By Jim Marzolf, Pipestone Business Services
In commodity production, high prices are the result of higher demand than available supply. Higher prices create profitability that attracts financial capital. As capital rushes to the higher rates of return, pork producers increase production capacity, which eventually increases supply and pressures market prices.
As supply and demand find equilibrium, the result is lower prices. There’s an old saying that “low prices are the cure for low prices,” causing producers to slow expansion or even reduce supply. As we experience another period of oversupply in pork production, producers are looking for strategies to survive and thrive through this cycle of oversupply and low prices.
During periods of low prices, it’s time to implement business strategies that improve cash flow and preserve equity. Unfortunately, it’s too late to improve working capital, hedge price risk or use other tools used during good times with an eye on future low prices.
Instead, here are five strategies that may be helpful in the midst of pressures from low prices.
1. Evaluate your assets.
Low prices pressure producers to reduce the supply of pigs. Producers will also have to decide whether their production facilities should remain in service. While these decisions are complicated and emotional, they require careful analysis and objective decision-making, focused on preserving equity during times of equity erosion. Generally, the industry rewards the assets that are the most productive, least susceptible to disease, most sustainable, most employee friendly and have the most remaining useful life. If your assets are disadvantaged in any of these areas, an objective evaluation should be considered.
2. Optimize return over feed costs.
It’s time to evaluate business as usual. While your production system is designed to produce 285-pound market hogs, you should balance the needs of your packer with an investment in additional feed, labor and yardage that may not contribute to your bottom line.
3. Defer capital purchases.
Producers in a strong financial position often expand their operations during periods of low market prices and stress. However, if your balance sheet is short on working capital, deferring capital purchases is a strategy that will conserve cash that can be repurposed to weather the storm.
4. Reduce equity draws.
It’s human nature to let lifestyle expand as disposable income increases. During times of prosperity, farm families—like the general population—often see their lifestyle improve. When prices are low, it’s time to take a careful look at discretionary spending.
5. Defer debt service.
Also called forbearance, working closely with your lender to defer principal payments is another way to conserve cash. This option should be a last resort because it can impact your operation in the long run.
Marzolf serves as the vice president of Pipestone Business Services.
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