By Steve Malakowsky, vice president of swine lending at Compeer Financial
Although it isn’t quite time to look at the full year in review, I would like to offer perspective on the most recent database information Compeer Financial has compiled through the third quarter of 2022. Out of all the quarters, I like the third quarter information best. Why? It reflects base operations and has the most tax-motivated decisions out of the financial statements.
The Numbers Tell the Story
The most telling impact on the swine industry continues to be health, and more specifically, porcine reproductive and respiratory syndrome (PRRS) challenges. I have also seen the most noticeable variation between profit per head and losses. Our database includes 21 farms, all who have their financial information prepared according to GAAP procedures, which I believe gives us a good representation of the industry.
Most producers had a profitable first three quarters of 2022. The biggest difference was in the variation between farms. The first three quarters were about average with a $9.41 per-head profit. The impact to the financial statements was also reflected with owners’ equity for the average farm moving up 3% to 60% overall equity. This compares to 55% owner’s equity just two years ago.
In addition, working capital per sow is a target we measure and use for a standard. This amount improved from $1,037 per sow at third quarter end 2021 to $1,409 per sow equivalent. To put this into terms of liquidity for your business, our standard is $400 per sow, and we use a target of $600 per sow which provides some cushion in times of increased volatility. Even with a much higher costs structure, operating debt per head decreased slightly from $45 to $42 year over year.
The biggest impact to producers is the amount of cash they have tied up in inventories. The average cost of production just two years ago was $69.12 cwt. and has moved to $91.83 cwt. With the average carcass weight at 214.9 lbs., this is an increase of $48.80 per market animal that had to come out of your working capital to build a higher cost of inventory. Assuming you sell your hogs evenly every week throughout the year, your average inventory cost with a $50 wean pig increased by $29.40 per head. With 2,500 sows of production at 27 PSY, you have an extra $992,250 tied up in your inventory alone.
Volatility in Pork Production
One area that shocked me was the increased volatility in the industry. To me, all production systems left in the industry today are there for a reason. Simply put, they are good operations. However, even with good production systems, the variation from top to bottom continues to increase. The variance year to date through the third quarter in profitability is $61.25 per pig when excluding an outlier. This is all driven by health challenges farms had to endure over the past 18 months.
The other number to test your farm against is your owner’s equity level. The average farm has 40% leverage and 60% equity. Most farms fall in the 50% to 80% equity level. The reason I would recommend you try to stay above the 50% equity level today is the increased volatility and cost of operations. When you are looking at 2023 capital expenditures, take that into account, especially in the higher interest rate environment we have now.
A Little 2023 Advice
As you prepare for the year ahead, here are two things to consider.
1. When you are completing your budgeting process, use your most recent inflation-driven costs numbers and not historic averages as many have done in the past. An accurate budget is vital to making risk management decisions that will help you keep your operation viable long-term.
2. If your interest rate is tied to the London Interbank Offer Rate (LIBOR), you will need to change to another index soon. LIBOR is being phased out by June 30, and the official replacement will be Secured Overnight Financing Rate (SOFR). If you haven’t heard from your lender what your options are, talk to them soon.
More from Steve Malakowsky on Farm Journal’s PORK:
Don’t Underestimate Inflation in Your Forecast Model
Volatile Times Can Provide Opportunity
