Cover Story: Diversification - A way out of the worst crisis in the hog industry's history?

Wednesday, December 2, 2009

Some producers are choosing this as the way ahead, but they caution that it is not for the faint of heart and that success depends on factors that may not be in the farmer's control

by MARY BAXTER

For the past decade, the Aarts, who are hog producers near St. Marys, have been developing a fresh vegetable, direct marketing business. So far, selling sweet corn and other vegetables at the farm gate and at a local farmers' market generates about one sixth of their business. Selling at the farm gate also presents a potential outlet for pork generated at their 150-sow farrow-to-finish operation near St. Marys.

The Aarts – 36-year-old son Dennis and his parents John and Rika – are among several producers in Ontario who have diversified rather than just specializing in hog production. In the midst of the worst crisis in the industry's history, their mixed farming approach appears to be paying off.

Compared to the hog operation, the vegetable business is small. But "we see enough potential in it that, if we had to get right out of hogs, we feel we could go into it," says Dennis, adding that he'd likely need to take a part-time job as well.

With government money on the table in the form of buyouts and loan guarantees, has diversification become the answer for hog operators searching to buffer market volatility and achieve long-term sustainability?

Scott Yule, assistant vice president of credit at Farm Credit Canada (FCC), doesn't think so. "We have long-term faith in the industry," he says, adding that FCC anticipates hog production will rebound with some adjustments.

Even so, Yule concedes that those who are diversified have an advantage in weathering the current industry lows. Diversification doesn't have to mean branching into another commodity. "It could be as simple as off-farm income," he says, noting that the term simply refers to having more than one income source.

Those who have diversified, or who are in the process of doing so, caution that it's not for the faint of heart. Success depends on an array of factors, some beyond a farmer's control. It takes time to establish a new business venture or take on another aspect of the production chain. Financing is key, and can be difficult to arrange. A new venture also affects the existing one.

Adding the direct marketing business has meant some adjustments to the Aarts' barn, such as reducing the herd size and converting to batch farrowing to free up time. Dennis doesn't know if combining local sales of pork with participation in provincial hog marketing pools would change production practices, other than perhaps involving additional record keeping. "We'll just see what people want," he says, noting that if meeting local interests means a shift to a niche market, producing certified humane pork would be "quite an undertaking." A shift to antibiotic-free production to make the change to certified humane pork would not be difficult.

Making the shift to direct marketing from commodity pork production has not only affected the structure of Oliver and Renate Haan's operation, but also how they spend their time.

Ten years ago, the Haans, who farm near Belleville, were finishing hogs in a 1,600-head capacity barn. In 2001, they made the switch to direct marketing, closed their herd and shifted to farrow-to-finish. Today, their 85-sow herd supplies frozen, medication-free pork products to six area farmers' markets, as well as to restaurants, caterers and stores as far away as Ottawa, Toronto and even Hamilton. They have achieved three back-to-back successful years, says Oliver Haan.

Direct marketing means putting a face to the operation and conveying a story about what you produce. "You cannot hire somebody to tell your story," says Haan. "You are the face, and therefore you have to do the marketing."

That means the couple spends a lot of time on the road, retailing their pork products and other local offerings out of two trailers, while hiring weekend staff to assist at the farm.

Hogs might still be integral to the operation, but there's no question in Haan's mind that diversification has taken place. "Historical pork production has always stopped when the animal goes on the trailer," he explains. "So we've taken it several steps beyond and the diversification is that we have gone into marketing."

The change has led to other ventures for the Haans. Back on their 475 workable-acre farm, the couple now raises cattle and cash crops of hay and straw.

Location has played a pivotal role in their success. They are close not only to their customers but also to two processing plants. Lack of access to a plant can be a deal breaker, Haan observes: "There are parts of Ontario that no longer have readily available, provincial abattoirs or even small federal plants that will custom-kill, do the value-added and utilize the whole pig."

Readiness to make the changes needed to serve their customer base is also essential. Rightly or wrongly, the average consumer who supports local food initiatives is concerned about modern hog production practices, he explains. "You have to overcome that."

The greatest challenge has been convincing lending institutions that creating a business around local food rather than commodity markets is bankable. He figures attitudes in the finance industry have recently softened in response to the hog industry crisis.

Not so, according to Scott Yule. If the venture is relatively new and unproven, he suggests, lenders typically look for the owner or producer to take more risk.

Producers won't find much opportunity for financing diversification in government buyout and loan programs either, he adds. The main purpose of the hog industry loan loss reserve program, which offers government guaranteed loans through lenders, is to provide producers with the working capital to get them through the crisis and survive longer-term on their existing operation. There may be room in the hog farm transition program to help contribute towards diversification, but it is intended to help producers exit, he says.

No help for expansion
The programs certainly don't look like they can help Tom Murray, who farms near Tavistock, to diversify. He doesn't qualify for the buyout because he didn't own pigs during the program's qualifying time period. Loans may help keep the operation afloat but don't leave room for innovation or expansion.

He's heard talk about the possibility of converting hog barns to house chickens, but it costs money. With his farm's massive debt and dwindling equity, what lender would finance his acquisition of quota and barn modifications, he asks?

Nevertheless, Murray has diversified in the basic sense by finding a full time job off-farm as a livestock broker. It has meant making significant changes on the farm – cutting the size of the operation in half, as well as adding automatic sorting and better feeding systems to his 2,000-head finishing barn to free up his time. Then there's the rising cell phone bill because he no longer has access to a much lower cost landline to conduct farm business during the workday. "Farm business still has to be done," he says.

Greg Haskett, who farms with his father Alvin near Bright in Oxford County, was able to use money received under last year's sow cull program (they culled 1,185 sows) to help leverage diversification. The program required barns where culls took place to remain out of production for three years, but did not (as the current buyout program does) require producers to idle all of their hog production facilities for at least three years.

So Haskett still owns some finishing pigs and says hog production will remain a part of the operation, "but instead of it being 90 per cent of our revenue, it might be 15 or 20 per cent."

The Hasketts have used the money to retire debt and raise the farm's debt-to-equity ratio to enable financial restructuring. Haskett is also considering applying for a transition loan to refinance other debt.

His first step in diversifying was to buy a 500-acre farm near Napanee for cash cropping. He could not justify getting involved in the venture in Oxford County, where competition is fierce.

He is using insurance money from a barn fire to remodel an existing barn and build a new one on the home farm. The barns are designed to be easily adapted to house different types of livestock.

Haskett considers himself lucky that he and his father never built specialized hog facilities. "Whenever I considered building a new sow facility or anything like that, there was not enough margin there to cover risk that I felt was acceptable to sign on to that type of debt," he explains.

Beginning sheep production is next on the list. He hopes to finance the acquisition of sheep with a loan from the Canadian Agricultural Loans Act program. He also looked at goats for both milking and meat, but made no commitments.

The sheep industry has potential – producers only supply about 40-45 per cent of the domestic market – but it lacks benchmarks for production standards, costs and revenues.

The dearth of industry numbers has also made financing a hurdle for Haskett. "Creditors don't really understand them (sheep and goat producers) because they don't deal with them," he says. He has tried to use existing producers' numbers, but these vary widely.   
Then there are the practical challenges. He wants to develop a large herd, but it's difficult to acquire appropriate breeding stock. So he has decided to breed his own and that will delay his entry into marketing.

There's a big learning curve about production, too. He has educated himself by taking a large flock infrastructure course from the Ontario Ministry of Agriculture, Food and Rural Affairs and by talking to those already in the industry.

Haskett hopes to adapt for sheep what he has learned in hog production about health, genetics and economic efficiencies. He thinks the industry's potential is exciting, but he is worried other producers might get the same idea.

Markus Wand, chair of the Ontario Sheep Marketing Agency, says he has heard of hog producers' interest in sheep, but he doesn't know any who have made the commitment to large-scale production. "The problem for hog producers who do want to switch over would be to actually find the breeding stock," he says.

Splitting the business
Kevin Kimball, who farms with his son Rob, combines a 250-sow farrow-to-finish operation with cash cropping corn, soybeans and wheat on about 1,000 acres near Staples in Essex County. The Kimballs have submitted a bid under the buyout program, but Kevin doubts it will be successful. It's a way of letting the government "know the desperate state of the swine industry in Canada," he writes in an e-mail.

If their application is successful, the Kimballs will use the money to help realize their long-term business plan of splitting the diversified farm business into two separate corporate entities. He would continue to cash crop while Rob would take over hog production.

Specifically, the money would be used to refit the barns during the three years of suspended production. Kimball doubts the hog industry will be lost in Ontario, but believes costs have to be brought into line with low cost producers in the United States.
The interest in dividing the business is motivated by problems arising from diversification. Cash crops might have buffered the effects of the hog crisis, but the farm's two facets often work against each other in government safety net programs.

For example, Kimball missed out on federal emergency payments in 2006 to grains and oilseeds growers because the program excluded farm-fed grains. When he made claims to AgriStability programs in 2007 and 2008 to offset plummeting hog market prices, he only received a fraction of the $200,000 a friend with exactly the same hog operation received.

That was because AgriStability calculated payments based on a whole farm's earnings rather than on each commodity's earnings, Kimball explains. This approach to calculating the payments really hurts "the diversification part" of his business, he says.
So is diversification worth the headaches? Louis Roesch, who has run a diversified operation since the 1990s thinks so.

In 1995, the Kent Bridge farmer and his wife Clara moved from a commodity hog operation that shipped 1,500 hogs a year to producing for their on-farm butcher shop.
It took six years to establish the business and another four to make a profit. What's earned for the hours worked would never equal off-farm salaries.

Yet neither would want to work for someone else. And Roesch is convinced they would have "never, never have survived in the hog industry" during the price crash of 1998, when they were also coping with the impact of a barn fire, had it not been for the decision to diversify. "We didn't make any money in that window, but we didn't lose any," he says. BP