A Lenders View of the US Pork Industry
The “Profile” of a Successful Producer
By Mark Greenwood, AgStar
At AgStar, we are very fortunate to work with some of the best producers in the United States. We are often asked about our perspective on the industry. I’d first like to share the current “profile” of a successful producer and then I’ll focus on the future, from an overview of the US pork industry.
The “Profile” of a Successful Producer
First, it’s important to note that you can be successful in the industry regardless of your size; size is really immaterial. There are several traits that we have seen through the past years that give producers a greater chance at profitability and success.
- They know their cost of production – The very good producers know their costs of production and it is updated every month. For example, in the month of March most producers will know their cost of production for the month and their corresponding profit and loss by no later than April 15. It’s important to know what is happening from an operational stand point in a timely manner. We believe it’s hard to make good decisions on your operation if you don’t have a handle on this and have the ability to get accurate numbers on how you are performing. Good accurate financial information is critical to success.
- They own the sow – Consistently we’ve said that to be competitive long term, owning your sows instead of buying weaned pigs on a matrix gives you a greater chance of success. There are some exceptions to this rule, but, when we look at the financial strength of producers that are farrow to finish, compared to producers that buy weaned pigs on a matrix, the data shows the farrow to finish producer has been more profitable in the past.
- Production matters – The level of productivity that we are seeing today is amazing. We have operations today that are weaning over 30 pigs per sow per year and their mortality from a wean to finish is under 3%. It’s important to have benchmarks:
While we see systems above and below these numbers that are still profitable, the producers that are above these benchmarks on average are more profitable than the ones below.
- Pigs weaned per sow per year > 25 PSY
- Nursery Mortality < 2.5%
- Finishing Mortality < 3%
- % Grade A Pigs Sold (Pigs sold as non cull pigs from wean to finish) – 92%
- Working Capital is King – Working capital, your current assets less your current liabilities, is a key ratio that we measure at AgStar. Producers that have a lot of liquidity have a greater amount of flexibility in making decisions about their business. Anybody that went through 2009 and saw liquidity being drained experienced this firsthand. Having adequate liquidity during times of volatility (that is the new norm) is critical to success. You may be asking how much should I have? While I would love to give a general rule of thumb, it truly depends on many factors for the type of production model you have. For example, if you have livestock with no facilities; you should have more liquidity than someone who owns land, facilities and livestock. In 2009, we had production systems that were just livestock that went from 70% equity in June to below 30% equity in October; these were operational losses. The bottom line is to work towards having more working capital in your operation.
- Risk Management/Margin Management is as important as production management – In our opinion, the days of risk management by selling hogs every day is gone. Due to the volatility in the marketplace, successful producers have implemented a strong margin management focus on their operation. Producers are using the CME to lock up acceptable margins for their business. Iowa State University recently stated that the average swine producer in 2012 lost $10-$12 a head. But we’re seeing data from producers that used a sound risk management strategy in 2012 that made over $10 a head in 2012; that’s an incredible $20 a head difference. Moreover, if you are losing $10 a head and someone is making $10 a head, the bigger question is how do you catch up to them? That’s very difficult to do.
A LOOK TO THE FUTURE EXPORTS ARE CRITICAL
The US pork industry, in our opinion, is the most competitive place in the world to raise swine. This is true for both the producer and processor as the industry has a competitive advantage when comparing to others globally. That being said, we have been on a rapid growth of exports in the last 10 years, and we are exporting close to 25% of our production. The recent decision by Russia and China to ban pork with ractopamine has curtailed pork exports to both of these countries and we have seen cash hogs drop over $20 per head since these announcements were made. In addition, the weakening Japanese Yen to the US dollar is potentially hurting our pork exports to Japan. The US pork industry is currently at a point of a strong reliance on exports so any drawback has serious economic consequences to the US pork industry.
DO WE NEED MORE SOWS IN THE US?
This answer is very simple: no, but we do need more productive sows and systems to remain competitive. From a lenders standpoint this is probably the most difficult decision we face. There are producers that want to grow and financially are able to, but any significant growth is not good economically for the industry. The consideration we ask our clients during this process is if they are making their business more valuable. Producers need to look at their business and determine the best long-term model for their operation. Our perspective for the industry is the total number of sows will not increase, bur rather decrease with increased productivity of the sows.
Having adequate liquidity during times of volatility (that is the new norm) is critical to success.
TECHNOLOGY & INFORMATION
Dating myself somewhat, when I grew up, our family had a party telephone line with three other families. Today, not only does every adult have a cell phone, but even most children over the age of 16 do too. We always have to think about the next technological breakthrough that will enhance our value to our customers globally. The speed of which information travels is amazing and as an industry we must be cognizant of this and use technology to our advantage, to help sell our product. It will be very interesting to see how the evolution of technology continues to change the industry over the next five to ten years.
The percent of people involved in agriculture in the US is now under 2%, with the number only decreasing. The people that are involved in agriculture must help educate the public on the “how” and “why” of agriculture production. You can’t afford to just sit on the sidelines and not be involved. We have seen producers that are bringing people from major metropolitan areas out to the farm to show production practices. They are advocates; helping people not involved in agriculture understand how food is produced. Going forward in our industry, this will be as important as risk management.
Moreover, if you are losing $10 a head and someone is making $10 a head, the bigger question is how do you catch up to them? That’s very difficult to do.
WHO WILL BE THE NEW LEADERS OF THE SWINE INDUSTRY?
Maybe I think more about this as I have become a grandparent and my hair grays by the day. But as I look at the industry, many companies that we work with are owned by folks in their 50s who now have children coming back to the operation. While this is encouraging, this comes with education and a transition. We need the next generation of leaders to start emerging and providing direction for the future. I have been fortunate to be involved in helping steer the swine industry and I am committed to ensuring we have the next generation of leaders guiding the US pork industry so it remains the best in the world.
MARK GREENWOOD Mark Greenwood is the Senior Vice President for Relationship Management at AgStar. He is responsible for overseeing the industry expert group at AgStar, which consists of Lookout Ridge Consulting, large grain, dairy, renewable fuels and the swine industry. He has been with the company since 1997. In addition to managing these groups at AgStar, he has given presentations in the U.S., South America, Europe and Canada on economic issues in the protein sector. He was born and raised on a farm in southern Minnesota and has been involved in the Ag industry for his entire business career. Mark received his bachelor’s degree in Business Administration and a minor in Economics from Minnesota State University, Mankato in 1980.