More Integration

The fallout from this economic crisis is familiar - more concentration, more integration. “Packers are starting to worry about supply, so they are faced with what they can do to ensure a supply of market hogs. My guess is they will go to their large suppliers and figure out how they can work with them. It will likely speed up integration,” he predicts.

The caveat to that scenario is the producer who can raise the corn needed for the hog operation. He is in the best position, regardless of herd size. “If he can raise his own feed, he can do whatever he wants,” agrees Greenwood. “The question he needs to answer is whether or not he wants to use his corn operation to subsidize his livestock enterprise. And does he have the passion and the labor to stay in the livestock sector?”

Manure-Corn Contracts

Finally, Greenwood is recommending producers work out an agreement with their contract growers who also raise corn. “I think those producers should look at utilizing first-right-of-refusal agreements on the corn. There should be a way for contract growers who raise corn to work with an integrator to ensure a supply of corn and help manage the price risks for both,” he says.

“A prime example is an individual who farms 5,000 acres and lives within 10 miles of a large pork producer. Have these two ever talked? The guy raising 5,000 acres is worried about making money; the other is worried about feed supply. That could be a sizeable portion of the pork producer's corn needs. And, from a fertilizer perspective, the crop farmer could potentially reduce his fertilizer bill significantly. Isn't there some sort of supply agreement that would benefit the risk management plans of both?” he asks.

“I firmly believe this is an all-agriculture issue, not just a livestock issue. The crop producers are where we were two years ago — you couldn't do much wrong. But, what happens if next year we plant 98 million acres of corn, fertilizer costs go higher and the breakeven costs are $750/acre rather than $600/acre?” he asks.

“You could have an oversupply of corn,” he points out. “Then, suddenly, the grain sector is in crisis. It might not happen in 2009, but it could happen in 2010. As costs spiral higher and higher, there has to be a correction sometime.”

Greenwood and AgStar are committed to providing crop and livestock producers with as much information as possible to develop their risk management plans. “In terms of getting access to capital, producers with very good information systems that show the ‘what if’ scenarios have much better staying power than those without a plan,” he says.

Debt restructuring will be reviewed on a case-by-case basis. Currently, AgStar is requiring interest-only on much of its term debt, which helps with working capital.

“We are asking people to give us 3-, 6-, 9- and 12-month cash flow needs, with updates on a monthly basis. We look at budget-to-actual (reports) to see if they are on target. The producer and the lender need to be flexible in terms of creating solutions,” Greenwood notes. “Open communication between producers and lenders is going to be critical to get through this period.”