Editor’s note: Mark Greenwood is vice president of commercial lending at AgStar Financial Services, Mankato, MN, a cooperative owned by client-stockholders, and is one of 95 institutions that comprise the Farm Credit Services (FCS) system. AgStar serves over 23,000 clients and manages nearly $8 billion in loan and lease assets. Greenwood’s role is managing AgStar’s swine portfolio, which represents over $1.4 billion in loan and lease volume serving nearly 1,200 clients throughout the United States. On Oct. 22, he was invited to address the House of Representatives subcommittee concerning the state of the U.S. pork industry. A major portion of his testimony follows.
“My name is Mark Greenwood. I exclusively handle swine loans and leases with producers of all sizes. I was born and raised on a hog farm in southern Minnesota and have been involved in the swine industry for my entire business career. I can clearly tell you that the current financial situation the (pork) industry is facing is the worst I have ever seen in 28 years of working with swine producers.
“In October of 2007, the loan portfolio of swine producers that I worked with was in the best shape ever. The average owner equity was close to 70%, working capital was abundant, and most producers were in very strong financial positions. Most of these producers believed that they could handle some adversity for the future. Many producers I worked with had no debt and had a cash surplus. Now, many of these same producers face dire financial circumstances.
“In the past 24 months, volatility in both the cost of production and in the revenue producers receive has increased dramatically (Figures 1 and 2). In 2008, the average cost to raise a hog was approximately $165/head and revenue was close to $140/head. Because of higher costs, most producers lost, on average, close to $25/head. Producers who raised the majority of their own corn fared better because the cost to raise a bushel of corn was significantly less than producers who had to buy their corn.
“The best estimate for producers that raised their own corn actually broke even in 2008, but in 2009, the cost to raise a bushel of corn increased significantly, so their losses have been larger than producers who were buying a majority of their corn.
“To date, the loss per head in 2009 has also averaged about $25/head. Considering this level of losses over the past 24 months, the overall losses for U.S. producers are now approaching $5 billion. If you relate this to an average family farmer with 1,200 sows and the capacity to finish all of the pigs produced, their total assets in October 2007 were $3 million and their net worth (70% of total assets) stood at $2.1 million.
“Again, if we assume the farm has lost $25/head for the past 24 months, their total losses would equal $1.2 million and their owner equity will have fallen to 30% vs. the 70% of two years ago (Figure 3).
“This scenario is the norm for what we are seeing on many swine operations. From a lender’s perspective, when the owner’s equity approaches 30%, the risk in the credit increases dramatically because the borrower likely has tapped all of their cash reserves and they are now at a crossroads.
“This is where I see the swine industry today. Both the producer and the lender are truly at a crossroads. Again, from a lender’s perspective, the last thing we ever want to do is force people out of business. However, it does not make sense for us to keep funding losses forever. The outlook for the next six months shows that there are more losses coming. Without clear indications that this downward spiral in equity will change, prudent lenders and producers face difficult decisions about whether to exit the business.
“The economic stresses facing the pork industry have far-reaching impacts on towns, small businesses, and families in the heart of rural America and beyond. Money generated by pork production circulates many times in the economy. When a pig owner is in financial trouble, it affects many other people. Young and beginning farmers who are contract growers for the pig owners now have empty barns and no source of revenue to service their debt. That producer generated sales for local feed dealers, equipment suppliers, veterinary services and other local businesses.
Volatility Impacts Capital Availability
“The volatility of the pork industry will impact capital availability going forward. Lenders will not be willing to lend money into an industry that has lost money unless there is a stronger linkage with a financially strong supplier going forward. Producers who were debt free in 2007 are now insolvent under the current system in which pigs are being bought. Lenders and producers are not going to be in the same position to have this happen again.
“Producers are cutting back production, but it takes time for this process to impact the marketplace. According to many economists, the swine industry either needs to shrink by 8-10 million head or something must be done to stimulate a comparable level of pork consumption. If the only alternative is to shrink production, the result will be a significant loss of jobs in rural America which, in turn, will affect many main street rural businesses.
“In conclusion, the pork industry needs your help. Offering higher Farm Service Agency (FSA) loan limits would help lenders deal with the risk of continuing to provide credit to the (pork) industry. The current loan limit is simply too low to help many family farmers. USDA should aggressively help by purchasing pork for use in various federal food programs.
“From a competitive standpoint, the U.S. pork industry has proven it is the best in the world at raising pork. Unfortunately, that success has led the industry to the brink of an economic collapse. The industry needs your help and support. As a lender, rest assured, we are doing all that we can to stay with the pork industry and our borrowers, but we can’t put the institution at risk by doing so.
Click to view graphs.
Swine Industry Consultant
Contact Greenwood at firstname.lastname@example.org