With 2014 year end financials fully wrapped up, pork producers across the country are finding themselves in the best financial position since 2007. In fact, this is the best position some producers have experienced in the entire history of their family farms. The industry is eager to explore expansion as we head into what is anticipated to be an environment of low feed costs, record levels of working capital and minimal balances on revolving lines of credit.
Challenges Continue in the Swine Industry
Everyone engaged in the swine industry is clearly aware of the extreme swing in profitability that occurred over the past 12 months. The end of the 2014 first quarter had cash hogs trading at $125.75/cwt. supported by a $132.58/cwt. carcass cutout. For producers who had hogs without any risk management positions in place, the market was presenting the opportunity to lock in an average of $56/hd. over the next 12 months. A short year later, we have cash hogs trading at $54.92 and a cutout at $65.36. With these prices less than half of what we were receiving a year ago, the opportunity to lock in profits at the end of the first quarter in 2015 wasn’t possible with crush margins forecasting a $2/hd. loss over the next 12 months.
The industry continues to face challenges with slaughter up 6 percent over a year ago and weights only recently falling below 2014 levels. This again leads to concern about slaughter capacity, something not talked about over the past 18 months as the industry dealt with PEDv. The strong U.S. dollar continues to create challenges for U.S. pork exports even with the west coast ports open again. The potential effect of the avian influenza continues to be an unknown. The export challenges the poultry industry faces could place additional competition in meat cases across the U.S.
Balance Sheets: Preparing for Growth
Pork producers across the country are fully aware of issues that could significantly impact their bottom line and how losses impact their balance sheets. While still concerned, many farms still have long-term goals to grow their operations to provide opportunities for the next generation returning to the farm. In an environment like this, it is especially important to stress test the balance sheet after a potential expansion and assess where working capital is positioned.
As producers updated their cash flow projections and revisited their risk management coverage levels after year end, a common theme emerged. To maximize the liquidity that their asset base can support in times of need, farmers are eager to rebalance their balance sheets. Many producers have experienced incremental growth without needing lender financing. Others have made significant progress in paying down debt. In extremely profitable environments, it is common to use a higher amount of cash and/or operating loan proceeds to finance capital improvements rather than using long-term financing that mirrors the expected useful life of the asset.
Source : Agstar