously awaiting a return to profitability. Currently however, some economists expect producers may have to wait until second quarter of 2013 to see a return to the black.

In an exclusive interview, Pork Network asked Kent Bang, vice president, client solutions, AgStar Financial Services, Mankato, Minn., 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.

One noted agricultural economist estimates the U.S. pork industry will lose $2 billion over the next six months and that it will be up to lenders how long they will work with producers.

Pork Network: 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?

click image to zoomKent Bang, Vice President, AgStar Financial Services 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 of time.  Currently, futures indicate the losses will continue 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 lenders job is to understand how quickly the borrowing base margin erodes before profitability is expected to return.

Pork Network: How might a producer improve their 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 understanding their numbers.  This includes knowing when financing is needed and for how long. The first step for producers is putting together a realistic forecast for the next 12 months.  Your monthly changes in positions of inventory, receivables, payables, and short-term debt should be included in your forecast. Your lender's understanding of grain and feed on hand, risk management positions, historical production and cost are all paramount. 

Pork Network: Do you have any recommendations to those producers who need more credit than circumstances allow?

Bang: This is always the big challenge for those who find their business in this circumstance.  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 in many cases.  Another strategy may be thinking about if the business should be scaled back to make it through the difficult time. 

If the working capital can support a business that is significantly smaller than it currently is, 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 Network: 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. If needed, engaging outside help may be a good idea to build a forecast and understand possible strategies and obligations, including tax ramifications, of the ultimate decision.

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