Wait and see no longer a viable option
18 February 2000
Wait and see no longer a viable option
Is your pig unit in deep
financial trouble? Industry
experts reckon it may be
better to consider your
businesss future now, rather
than continue hanging on.
Suzie Horne reports
FEAR that prices will improve the week after they sell their stock is the biggest factor stopping producers from quitting pigs.
But wait-and-see is no longer an option for many whose sole activity is pig production, says consultant John Hartwright.
Realistically, there is no sign of an upturn within six to 12 months, says Newmarket based Mr Hartwright, of the Laurence Gould Partnership.
The pig price would have to exceed 120p/kg and stay there for more than 24 months to put producers back in the position they were before the price crash began in July 1998.
"There is often a tendency with any business under serious threat to take the view of "in for a penny, in for a pound," to the extent that even when a large part of the equity has been eroded, the owner is willing to stick it out until the bitter end.
"But is this wise? I believe that once you have reached this point you would be best advised to stop and preserve whatever equity you may have left. No business is worth your last penny, your health or your familys happiness."
One of the prime management rules across all aspects of agriculture is to concentrate on improving the factors that you have control over, says Mr Hartwright. "Do not waste your time and effort on things that you cannot influence."
He expects an increasing amount of his new work this year to be involved in looking at pig units in trouble. Calculating their true net cost of production/kg of pigmeat is the first step in assessing their future.
There is still a vast range in cost of production, from 70-110p/kg dw, he says. "If you are at the bottom end of the range you may be able to tough it out and wait for world-wide pig numbers to fall and for sterling to weaken in value. The only other hope is for consumers to demand British reared pork and create a differential trade shortage within an oversupplied market.
"If you are at the top end, you will probably need to consider stopping production, difficult though that is to face up to."
For those in the middle – between 85-95p/kg – the decisions depend upon whether reductions in cost of production are possible, whether the pig unit is the sole enterprise or not, and whether the unit has an alternative use.
There can be problems in calculating the true cost of production. This must include trading items as well as HP payments and other capital items, loan repayments and private drawings.
The cost of living is often either underestimated or left out in these calculations, says Mr Hartwright. Often those at the bottom end of the cost of production range have moderate private drawings and no loans, while those up at 110p/kg may have a large overdraft and are still taking too much out of the business.
For producers operating at 95-110p/kg, the alternatives to getting out of pigs are limited. It may be possible to take a capital holiday from loan repayments, or to restructure to an interest-only loan without penalty, or for an injection of private funds, but these would only apply in limited circumstances, says Mr Hartwright. If drawings are excessive, then a dramatic cut could make a difference.
While there is scope for rent reductions for some tenants, it is this sector which probably faces the most difficulty, he says.
Mr Hartwright acknowledges that banks are particularly sensitive to this sector of the industry. But he makes the point that the earlier assistance is sought from banks, often the greater the range of options available.
Where a tenanted unit is exclusively running pigs, there may be opportunities for the tenant to benefit financially by quitting the holding. But this must be carefully handled, as there are tax implications for both landlord and tenant.
Where pigs are not the only business, it is likely that the other enterprise will be arable, which may also be under pressure.
But if a reasonable return is being made on the arable front, then it may be worth continuing to cross-subsidise to keep the pigs going.
The danger in this situation is that unless the true state of performance of each is recognised, then they could both be pulled under.
Many would do better to accept the inevitable on pigs, close the unit and look for alternative uses for buildings, suggests Mr Hartwright. While these are also limited, there are still feed and pig companies looking for contractors to rear weaners from 7kg.
There may be scope for letting out or converting pig housing, or for other livestock uses, depending on location.
The prospect of having to make staff redundant is often a bar to making decisions on the future of a unit. But unless this is faced, the entire farm and staff could be at risk. Fewer staff may mean that housing is available for rent, earning £4000-£5000 a year – a relatively secure income compared with that from many pig units at present.
Some government help is available in the form of a loan to cover redundancy payments for businesses in financial difficulty.
Considerable evidence of the financial problems must be provided, and may include a bank letter confirming that the overdraft will not be extended, he adds.
PIG DECISIONS
• Price improvement unlikely.
• Preserve equity left.
• True cost of production vital.
Is it wise to stick with the pig industry until the bitter end?