Farm & Country PORK

November 16, 1998

Bankers keep their cool

Strong producer balance sheets are staving off banker insomnia -- so far

BY ROBERT IRWIN

Despite low pork prices in recent weeks Ontario's farm lenders don't seem concerned about hog loans...yet. "I'm not losing sleep over them these days," says Vaughan Stuart, manager of the Royal Bank business centre in Elmira which has 11 agricultural specialist serving offices in Elmira, Fergus and Orangeville.

"Those that are prepared for a downturn in the market are going to survive no problem. Those others are going to have to do some serious work and scratching because let's face it the working capital is going to deteriorate," says Stuart an agricultural economist and 19 year veteran with the Royal, including 12 as a field agrologist.

Stuart admits he's not much good at predicting pork cycles, but he wonders whether widespread construction across North America may delay the return to profitability one would expect by next summer in a normal hog cycle.

None of his customers have asked to postpone payments yet, but he says most credit reviews don't take place until late winter, so that may change. Like all lenders he urges those in trouble to communicate with their account manager.

Loop or Segregated Early Weaning (SEW) production is a new phenomenon for lenders such as Stuart. "It's (low prices) going to have some significant impact on them, I would suggest. The person who owns the inventory needs be in a position to cover the shortfall in working capital."

Serving Huron, south Perth and Oxford counties, the Exeter central business branch makes most of the Royal's hog loans, holding what area market manager Brent Wilson terms "a major competitive market share. I'm quite optimistic. I'm in it for the long haul."

He calculates that "most operators are losing $15 to $25 a finished hog on total overheads." But he estimates most are covering variable costs such as feed and hydro, with something left over to contribute to total overhead.

"What it really comes down to is staying power. This is a cyclical commodity: It always has been and I would expect it will continue to be. Staying power equates to management, management, management."

Hog expansion loans "have slowed considerably," at the Royal, Wilson reveals. He confides, however, that there is still one - a farrowing operator who wants to finish - on the table.

Some of Wilson's customers have cut costs by booking soymeal more than one year ahead. "We have guys booking soymeal at about $270 a tonne where last year it was $350 a tonne."

Last year Royal Bank affiliate RBC Dominion acquired commodity trading specialists Richardson Greenshields. In early summer, Wilson began steering customers toward RBC Dominion Securities offices in London and Woodstock to hedge inputs and production.

It's something that is catching on with the more progressive producers," he observes. Wilson concludes, however, that minimum contract sizes dictate that smaller producers are still best served by Ontario Pork's array of marketing options.

Corlette Elder, at Farm Credit Corporation's Clinton office, has spent 20 years with the corporation's offices, including a stint at Stratford where she estimates hog loans make up as much as half the loans. She says many of the 1996-1997 pork producer statements she's reviewed "have never been as strong in the length of time I've worked for Farm Credit."

Most, she suggests, will be able to withstand a prolonged downturn. "If they've had to depop and repop during those high hog prices and weren't able to capitalize on them, then that's a different proposition."

The corporation's 1997-1998 annual report shows nationally just 0.04 percent of principal was in arrears for hog loans. Elder says plans for some new feeder barns are still underway and at least one "fairly large Huron county farrowing setup is just kind of getting on stream now."

Last year hog loans made up a little over10 per cent of FCC's loans. Ontario farmers borrowed 13.8 per cent of that total, surpassed only by Manitoba producers who grabbed 20 per cent and Prince Edward Island producers who used 18.3 per cent.

© copyright 1998 Agricultural Publishing Company Limited.



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