How Can I Weather the Storm?
It was as recent as March 20 that we had $15 per head profits staring at us for the next 12 months available in the futures markets. As it has turned out, this is one of the largest and quickest deterioration in markets I have experienced in my 26-year career at Compeer Financial. By of end of May, the net profit for 2023 completely dissipated and we are now looking at a $28 per head loss for the next 12-month period. There are some operations that have stockpiled enough working capital to provide some cushion to a downturn in profitability. But with the erosion of liquidity and extra per-head loss, few producers will be able to withstand the impact to their balance sheets.
Are you looking for a game plan to manage through? Start by looking at ways to generate cash to cover the shortfall of working capital. How can you reduce costs without reducing productivity? The largest expense to target is feed and feed additives. Look at historic research analysis to determine the true impact a nutrition change will have on your operations.
Next, look at potentially putting capital expenditures on hold. For example, if you can put off replacing a roof for a year with minor repairs, it can help your operation endure. In addition, every operation has higher costs segments of their business. It may be an inefficient pig flow of underperforming finish barns. It can be vital to survival that all options are on the table. After exploring those cost savings measures, look to your balance sheet for ways to improve your working capital position. This will help provide the cash flow you need.
Once that’s done, update your budget forecast based on current market conditions and take your risk management strategy into account. I understand the new forecast might come as a shock, but you do need to test that information against your loan covenants to see if you have any violations. Share that information with your lender sooner rather than later. If you determined you will violate a covenant, at least you have been upfront with your lender. You can avoid any surprises and work with your lender to know what your options may be.
After implementing these cost-cutting measures, there is still another option left to help provide liquidity and make it through to more profitable times. The first place to look is at your balance sheet. Do you have the right loan structure? Is there a new loan structure that can help you generate more working capital? I typically start by looking at the cash flow demands on the debt structure to make sure you remain competitive with your peers. Then look to see how much pressure your debt payments put on your operation’s cash flow. When looking at finish or wean-to-finish spaces, I would recommend your debt service payments are at $25-$27 per space for principal and interest payments. This is approximately $200 per debt on a 10 to 20-year-old facility with a 10-year amortization. For nurseries, I would stay in the $20-$22 per space for debt service. These are conservative enough numbers and can be changed based on the age of the barns. I also realize land sales have been high-priced recently. But just because land has sold for $12,000 - $18,000 per acres in your area, doesn’t make it sustainable. When looking at advance rates on land to be sustainable long-term I would recommend an amortized payment of $350 - $450 net of taxes depending on your location. This amount would be approximately $5,500 per acre debt amortized over 30 years. Long-term this is not where I would want to be on land, but it could potentially help you bridge that cash flow gap.
One common theme I have seen on balance sheets rests with the asset type. Many farmers invest in assets that may or may not be farm-related, which can build equity within the business, but then find that they can’t leverage those assets because of the asset type. This could be investments outside the business in a privately-held corporation, or investments in which they hold a minority interest. Regardless, if you believe you will violate your loan covenants, I encourage you to sit down with your lender to discuss your options before any violation occurs.
As of today, everyone is looking for that ray of hope. Unfortunately, this is a time to make difficult decisions and perhaps have an uncomfortable discussion with your lender. This is the third extensive down cycle I have experienced in my career in the swine industry. I know from experience that we may see some good operations consolidate or discontinue. Give your operation the best chance to succeed by working with experienced consultants and your lender to chart a path forward for your business.
For more insights from Steve and the Swine Team, visit Compeer.com