June 1, 2009

 

Agricultural lenders see more cutbacks in US hog production amid losses

 

 

Many producers, large and small, have struggled with losses over the past 20 months and the agricultural lenders expect more swine production cutbacks. Earlier in the year, producers were optimistic that hogs would turn profitable again this spring and summer. That would have eased the financial strain their operations have been under since September 2007.

 

About the time that hog and pork prices were set to move up, the AH1N1 influenza outbreaks were discovered in Mexico with several deaths reported. A few cases were also seen at that time in Texas and California. The influenza, initially called swine flu by US and world health officials, caused consumers in Mexico and elsewhere to shun pork and pork products due to concerns that they could contract the disease from the meat of swine.

 

Previously optimistic expectations for spring and summer hog prices dimmed and hopes of producer profitability for the period have largely been washed away. Rising grain prices have made matters worse for producers because that means feed costs and producers' break-even prices will be higher.

 

Lee Fuchs, vice president, Capital Markets, FCS Financial, in St. Louis, said that "there will almost certainly be more cutbacks in production if not total liquidation by many producers." For the most part, producers have exhausted nearly all of their liquidity due to operating losses, he said in an email.

 

"Very few producers have enough liquidity to operate another year under the current economic conditions," Fuchs said. Additionally, lenders will not have the ability to infuse more liquidity into the hog industry as most are already "nearly tapped out in their loan portfolios from an industry exposure standpoint," he said.

 

Fuchs said lenders are under increased pressure from regulators due to economic troubles and the banking issues that have developed during 2008 and 2009. "Therefore, the lender's risk appetite has been substantially reduced at a time when the industry is clearly short on liquidity," he said.

 

Bill Wagner, vice president of Ag and Commercial Lending, First Mid-Illinois Bank and Trust in Highland, Ill., said the current economic situation in the swine industry is "not sustainable." Some producers have indicated they will not stay in the hog business and lose more equity - they are getting out on their own, he said.

 

Many producers are carrying too much debt, and because of that, they are locked in and must continue to produce hogs, Wagner said. "If they don't [produce], they still have a high cost operation sitting idle."

 

Some producers have long-term contracts that they are obligated to honor, and so cutting back on production or liquidating is very difficult, Fuchs said. As a result, it seems now that the producer with less fixed investment and limited contracts can get out. Those who exit first may end up being the winners because they will cut their losses. The remaining producers, however, continue to operate but lose substantial amounts of money, he said.

 

Market analysts and commodity brokers contacted said from 15 percent up to 50 percent of their small and midsize independent hog producers are seriously considering exiting the business.

 

Exports may be the only bright spot to show promise, but that will not be enough to offset the domestic demand troubles, high cost of production, and the lack of liquidity of producers and their lenders, Fuchs said. "As a result, the outlook is not very pretty, and it points to more liquidations and production cutbacks. The big question is how painful will it be. But, it seems that those who exit first may end up being the winner."