“If you don't currently have a risk management strategy, you'd better get up to speed really quick to learn how to develop one.”

That's the best advice Mark Greenwood, senior financial services executive at AgStar Financial Services, has to offer pork producers struggling to keep their production units intact. As one of the pork industry's largest lenders, AgStar provides financial services to about 1,100 pork production systems, which accounts for about $1.5 billion in their pork-lending portfolio.

With his 13-plus years of lending experience in agriculture, Greenwood admits the current financial distress in the pork industry is “unlike anything we've ever seen.”

Greenwood sees a chasm between the pork producers who have been very prudent buyers and marketers vs. those who are extremely good at production, but never have really worried much about risk management.

“Even if you are really good at production, that doesn't mean you can be viable in this industry,” he notes. “We've seen some very good production companies today that might not be in business just because they haven't been able to do as good of a job at risk management.”

For starters, Greenwood says: “Be proactive, not reactive.” That means thinking and planning — not just six months out, but 12 months out or more.

He reflects to last fall, when the general consensus was “there was a pile of pigs coming.” The prudent thing to do was to take on some market risk protection. Those who did may not have made a lot of money, but they haven't lost near as much as those who didn't, he says.

The same philosophy applies to feed procurement. “Instead of waiting for the market to act, successful producers were very proactive on corn procurement,” he says. Many of his clients maintain 6-8 months of physical possession of corn. He challenges them to continue to lengthen their feed supply. “It might not be corn. You may have to think entirely differently on how you feed a pig,” he suggests. “You have to think more about alternative feed ingredients and using multiple feed sources as another way to manage part of your risk.”

Current feed procurement strategies may require immediate payment for the product, plus storing it. “It then becomes a capital constraint you put on your lender — and it can be a sizeable dollar amount,” he says. “Normally, we will borrow 75% of the value of corn per bushel. When corn was $3/bu., you had to come up with 75-80¢/bu.; at $6/bu., you would have to come up with twice as much, unless we changed our advance rates. Most lenders don't want to do that. Those capital needs are really, really tough on producers today.”

Taking possession of corn or wheat incurs additional storage and interest costs, “but that might be better than betting you will be able to actually get it when you need it,” he says.

Know Your Feed Needs

At the outset, Greenwood advises producers to get a handle on exactly what their feed needs are going to be, then get aggressive with feed procurement. “A lot of people are trying to own as much corn (in the physical sense) as they can, then buy some form of an option strategy as protection if the price goes down,” he relates.

Looking at the big picture, the United States produces about 53% of the world's corn. It's unlikely that the government will tinker with corn exports, nor will the levels dedicated to ethanol production come down.

“With 8% less corn acreage planted this year compared to last, and a billion more bushels used for ethanol, supplies will be tight,” he assures. “If corn is $6/bu., and soybean meal is $310/ton, that puts the breakeven at about $92/carcass cwt. ($180/carcass). In mid-May, the best a producer could do is lock in a carcass/cwt. price of $70, which leaves producers with a $20/head loss, or more.”

To minimize the feed cost impact, Greenwood suggests all producers should focus on optimizing sell weights. “There's no reason for market weights to be as high as they are today. For every 5 lb. we bring weights down, it is like taking 2% off the U.S. pork supply. It's like taking 8,000 head/day out of the system. Packers don't like this because it means taking more pigs through the plant (for equal pounds), but it's the right thing to do.

“If you want the economic fundamentals to improve — everyone must work to optimize sell weights and get rid of another 10% of sows, so we have a much more efficient system at the end of the day. This strategy will have a much better, quicker return than anything else we could do. Unfortunately, it seems like everybody has this ‘last man standing’ approach. I'm telling you, this time around, that's a pretty tenuous position,” he continues.

“It's also about figuring out a way to find a workable solution for the producer and the lending institution. It's not always perfect, but it's something we all can live with,” he adds.

Greenwood estimates the erosion of assets on balance sheets from October 2007 to May 2008 has averaged 4-5% every month. “In seven months, we've lost 25-30% off our balance sheets. In addition to that, the value of the inventory and the cost of feeding the inventory has probably risen $20-25/head, so it's a compounded effect. As a lender, it becomes a question of how much you're willing to borrow per head,” he explains.