Financing the volatile pig sector

Pig-production farms are back in profit for the past six months but the price trough up to then had been one of the longest in pig farmers’ memories. At times of financial loss, such as Irish pig farmers have experienced, the financial resilience of a business is only as robust as the financial backing it receives from its bank. The financial volatility in the pig sector is something that financial institutions are conscious of, says Pat. “Last year, they were losing money, considerable sums in many cases, because of low output prices and historically high input costs. Feed costs, and they make up the majority share of the input costs on a pig farm, were especially high.
“Margin over feed is the key profit or loss indicator on any pig farm and was the lowest since Teagasc records of pig farm accounts began. It was a huge challenge from a banking perspective, and it was our aim to support pig farmers through that loss-making period,” he explains.

Extended credit

Pat agrees that it was not only the depth of the financial losses, but also the prolonged nature of the downturn in profitability that was challenging: “It started in around September 2021 and continued until the end of last year and into the early months of 2023 before profitability really returned and stabilised the sector. Through 2023, cashflows have been improving. Before that, so that pig businesses could manage their way through the loss-making period, we would have offered interest-only loans. In addition, working capital would have been financed to keep the business operating and producing on a daily basis.”

In for the long term

The banking representative says that Bank of Ireland, in common with other lenders, is in the business of financing the pig production sector for the long run: “We see the pig sector as very important to the whole Irish agri-economy. Even though there are relatively small numbers of producers involved, the total revenues and output are quite large. Irish commercial pig producers are large scale, intensive and extremely efficient, and we are aware of the volatility involved in pig production.
“In general, we work well with our pig farmer clients, and we are as supportive as possible when necessary. We are all in for the long haul. It is up to all stakeholders to support production during downturns. The financial trajectory can run from severe losses to the generation of very good profits in a matter of months during the inevitable peak-trough cycles. Economics books have been written about hog cycle volatility over the years. We need to be able to understand that and work with pig farmers along the way.”

Payback time

But borrowed money must be repaid and, Pat says, that is already happening: “In almost all cases now, pig farmers are back meeting their loans, repaying interest and capital. In relation to long-term financial planning, we do advise our clients, if possible, to put a cash fund – a sinking fund – in place so that they can build up some cash reserves. That money would be available to them to meet or at least soften the next downturn, which, given previous experiences, is inevitable at some stage.”
His experience with the sector has given him a sound understanding of its financial dynamics: “I recollect one producer saying to me that he has to monitor the cost of everything right down to the price of a lightbulb. That gives some indication of how financially aware pig producers are in managing all costs in their businesses. They have to be very efficient and, in fairness to them, an awful lot of the pig farmers still in production are operating at very high levels of financial and production efficiency, comparable to other producers across the world. We see ongoing improvements in terms of meeting the key production figures such a pigs per sow per year, feed ratios and all the other key production indices involved.
“In fairness, Teagasc and other independent advisers provide strong support to pig farmers. At the end of the day, the pig price is dependent on European and global factors outside of pig producers’ control. Feed costs, in particular, and energy costs which went up to extraordinary levels, have a big impact on margins. All non-feed costs, including energy, increased over the past two years.”

Conservative market outlook

Pat was cautious on market prospects: “It’s not because of anything in particular on the horizon. It is more to do with the fact that pig prices are always subject to that extreme volatility. There has been a major sow cull across Europe and the big unknown, always, is China and what will happen in that market in production as well as consumption terms.
African swine fever hit the Chinese pig sector badly, he said, and that provided a period of profitability for Irish and other international pig producers during 2019 and 2020. Cashflow was strong among our clients as the Chinese imported much of their requirements. Since then, the Chinese pig production sector has been rebuilt and remodelled into large scale units with thousands of sows in each unit. Because they are such a big player in the global pig sector, their actions and strategies impact greatly on international pig meat prices, right down to the Irish pig farm.”

Pig-farm ambition

Bank of Ireland’s monitoring of the Irish pig sector has noted some critical developments: “Over the past 12 months, we have seen the most efficient producers looking at opportunities, where some farms were exiting the sector for one reason or another, not always directly due to their financial circumstances. Succession issues, animal health challenges or the need to invest significantly to meet higher regulatory standards, also came into play on some farms. That has facilitated some expansion among remaining pig production businesses. Some producers culled their numbers to reduce losses and/or rejuvenate their pig herds with improved genetics and higher health status. That is an ongoing process on several pig farms.”

Making loan judgements

It is not only the financial and production figures that lenders consider when supporting their pig farmer clients, Pat says: “The pig farmer, the individual, is really important. Management ability, expertise, track record, they are all taken into account, as well as, obviously, the efficiency of the business. Competent labour and its availability on a farm are important facets of a pig-production business. When we look at financial accounts, in general, we look across a three-year cycle. In the pig sector, with its incessant volatility, we study the business over a five-year period. That provides a better indicator of average profitability over the long term.”