FARM DEBT: A looming issue for some swine producers
Monday, February 20, 2012
Many pork producers are taking a welcome breather and enjoying reasonable returns after the string of crises that has hit the industry in the last decade. Most are carrying more debt than before and, for some, it is a millstone that will be hard to slough off. Debt is certainly a looming issue for the 400 hog producers who haven't paid back their nearly four-year-old ACC loans.
Don LeDrew, chief operating officer of ACC Farmers Financial in Guelph, says that in 2008 the Emergency Livestock Advanced Payment Program lent about $96 million to roughly 650 Ontario hog producers at a reduced interest rate. Of that, $32 million, or about one third, has been paid back. About 400 hog producers owe ACC $64 million.
LeDrew says the average outstanding loan is $160,000, but individual loans range from $120,000 up to $400,000 (the maximum lent in 2008). The first $100,000 was lent interest-free and had to be paid back first. In addition, as much as $300,000 was lent at the prime interest rate.
Agriculture Canada has allowed two stays of default, LeDrew says, the most recent in the fall of 2010. Producers that don't pay their outstanding loan by the end of March must arrange a repayment program to be completed by March 31, 2013. The interest rate on the loan is currently at prime minus one quarter of a per cent.
"If they can't, we will be working with them for an up-to-five-year repayment agreement" at a rate of prime plus half a per cent, LeDrew says. "ACC Farmers' Financial will be working very closely with producers to assist in structuring repayment and settlement agreements," says its website.
Debt is all too familiar to most of the province's pork producers, according to a study conducted by Ridgetown-based University of Guelph economists Randy Duffy and Ken McEwan. They compared the financial fitness of swine farms before and after the economic battering endured between 2005 and 2010, using several different and overlapping financial studies. And they compared Ontario's swine-producing sector debt to producers elsewhere.
The Farm Financial Survey, a joint publication of Agriculture and Agri-Food Canada and Statistics Canada, says average Ontario swine farm debt of $551,000 in 2006 grew 36 per cent to $749,000 in 2009.
Another measure of farm debt is the Ontario Data Analysis Project (ODAP). The relatively small number of farrow-to-finish farms, measured by McEwan, showed a 34 per cent increase in debt carried, with total swine farm liabilities averaging $905,000 in 2006 and rising to $1.21 million in 2009.
Total Canadian farm debt, increasing since 1992, was estimated at $66.4 billion on Dec. 31, 2010, a 42 per cent increase since 2003.
Chartered banks hold 36 per cent of that total Canadian farm debt, long- and short-term – down from 44 per cent in 2003. Government agencies' share grew to 28 per cent from 19 per cent in 2003. Nationally, swine farms hold six per cent of the total farm debt in 2009 compared to seven per cent in 2003.
For mortgaged debt, however, government agencies, including Farm Credit Canada, are the largest holders, well above that of chartered banks.
Across Canada, debt averages $850,000 per swine farm, amounting to just over $2 billion in total. In Ontario, total agricultural debt grew from $12.7 billion in 2006 to $16.4 billion in 2010, according to Statistics Canada, a 29.5 per cent increase. The increase in 2009 to 2010 alone was 10 per cent. Ontario holds 25 per cent of total Canadian farm debt, ahead of Alberta with 22 per cent and Quebec with 18 per cent.
Ontario's grain and oilseed growers carry 21.8 per cent of the province's farm debt. Beef producers account for 8.9 per cent, poultry and egg 8.3 per cent, and swine eight per cent. Dairy is the standout, with a whopping 30.9 per cent of the province's agricultural debt.
Ontario swine farm debt is likely higher than the national average, ranging from $944 million to $1.1 billion, with interest costs of between $38 million and $78 million annually, depending upon the estimate.
According to an analysis of the Ontario Farm Income Database, from the Ontario Ministry of Agriculture, Food and Rural Affairs, swine farms with sales of $500,000-$1,000,000 carried 22 per cent of the debt and farms with sales greater than $1,000,000 carried 60 per cent of the industry debt.
Between 2007 and 2009 the ratio of current assets to current liabilities (the measure of a business's ability to meet its near-term debt obligations) dropped to 1.4 from close to 2.0 between 2003 and 2008. A ratio of at least 1.0 is a minimum guideline to allow short term liabilities to be covered. At the end of 2009, arguably a low point for swine industries in many jurisdictions, Manitoba was at 1.74 and U.S. farmers were at 2.4. A financially troubled Quebec industry was at 0.97.
Debt to total revenues, the percentage of total revenues that is required to service all debt obligations for the year, averaged 1.25 during that period, higher than all other Ontario commodities except for dairy.
The Ridgetown study found that Ontario swine farms typically have higher debt-to-equity ratios than swine farms in Manitoba and the United States, but lower than Quebec swine farms. (The debt-to-equity ratio is total liabilities divided by total equity. It indicates the capacity of a farm to repay debt.)
Debt-to-equity ratios are also higher than most other farm types in Ontario. Beef and grain and oilseeds farmers have the lowest ratios. The McEwan and Duffy study noted that, while debt levels seem to increase with farm size, debt levels don't necessarily relate to profitability.
Crisis after crisis
It's no surprise that Ontario swine farms are carrying a higher debt than five years ago, notes Sebringville producer Phil Anwender, a former Ontario Pork director who will be speaking about swine farm debt at the London Swine Conference in late March.
The industry suffered through one crisis in production, income and costs after another.
Circovirus reduced production on stricken farms by as much as 10 per cent in 2006. A very high Canadian dollar reduced returns per hog in 2007. Feed costs went through the roof in 2008, and the H1N1 crisis hit exports and dampened domestic demand in 2009.
But how Ontario is doing compared to other production areas is a contentious point. The Farm Financial Survey reveals that, typically, Ontario swine farms have higher debt-to-equity ratios than their counterparts in Manitoba and the United States, but lower ratios than Quebec farms. They also carry more debt than most other farm types in Ontario, with dairy as the exception. And Ontario swine farms have lower percentage equity positions than U.S. swine farms and other Ontario farm types.
Al Mussell, senior research associate at the George Morris Centre in Guelph, isn't surprised at the comparison with the United States. "We build in higher fixed costs than some of our counterparts in the U.S.," he says. He can't think of a reason why producers in Manitoba are less exposed to debt than those in Ontario. "I don't know why they would be," he says.
Farm Credit Canada develops its own score for the financial health of farming clients, using a formula that involves a number of ratios, says senior agricultural economist Jean-Philippe Gervais. "Pig farms in western Ontario are doing better than the rest of the country, if you look at our portfolio." He allowed that may be "a biased sample." And it "paints a different picture" than the one in the Ridgetown study which he described as "extensive and well done." He did not say where eastern Ontario pig farmers stand. FCC groups them with farmers in the Maritimes. Gervais wouldn't comment at first on the differences between Ontario producers and their American counterparts. "I don't feel qualified," he said. When pressed, Gervais says operations and industries are structured very differently in the United States, ranging from highly specialized large operations in North Carolina to more or less diversified farms in Iowa. He describes the U.S.
Department of Agriculture's Agricultural Resource Management Survey (ARMS) study, which McEwan and Duffy used, as a "very powerful" tool encompassing more than 22,000 farms.
Mussell does think it is likely that Ontario land-based farrow to finish operations that grow their feed will be less financially stressed than the "independent" operators who expanded rapidly in Ontario and elsewhere in the late 1990s and early to mid-2000s. "If my source of feed is the feed truck, then every time the feed truck comes, I am putting out cash. It's coming out of working capital. In 2009, I was increasingly stretched to try to find it."
Not all Ontario producers were hurting, Mussell stresses.
Mussell says it's important to note that "you will find some farms that did not find themselves in financial difficulties." Some turned a profit all the way through those crises, he says. Some of the well-performing farms were large and professionally run, while other top farms were small. "Some of the large professionally run ones were the worst performing," Mussell says. "There are economies of scale in hog production, but don't assume that explains everything. There are some small farms that are very profitable and there are some large farms that aren't profitable and should be, given their scale."
Rising land values help
Pork producers have benefitted because their neighbours paid more for land. The increased land values provided additional collateral for assuming higher debt levels. The Ridgetown study shows that, according to Statistics Canada, Ontario farm land values rose to $4,767 per acre in 2009 from $4,201 in 2006. Trending into 2010, the average value per acre was $5,061, a 20 per cent increase from 2006.
According to the ODAP, total assets increased five per cent between 2006 and 2009, but the land component of those assets increased 15 per cent.
Anwender says producers have used the increased value of their land, mostly driven by nearby purchases by cashcroppers and supply-managed farmers, to remortgage and restructure. Increased land values kept their balance sheets in line.
Anwender, who quit pork production at the height of the financial crisis in 2008 and got back in about 21 months ago, agrees with a key point in the study – that, in spite of the difficulties, some producers are not under financial duress. He says there is a group of producers "that are in a good position and can go ahead and expand." There is another group he describes as "wobbly" after the financial hits they took during the crises. Those producers wonder how the first group pulled it off.
And he says swine farmers shouldn't forget how much various government programs, including the ACC loans, the Hog Industry Loan Loss Reserve Program (HILLRP), and interest-only loans from Farm Credit Canada helped during the crisis. He chaired Ontario Pork's safety nets committee and remembers taking calls from farmers "whose operating loans were maxed out."
The HILLRP was a big help, Anwender notes. It pumped many millions of dollars into an industry that would otherwise be carrying even more debt. A number of producers wouldn't be around without the program.
For the farmers who didn't pay back the ACC advance, "it is now crunch time and they have to come up with a strategy to repay that debt," Anwender says.
Financial analyses point to swine farms having more of their debt structured for long-term rather than short-term repayment relative to other swine regions and most other Ontario commodities. Anwender says that indicates they have remortgaged on a longer-term basis and immediate interest rate hikes aren't going to hurt them. In the meantime, locking in rates for the long term means that they are paying a higher interest rate than otherwise.
While Ontario hog farmers owe more money to lenders, they also are marketing fewer pigs. Hog marketings hit a high of eight million hogs in 2004 and fell to a low of 6.5 million in 2009. Total interest expenses, according to the Farm Financial Survey, showed interest expenses as low as $57 million in 2005 and as high as $74 million in 2009. Total interest expenses on Ontario hog farms accounted for nine to 12 per cent of their total expenses.
Anwender says he can't get a deal with a bank lender as favourable as before he got out of pigs, even though he feels he made all of the right decisions and reduced his potential equity losses by stepping out. Don't expect lenders to be as free as they were before the downturn, he warns. He's expecting good returns for another couple of years, and the industry has adjusted to a par Canadian dollar and higher feed prices.
Others may not be as optimistic. "In 2010 and 2011, we've had a much better pricing environment, but it's a cyclical business. You know prices will get low again," George Morris Centre's Al Mussell says. BP