Raising hogs this past year gave new meaning to managing risk and what it will take to survive.
For their part, lenders at a risk management seminar in early December said they would support credit-worthy producers in the tough months ahead.
'Every producer is losing money today, essentially, whether they have packer contracts or not,' declares Lee Fuchs, AgriBank, St. Paul, MN.
'If you do n't have a contract, it's clearly a crisis. How lenders will deal with that, the jury is still out.
'But I think our approach is that if you've got a good system put together, you manage it well and you have your costs under control, we are going to be very flexible,' says Fuchs.
'If essentially all your financial problems are due to low hog prices, I think we are going to be very flexible and give you time to ride this out, and hopefully prices will come back,' he says.
But for marginal operations, Fuchs says AgriBank's positioning might be different. More likely, they would advise those producers to exit the industry while they still have some equity left.
'But again we are going to be flexible with good operations and I can point to a few cases already where we have said we are going to extend this thing for up to a year,' adds Fuchs.
Tom Vincent of Brenton Bank, Perry, IA, also expressed support for producers who are doing a good job of managing risk. Pork production and agribusiness are looked upon very favorably by the banking business, he notes.
But he points out that bankers don't have very deep pockets. While the balance sheet of the average pork producer usually is made up of half equity and half debt, the amount of equity or capital carried by a bank is much less, he says. Most banks carry 8-10% of capital.
That means that the degree of variability in returns can't be as great and still return a profit to its owners, Vincent explains. Losses greater than one-half of one percent can place a bank in financial peril.
Prepare For Bank Visit Many pork producers will be visiting their banker this winter to review their financial situation, he says. Before making that visit, make sure you are prepared to review the period of time since your last appointment. 'That will give your banker comfort that you are on top of things and taking the appropriate actions that you can,' Vincent told producers attending the National Pork Producers Council-sponsored seminar.
During your visit, make sure you update your banker on the business plan you used to secure your loan. Discuss contingency plans.
Use of outside experts can bolster your chances of success if you are experiencing difficulty in your operation, plus it will lend additional credibility to your business plan and your operation in the banker's eyes, Vincent says.
Having good quality records that show actual performance compared with projections on your business plan carries a lot of weight, too. Provide your lender with both detailed production and financial records. Records provide the means for maintaining communication and objectivity, key elements in a lender/client relationship.
'I am convinced that a number of farmers who went out of business in the '80s might still be around had they had better records,' observes Vincent. With better records, those producers would have made better management decisions and been better able to communicate with their banker, he says.
There are three reasons to keep records: for management and decision making, for the bank/investor and for Uncle Sam.
Obviously, most producer client records won't reflect much success from 1998. How will bankers view performance this past year?
Regardless of the current situation, bankers tend to review trends for 4-5 years, Vincent explains. Trend analysis usually focuses on such production factors as sow productivity as it relates to facilities, mortality, feed conversion and carcass performance. Financial trend analysis typically covers return on investment, return on equity, leverage, liquidity and trends in cash flow performance.
Variability in performance is also noted by bankers, especially as profitability varies from year to year.
'If the producer has demonstrated the ability to be profitable in the past, I think it is safe to say most lenders are going to continue to work with these folks,' affirms Vincent.
Restructuring current debt into non-current debt reduces current liabilities. But debt restructuring should not be the first alternative in trying to solve liquidity problems.
Allan Lash of AgriSolutions Inc., describes five ways to add working capital or solve liquidity problems.
Generate more profit. Though this is the long-term preferred option, it may take several years to reverse negative working capital. Other alternatives may need to be tried to provide a faster infusion of capital.
Partial liquidation of non-current assets. If an operation has non-essential or non-producing assets, selling them can provide an immediate liquidity solution.
Use gifts or inheritance or equity options. Gifts or inheritance are usually not a reliable source of liquidity. But if they are available, they can help solve a current working capital crisis.
Another option is for the owner to spin off a portion of the business with the accompanying debt (a piece of land, for instance) into a separate corporation or partnership. The owner then sells an equity interest or an investor could assume debt for equity.
Restructure current liabilities. This method doesn't solve the issue of long-term profitability and current cash/credit limitations. Without a resurgence of profits, owners will be faced with this same working capital crunch in a few years.
In short, restructuring only buys time and should only be applied where there is a practical action plan and time for the plan to work.
Write down debt. This is the option of last resort. Debt write-downs usually only occur when borrowers and lenders have to go to bankruptcy court to resolve debt issues. This occurs when debt can't be repaid from profit and/or total liquidation of assets.