Expanding your swine facilities: Considerations for producers
Interest rates and building costs are top of mind for any swine producer considering building a new facility in 2022. Between COVID-19 supply chain disruptions, manufacturing and transportation challenges, and strong material demand, costs have increased across almost all aspects of a construction project. On the interest rate front, rates bottomed during the tail-end of 2020. Since then, rates have gradually increased with more chatter and economic indicators pointing towards continued rate increases.
As we dig into the numbers on how interest rates and building costs are currently affecting the economics of a new wean-to-finish barn, it’s interesting to reflect on the past five years and how we got to where we are. Below are some visuals on a standard 2,400 head wean-to-finish barn with the following assumptions:
- 15-year term loan
- 85% loan financing
- Average borrower credit
- Southern Minnesota and Northern Iowa cost averages
- Costs include all aspects except land
Interest rates shown are as of February 1 of each respective year. Overall costs for the site can change based on your equipment package, material quality, etc., but we believe the trend captures what producers have been experiencing in the countryside.
When looking at the data, there are a few key points to consider. Since 2020, building costs have increased 23%. During the years 2020 and 2021, interest rates decreased, which offset the increase in building costs. However, as we enter into 2022, both building costs and interest rates are working against a producer. The result is the highest loan payment per space we have seen in the past five years and likely much longer. When you focus solely on the loan payment per space, with today’s costs, it is interesting to note that a 1% increase in interest rates and a 7.5% increase in building costs will have the same impact on your loan payment per space.
Considering the information above, it may look less appealing to build a new wean-to-finish barn, but there are still some positives to note. With the increase in commercial fertilizer costs, producers are receiving much greater value for their manure, helping to offset the increase in debt cost. Based on this past fall’s N, P and K values, rough figures come out to $7-10 per space of commercial fertilizer savings. Additionally, hog barns have historically held their values exceptionally well. It is common for us to see existing barns appraise for around the same price it took to originally construct it several years prior. This allows a producer to gradually build significant equity in a long-term asset, which in turn will help them grow their farming operation. Finally, although we are seeing a recent increase in interest rates, compared to historic interest rates, we are still in a favorable rate environment. This offers a producer the opportunity to lock in attractive long-term interest rates.
In today’s world, things can change fast. Possible opportunities could come up at a moment’s notice. Understanding where you are currently and where you would like to see your business, including risk management strategies, will help you jump on an opportunity when it arises.