The Swine Industry & Exit Strategies
The Swine Industry & Exit Strategies
Agenda • Overview of AgStar and the role of financing the swine industry • Current swine economics • Exit Decision • What is the value to the owner and ultimately to others • Exit planning • Q&A
Background of AgStar • Part of the Farm Credit System – primary financing arm of swine producers in the US • AgStar manages over a $1 billion to the swine industry • AgStar has lending relationships with 60% of the top 30 largest pork systems in the US • AgStar is heavily invested in the pork industry
AgStar Sow Database • • • • •
19 F-T-F clients with a total of 952,000 sows Avg OE > than 50% (GAAP) WC/Sow of $750 and Current ratio 2.11 Avg. cost of production $167 or $61.85/cwt. All 19 clients are acceptable credit
Portfolio Overview • • • •
Average producer has made $10 a head/ YTD The very good have averaged over $15 per head profit Balance sheets were improving Big differences in recovery due to risk management and cost of production • Successful producers have tremendous working capital – very little operating debt • Risk management has been good for the very good
Portfolio Overview • 23% usage on their revolver as August 2012 • They have 77% availability on their revolver • The issue going forward is losses are coming – fast and furious along with much higher cost of production • In the last 90 days higher feed costs has the cost the pork industry $3.3 billion • Feed costs are increasing $30+ per head from where they were 4 months ago • The next slide shows the forecast per month for the average producer on profits
Outlook
Economic Forecast • Current losses today are over $30 a head with potential to get worse • Drought impact is significant • We are trying to manage this as best we can • We work with the best producers in the US but the economic pain is significant • If the forecast stays as is this will erode equity quickly and reduction in numbers will occur
Strengths & Weaknesses • To understand sustainable production models going forward it is important for producers to understand the strengths and weaknesses of certain models • Larger scale sow units, 2,000 sows and larger, will producer a lower cost wean pig because of efficiencies of scale • Down line pig health is also better due to lower age variation on finishing sites • One weakness of larger systems compared to small is that most large systems do not grow their own inputs
Strengths & Weaknesses • If you are a smaller producer who may not be as efficient on hog production but is still very competitive because you produce your feed inputs can you make the same or more money selling the corn? • Currently we may be seeing some realization of this in areas hit hardest by the drought • Either large or small and whether or not you produce some of your feed inputs risk management must be a strength of your business to succeed
Exit Decision • The first step is the decision to exit • Financial standing and market conditions at the time will affect the outcome • For many smaller producers the decision is affected by the returns on crop production vs hogs over the past 5 years • Historical numbers of farms continues to fall because margins are squeezed and consolidation occurs. • This continues to date with efficiencies of scale
What is the Value? • The owners of opinion of the value and the marketplaces value may differ based on key factors • Size can play a large role due to efficiencies of scale • If it’s a sow unit and smaller than 2,000 sows there may still be interested buyers if the existing unit is well maintained and permitable/expandable to a larger size • Location will be key in determining if this is a viable option • Timing will also play a key role in the value. Now may not be the best time to find willing buyers!
Examples of Value • 600 hd sow unit in north central Iowa may have no real value as a sow unit due to size and location near large amount of swine • Even a 1,500 sow unit today in southern Minnesota appraises for $600/space but you would be hard pressed to find a buyer in today’s market due to the outlook and smaller size • Reality is a unit smaller than 2,000 sows would be hard to move unless there are special circumstances. Location, permitable expansion, etc.
Exit Planning • Timing is also important in terms of tax planning • Deferred tax liabilities can have a huge impact! • What is the producers basis in livestock and facilities – may make it difficult to liquidate in one year and not have a large bill to the government
Exit Planning • Need to consider packer contracts • Are animals hedged or sold on forward contracts? • How many years may remain on contracts with custom growers?
Exit Planning • The preferred option may be to sell the business as an ongoing operation but this will depend on size and a willing buyer • Another option would be to wind down the inventory and shut down certain assets that may have reached the end of their useful lives • Although you may still have the tax implications to deal with the options may be simpler if you only own finishing spaces and are looking to become a custom grower for an integrator • Exit and restart is probably not an option for most
Exit Planning • At the end of the day estate planning in advance can save a lot of head aches when it comes time to exiting the business • If a producer waits until the bank is starting to make decisions for them the horse has already left the barn • Be sure to have the right consultants, legal, and tax advise well in advance of exiting the business • Paying some taxes may be better than deferring the whole bill until exit or death!
Exit Planning • A good question posed to me by a business consultant referring to those wishing to exit a business was “what are you planning to do after you exit?” • Many times producers have spent the better part of their life working in these industries and if they leave and do not think about what they will do afterward there could be some negative consequences.
Thank You – Questions?
Special Thanks to: Lookout Ridge Consulting Professional Ag Marketing
Agenda • Overview of AgStar and the role of financing the swine industry • Current swine economics • Exit Decision • What is the value to the owner and ultimately to others • Exit planning • Q&A
Background of AgStar • Part of the Farm Credit System – primary financing arm of swine producers in the US • AgStar manages over a $1 billion to the swine industry • AgStar has lending relationships with 60% of the top 30 largest pork systems in the US • AgStar is heavily invested in the pork industry
AgStar Sow Database • • • • •
19 F-T-F clients with a total of 952,000 sows Avg OE > than 50% (GAAP) WC/Sow of $750 and Current ratio 2.11 Avg. cost of production $167 or $61.85/cwt. All 19 clients are acceptable credit
Portfolio Overview • • • •
Average producer has made $10 a head/ YTD The very good have averaged over $15 per head profit Balance sheets were improving Big differences in recovery due to risk management and cost of production • Successful producers have tremendous working capital – very little operating debt • Risk management has been good for the very good
Portfolio Overview • 23% usage on their revolver as August 2012 • They have 77% availability on their revolver • The issue going forward is losses are coming – fast and furious along with much higher cost of production • In the last 90 days higher feed costs has the cost the pork industry $3.3 billion • Feed costs are increasing $30+ per head from where they were 4 months ago • The next slide shows the forecast per month for the average producer on profits
Outlook
Economic Forecast • Current losses today are over $30 a head with potential to get worse • Drought impact is significant • We are trying to manage this as best we can • We work with the best producers in the US but the economic pain is significant • If the forecast stays as is this will erode equity quickly and reduction in numbers will occur
Strengths & Weaknesses • To understand sustainable production models going forward it is important for producers to understand the strengths and weaknesses of certain models • Larger scale sow units, 2,000 sows and larger, will producer a lower cost wean pig because of efficiencies of scale • Down line pig health is also better due to lower age variation on finishing sites • One weakness of larger systems compared to small is that most large systems do not grow their own inputs
Strengths & Weaknesses • If you are a smaller producer who may not be as efficient on hog production but is still very competitive because you produce your feed inputs can you make the same or more money selling the corn? • Currently we may be seeing some realization of this in areas hit hardest by the drought • Either large or small and whether or not you produce some of your feed inputs risk management must be a strength of your business to succeed
Exit Decision • The first step is the decision to exit • Financial standing and market conditions at the time will affect the outcome • For many smaller producers the decision is affected by the returns on crop production vs hogs over the past 5 years • Historical numbers of farms continues to fall because margins are squeezed and consolidation occurs. • This continues to date with efficiencies of scale
What is the Value? • The owners of opinion of the value and the marketplaces value may differ based on key factors • Size can play a large role due to efficiencies of scale • If it’s a sow unit and smaller than 2,000 sows there may still be interested buyers if the existing unit is well maintained and permitable/expandable to a larger size • Location will be key in determining if this is a viable option • Timing will also play a key role in the value. Now may not be the best time to find willing buyers!
Examples of Value • 600 hd sow unit in north central Iowa may have no real value as a sow unit due to size and location near large amount of swine • Even a 1,500 sow unit today in southern Minnesota appraises for $600/space but you would be hard pressed to find a buyer in today’s market due to the outlook and smaller size • Reality is a unit smaller than 2,000 sows would be hard to move unless there are special circumstances. Location, permitable expansion, etc.
Exit Planning • Timing is also important in terms of tax planning • Deferred tax liabilities can have a huge impact! • What is the producers basis in livestock and facilities – may make it difficult to liquidate in one year and not have a large bill to the government
Exit Planning • Need to consider packer contracts • Are animals hedged or sold on forward contracts? • How many years may remain on contracts with custom growers?
Exit Planning • The preferred option may be to sell the business as an ongoing operation but this will depend on size and a willing buyer • Another option would be to wind down the inventory and shut down certain assets that may have reached the end of their useful lives • Although you may still have the tax implications to deal with the options may be simpler if you only own finishing spaces and are looking to become a custom grower for an integrator • Exit and restart is probably not an option for most
Exit Planning • At the end of the day estate planning in advance can save a lot of head aches when it comes time to exiting the business • If a producer waits until the bank is starting to make decisions for them the horse has already left the barn • Be sure to have the right consultants, legal, and tax advise well in advance of exiting the business • Paying some taxes may be better than deferring the whole bill until exit or death!
Exit Planning • A good question posed to me by a business consultant referring to those wishing to exit a business was “what are you planning to do after you exit?” • Many times producers have spent the better part of their life working in these industries and if they leave and do not think about what they will do afterward there could be some negative consequences.
Thank You – Questions?
Special Thanks to: Lookout Ridge Consulting Professional Ag Marketing
