Cover Story: Needed - a consistent farm policy for Canada's hog industry

Tuesday, February 16, 2010

While other lenders are more circumspect, Farm Credit Canada (FCC) has set the financial benchmark for talks on lending success as producing pork for $1.40 a kilogram in two years and making this the starting point for financial analysis of a pig farm.

As a result, producers are asking themselves the question: Can they produce pork, cover costs at that level and service their debt?

Henry Homan and his sons, John and Dirk, finish pigs from 275-280 sows on homegrown feed from 450 acres of land in the Niagara Region, near Wellandport. Their farm, Hihojo Ltd., weans 27.1 pigs per sow and ships 6,500 pigs annually. Average corn yield as recorded by Agricorp is 161 bushels per acre.

John, 32, has been involved in the operation for 10 years. Dirk, 23, joined a year ago. Both are well-educated and could get jobs elsewhere, but they want to farm. The same goes for their father. A generation before, Henry gave up his career as a school teacher to take over his father's farm. He is about as far from being a radical as a pork producer can be.

The two generations of Homans are soldiering on, even though they are baffled by government programs that are supposed to help embattled producers and food safety regulations that add costs with no apparent benefits.

Before an expansion in 2004, and poor pork returns since, the Homans were mortgage-free. They replaced worn out facilities in 2004-2005 and expanded from 120 sows. Their five-year-old Royal wall design barn, 160 by 132 feet, is well-insulated, biosecure and easily washed. Pork farming economics delayed the second phase of a planned expansion.

"We put our land base first," explains 62-year-old Henry, adding that while 2004 was not an ideal year to expand, "if you wanted to stay in business, you had to have good facilities."

Because of the expansion and price trends, they were unable to trigger a Canadian Agricultural Income Stabilization (CAIS) payment in succeeding years. "We tried hard," Henry says, even switching to a more experienced accountant.

In late fall of 2009, the Homans refinanced with a regular bank loan (Henry Homan won't say with which lender) after being rejected for financing through the Hog Industry Loan Loss Reserve Program (HILLRP). Henry says he was told their operation had too much equity.

"We were told, 'This is not meant for you.' The question is, who is this program meant for? We started to wonder if this was just politics?"

High-profile producer Wayne Bartels, spokesman for a Beginning Farmers group and profiled in Better Pork in October 2009, also wonders. He applied for HILLRP financing in November. "They turned us down. They told us we had too much debt."

Months after he gained notoriety for running his sow barn on generators to stave off a shutdown caused by non-payment of his utility bill, Bartels is still looking for financing. He says lenders won't support operations that have lost money in the last three years, even though that financial situation is widespread across the industry.

Bartels calls the HILLRP program "nothing but fluff." A lender told him that the loan loss program will only cover the bank for 90 per cent of the failure of a certain number of clients enrolled under the program, based upon the assumption that not nearly all of the applicants will fail. He believes this makes lenders reluctant to lend to an industry that is in trouble across the board.

According to the Agriculture and Agri-Food Canada website, "lenders are responsible for assessing applications, extending and managing loan amounts in accordance with the program's terms and conditions, managing their Reserve Fund and for any losses beyond those that can be drawn from the Reserve Fund. As such, lenders continue to bear a proportion of the risk for loans extended under the HILLRP."

Bartels hopes to write down his debt through mediation, and needs to find a new lender. He says those he has spoken to aren't taking on new hog farm accounts. To other producers looking for a new lender, he says "good luck."

No magic number
HILLRP is a loan loss reserve program, not a loan guarantee program, says Perry Wilson, district director for FCC's London district. Wilson says the $1.40 figure is "a benchmark we've been using for quite some time." It is the 15-year average price for pork, corrected for a 90-cent dollar and inflation. "It's a starting point," he says. A borrower's viability is still based on cash flow statements and long-term projections.

HILLRP is designed to get producers through until prices get better over the long term, he says. Viability of farms is assessed on an individual basis.

Assessment is done on an individual basis. Farm Credit asks the producer to come to it with cash flow statements and projections that show the borrower is viable in the long term, Wilson says.

As of Dec. 23, FCC had dispensed $63.5 million under the HILLRP program to customers with a combined portfolio of borrowings of $163 million and representing 14 per cent of FCC's $1.2 billion national hog portfolio.

Peter Brown, Toronto Dominion Bank's director of agriculture says there is no magic number for profitability. "It depends on many different things," he says. Neither TD nor other banks would comment on the number of applications they had accepted. But, in December, Martin Rice, executive director of the Canadian Pork Council, reported that financial institutions said there "hadn't been much traffic" on the HILLRP file.

Back on the Homan farm, Henry, a local pork association committeeman, says the process "makes for a lot of very cynical people." He adds that "we are trying to look ahead and keep all of our options open" by repopulating with higher health pigs. The Homans are also selling excess corn.

John and Dirk remain enthusiastic about farming. But Henry wonders what the future holds for many operators. If they are forced into bankruptcy, they will have to sell their land, and there will be little, if anything, left after years of work.

Henry Homan thinks the FCC number of $1.40 may cover interest payments on loans, but likely not pay back principal. He estimates current pork production costs are in the $1.60 to $1.65 range. "The costs to produce feed have gone up quite a bit," he observes.

But financing is only the immediate challenge that producers face. In the longer term, policies need to be put in place that support the pork industry rather than weigh it down.

Cash croppers struggled for years with poor prices and Henry Homan says the solution is not to bring down corn prices. "The fault lies not in high feed costs but with a return that doesn't cover costs."

The pork business "has to make it profitable for everyone involved" and the pork board has struggled with this dilemma, he says.

Risk management program needed
The Homans have been doing some brainstorming in their spare time. Their conclusion is that Canada needs a consistent farm policy. Governments have to recognize that pork didn't get into this situation by itself, Henry says, citing strong encouragement from processors such as Maple Leaf, which aimed to export fresh pork to Japan and then decided several years ago to get out of the business, leaving producers wondering where their markets were.

Henry and John emphasize the need for a risk management program for Ontario producers. They would like to see a program similar to the Net Income Stabilization Account (NISA) brought back.

Ontario producers have no guarantee of $1.50 per kilogram, as exists in Quebec. There is no regulation on production. Supply management isn't an option because of grief from trading partners. "Our politicians need to get out in front for us" on border issues such as Country of Origin Labelling (COOL), John says. There has to be fair trade, "not just free trade for the sake of free trade."

Some stabilizing mechanism for currencies would also help. "Europeans addressed it by going to the Euro," Henry Homan says.

The United States does have a policy, says Henry Homan. Grain production is strongly subsidized, supporting livestock production and exports. In spite of that, producers of dairy, pork and chicken are hurting.

A U.S. Department of Agriculture farm income forecast last November said "the $57 billion forecast for 2009 remains the eighth largest amount of income earned in U.S. farming history. The top five earnings years have been tightly grouped between 2003 and 2008, attesting to the profitability of farming this decade."

Farming keeps on getting hit with rules that don't help profitability. John cites the Specified Risk Material rule, requiring the separation of beef spinal cords, heads and some other body parts associated with BSE from the rest of the offal is an example of a law that does hurt domestic beef producers. It costs packers here over $30 a head more than packers in the United States to slaughter a steer. "To say our pork is safe and our beef is safe is not helping any one," John Homan says. BP