Lee Fuchs, AgriBank's (FCB) senior lending officer, has a few tough words for some pork producers who want to be part of the industry's future.
If you are a pork producer, you definitely need to have your act together. "You can't lose money very long in this business and (expect to) stay in business.
"That's what's happening to most producers nearly across the board. The losses in the pork industry are very significant and very real. The profit margins in pork production are declining, which is a long-term trend that is being accelerated by these low prices," remarks Fuchs.
Most modern producers tend to be cost competitive. "But if you don't know your costs, or your costs are not in line with industry norms, you will not be part of the industry of tomorrow," asserts Fuchs.
In most industries, if you don't meet those criteria, you will be eliminated, says Fuchs. "Bank regulators wouldn't let a bank stay in business very long if it couldn't report its costs," he notes.
Fuchs went on to say that the Farm Credit system will not loan money to producers who don't know their cost of production.
To secure their place as a future member of the pork industry, producers must know their costs, have their costs in line and produce a quality product for the packer.
In most industries, it is important to know your customer well. For the pork industry, that customer is the packer. "If you are consistently producing the carcass quality characteristics in your hogs that the packer needs, then you will more likely be part of the industry of tomorrow," stresses Fuchs.
Don't Bank On Big Exodus If producers think they can just wait until the "big boys" go broke and then supplies will drop and the problem of oversupply of hogs will be solved - think again, says Fuchs. If some do go out of the business, there will be others to take their place. The bottom line is - that scenario will not produce a reduction in the hog supply.
It's already started to happen in southern Minnesota on a smaller scale, says Don Farm Jr., vice president of commercial lending, AgStar Farm Credit, Mankato, MN. "We've had four or five producers who have been in a position to buy up some operations. These are operations that we at AgStar don't finance ourselves, in the 2,500- to 3,000-sow range. Most of these-sized units are staying in business, just under different ownership," explains Farm.
Overall, as margins have tightened, banks have been very lenient, have stayed with producers and are not fixing the problem of oversupply, says Fuchs.
"So producers need to make their own decisions and, in some cases, get out before they lose everything." By waiting, some producers will lose everything and simply be forced out of business by their banks at a later date, he says.
There's no doubt that some pork producers lost more equity in the last 12 months than they made on hogs in the past 10 years, affirms Fuchs. A key is not to let your operation get below an 50% equity rating, because it is too hard to get back and severely dilutes ability to obtain a loan.
Saving The Farm Producer Brian Ruebush, 33, had lived his whole life in Blandinsville, IL, and didn't want to see the equity in his farm washed away by low prices.
In his case, he managed a gilt nucleus multiplier herd for Premiere Swine Breeders for a decade. He says it was an excellent setup, selling replacements to commercial customers.
But last fall, the bottom fell out. "I was doing all right until about last October. I had been selling gilts to four other herds and all of those guys cancelled all of their gilt orders. So I went from being sold out one month to next month everything had to go to town," he recalls. Those producers were getting squeezed by their bankers and were forced to develop their own replacements to save money, he says.
In turn, Ruebush, a 300-sow supplier, felt the pinch from lost sales. "A business can only stand to lose $50,000-60,000 a month for so long. I did it for four months," he says.
Then he made a business decision to voluntarily quit. He hopes it will enable him to save the home farm. His production facilities are currently being used as contract nurseries and finishers.
To support his wife and two children, Ruebush took a job on a hog farm in Pittsfield, IL.
Hog Glut More producers need to take action, like Ruebush did, to avoid financial ruin, stresses Fuchs, either by temporarily or permanently exiting the hog business. He expects that reduction of the nation's oversupply of pork will have to come mostly from small- to medium-sized producers who exit the business. Production from the mega-sized producers (as mentioned above) will continue in one form or another.
Fuchs emphasizes the ONLY way the industry is going to fix the hog market is to solve oversupply. Producers seem to think that if they hang in there long enough, profitable prices will eventually return, he observes.
"Profitable prices will not come back until the supply of hogs goes down. The demand for pork is already strong. It is doing its job. It is not going to save us.
"Exports are doing good and prices still have not rebounded enough," says Fuchs.
In this volatile price climate, most producers need some kind of risk-share packer agreement to survive. "You can't invest in 20-year hog buildings and sell on the open market," he explains. "You need a packer contract."