I spent this past week at the 2012 Pork Management Conference and there was a lot of conversation about the recent rally in the hog markets. The rally many have been waiting for seemingly came later than normal this year. This is likely evidence of a bit of a hole in pig supplies as weekly hog slaughter totals are down when compared to last year. Carcass weights are on their way down also. It appears that porcine reproductive and respiratory syndrome (PRRS) may have played a larger role than in previous years, but we will have to see how long the tight supplies last.
The long-awaited upswing in pork prices has been, unfortunately, coupled with a steep incline in corn and soybean prices this week. Although things look great now, with high cash hog prices in the near term, the 12-month forecasted margins have actually been going in the other direction. The reason – the USDA’s weekly crop conditions have been deteriorating due to lack of moisture in some areas.
From a banker’s perspective, the continued volatility reaffirms the need to manage risk. With long-term margins not yet improving, it begs the question of what will happen as hog numbers continue to increase, with continued production improvement and expansion. It will be interesting to see how the rest of this summer turns out, what kind of carryover the United States will have in corn and soybeans and how any shortage could impact margins. With some expansion underway, a combination of tight crop carryover and the prospect of tight packing capacity could make things interesting late in 2013. Hopefully global demand will push the product through without interruption.
Changes for Contract Growers
Another interesting topic discussed at the conference that will impact financial statements was the upcoming changes being pushed through by the Dodd-Frank Reform Act. Of particular interest to swine producers and contract growers will be how lease relationships will be handled on the balance sheet. Although I’m not an accountant, it appears that the rules would essentially require operating companies to recognize the value and coinciding liability of those long-term leased facilities on their balance sheets. This move could dramatically affect covenant calculations and require covenant modifications for those who utilize the contract grower model. Likewise, for the contract grower, much of the value and liability would be removed from their balance sheets.
Many producers and accountants are left scratching their heads. Many thought it would be simpler to require a little more clarity around contract arrangements in the notes tied to financial statements. Stay in touch with your accountant as it looks like this change may be coming in a few years.