During volatile times in the pork industry, one of the most critical relationships you can maintain (besides your packer) is the one with your lender. There are many unwritten rules regarding this relationship which, if followed closely, will greatly reduce the chance that you or your banker will have a bad surprise.
Rule 1: Do not surprise your lender.
Frequent and open communication is very important during times of volatility. Your lender already knows what is happening in the swine industry and knows you are facing difficult times. Don’t hide the details of your operation that are material to this relationship. Once your lender is surprised by details you should have shared with them, they will constantly be looking for the next surprise and taking a more cautious approach in your relationship.
Rule 2: Keep your records current.
Make sure your production and financial records are up-to-date so you can accurately describe your situation and avoid generalizations like, “Things are a little rough” or “We will need some extra money but right now, I can’t tell you how much.” Be prepared to forecast using a best case, expected case and worst case set of assumptions so you can provide a range of outcomes that may be needed to help you get to the other side. Remember, your lender will represent your requests and position to colleagues and regulators. Give your lender ammunition to fight for you. Believe it or not, they want you to succeed as much as you do.
Rule 3: Make sure you have a Plan B, Plan C, etc.
Lenders get nervous when they think you are adrift on the sea in a boat with no motor or oars. When situations unfolding around you appear to be the only thing determining your future course, don’t expect any leeway on credit considerations. Be prepared to say things like, “If we can get 85% of our finishing marketed this month, our gross profits or losses will be in this range…” or “If we get less than 85% marketed, we will need to take these additional steps to slow growth and preserve quality.” Being able to list the steps and the added cost necessary to execute them shows your lender you have a plan. It’s even better if you can say, “I have identified these two buyers for packer A and B who believe they can work in my excess if I give them 2 weeks’ notice.”
Rule 4: Plan a meeting with your lender to discuss restructuring your debt.
If a lender must call you to restructure because things have deteriorated to an emergency, such as impending missed payments, the ending deal will not be as good because lender confidence will drop. Be aware and ready to proactively manage your debt situation. Although it is best to seek professional guidance in most cases to manage your finances, it is even more important in a crisis.
Rule 5: Remember liquidity is king during a crisis.
In this case, liquidity is the ability to raise and/or produce cash through regular sales of hogs, sales of unneeded assets (think vacation home), or through additional debt normally accessed through a revolver (revolving loan). There is a well-known saying in ag lending, “When you are out of cash, you are out of business.” If sales temporarily do not support current expenses and long-term debt retirement, you must be able to access cash through short-term debt and unneeded asset sales. Reduce long-term debt payments by restructuring existing loans to longer terms (which can often be done now at lower interest rates), maintain a strict business use of the revolver, postpone unnecessary purchases by upping maintenance practices and make sure you are accounting for the full value of your inventory rather than using a flat figure that is out of date.
Following these basic rules will greatly improve your relationship with your lender and could be the tipping point for hanging on until profitability emerges again.
Dennis DiPietre and Lance Mulberry are economists with Knowledge Ventures LLC.
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