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Credit Analysis
Assessing the Risk Profile of a
Pork Production Company
By: Lee Fuchs
FCS Financial
2009 Pork Management Conference
May 2009
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Farm Credit System Structure
Congressional Agriculture Committees
Farm Credit System
Insurance Corporation
Farm Credit Administration
(Regulator)
The Farm Credit Council
Federal Farm Credit Banks Funding Corporation
(Funding Corporation)
CoBank,
ACB
AgFirst,
FCB
AgriBank,
FCB
FCB of
Texas
U.S. AgBank,
FCB
Cooperatives and Other
Eligible Borrowers
Associations
Farmers, Ranchers, Rural Infrastructure businesses, Rural
Homeowners and Other Eligible Borrowers
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Farm Credit System Portfolio
Rural Home Loans,
Farm Landlords, Part-
time farmer, 6%
Other, 4%
Food Products, 6%
Tree Fruits, nuts,
Grapes, 7%
Farm Supply Marketing,
5%Field Crops (Cotton,
Sugar, Beets, Potatoes,
Vegatables), 7%
Dairy Farms, 7%
Forestry, Agricultural
Services, Fishing, 10%
Cash Grains (Corn,
Wheat, Soybeans), 12%
Livestock (cattle/hogs),
12%
Other Livestock, 1%
International Loans, 2% Bio Fuel Products
(includes ethanol) , 2%
General Farm Primarily
crop, 4%
Energy and
Water/Waste disposal,
6%
Poultry and eggs, 3%
Communication, 3%
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FCS Financial PortfolioDecember 2008
Nursery &
Greenhouse, 1.10%Meat Packing, 0.51%
Eggs, 0.91%
Grain Processing,
1.44%
Beverage, 0.59%
Fruit & Tree Nuts,
0.40%
Forest Products, 2%
Rural Home, 1%
Timber, 2%
Rural Telecomm, 3%
Others, 3%
Dairy, 3%
Ethanol & Biodiesel,
3%
Farm Supply & Svc. ,
3%Broiler, 5%
Landlord, 7%
Swine, 9%
Cash & Other Crops,
27%
Beef Cattle, 19%
Vineyards, 2%
Turkey, 2%
Food Processing, 2%
Rural Energy, 1%
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RR S & P Lending Limit
• 1 AAA, AA $30MM
• 2 AAA, AA $30MM
• 3 AAA, AA $30MM
• 4 AA, A, BBB+ $30MM
• 5 A, BBB+ $25MM
• 6 BBB-, BB+ $20MM
• 7 BB+, BB- $18MM
• 8 BB-, B $15MM
• 9 B, CCC $10MM
Risk Ratings(by Commitment)
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Industry Intrinsic Risk
Score Ranges
• 0-18 Low Risk
• 19-30 Moderate Risk
• 31-48 High Risk
Industry Score
• Corn 23
• Soybean 21
• Dairy 27
• Hogs 31
• Turkeys 31
• Broilers 30
• Sugar 31
• Cow/Calf 24
• Cattle Feedlot 36
• Eggs 33
• Timber & Forest 32
• Ethanol 37
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Intrinsic Risk Categories
• Historical Risk Elements1. Financial Performance
2. Financial Structure
3. Stability/Longevity
• Predictive Risk Elements4. Structure/Diversity
5. Product/Service
6. Competitive Factor
7. Political/Regulatory/Tax
8. Economic Vulnerability
9. Environmental/Natural
10. Covariance/External Factors
• Lending Risk Elements11. Collateral
12. Term/Type
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Underwriting Guidelines
Swine
• Total Equity/Total Assets > 50%
• Current Assets-Current Liabilities > 1.30
• Cashflow > 115%
• Loan/Appraised Value < 65%
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Underwriting Guidelines
Swine - Contract
• Total Equity/Total Assets > 25%
• Current Assets-Current Liabilities > 1.00
• Cashflow > 115%
• Loan/Appraised Value < 80%
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Credit Analysis Format
• Character
• Capital
• Capacity
• Collateral
• Conditions
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Subjective Credit Analysis
• Marketing Price Risk
• Production Risk
• Input Cost Risk
• Environmental Risk
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Marketing Price Risk Mitigators
• Marketing Agreements
• Hedging Policies
• Quality Genetics
• Location of Finishing Operations
• Management’s Marketing Skill
• Counter-Party Risk
• Strong Liquidity Position
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Production Risk Mitigators
• Nutrition Programs
• Specialized Management and Labor
• Bio Security and Herd Health
• Quality Genetics
• Quality Facilities and Location
• Pig Flow Methods
• Strong Liquidity Position
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Input Cost Risk Mitigators
• Feed Purchase Agreements
• Dedicated Feed Mills
• Hedging Policies
• Facility Location
• Available Labor Force
• Fixed Interest Rates
• Strong Liquidity Position
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Environmental Risk Mitigators
• Site Selection
• Local Acceptance
• Quality Facilities and Location
• Legal Resources
• Contract Production
• Compliance with Regulation
• Strong Liquidity Position
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Cost of Production/CWT
2009 2008 2003
Measure Good Good Good
Feed Costs < $32 < $36 < $24
Non Feed < $9 < $10 < $8
Fixed Costs < $11 < $12 < $10
Total < $52 < $58 < $42
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Burn Rate
• Cash Operating Expenses $0.46/lbs
• Debt Service $0.05/lbs
• Maintenance Cap Ex $0.03/lbs
• Total Cash Uses $0.54/lbs
• Cash Receipts $0.40/lbs
• Burn Rate $0.14/lbs
• 20,000 sows farrow to finish $1,400,000/month
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Production Measures
2008 - 2009 2003
Measure Good Very Good GoodP/Litter > 11 >12 >10
P/S/Y > 23 >25 >21
Nursery F.E. <1.70 <1.60 <1.75
Nursery ADG >0.80 >0.90 >0.90
Nursery D.L. <6% <4% <5%
Finish F.E. <3.00 <2.75 <3.00
Finish ADG >1.55 >1.75 >1.55
Finish D.L. <7% <5% <5%
W-F F.E. <2.65 <2.55 N/A
W-F ADG >1.50 >1.70 N/A
W-F D.L. <8% <6% N/A
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Key Factors for Success
• Good Liquidity– Financing from Creditors
– Investing from Owners
– Cash Flow from Operations
• Mitigate Volatility– Contracts with Key Parties
– Production Levels
– Hedging
• Low Cost Producer ??
• Balance Sheet Leverage ??
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2
4
6
8
10
12
14
16
18
30
80 70 60 50 40 30 20 10 0
ROA
Weighted Avg.
Cost of Debt
ROE
% Returns
Leverage (increasing)
% Returns at Varying Leverage Levels
Good
Maximizing
Returns
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Industry Observations
• Outlook for Producers
• Outlook for Lenders
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Lee Fuchs
FCS Financial
Capital Markets Group
Three City Place Drive
Suite 870
St. Louis, MO 63141
Phone: (314) 432-3922
Fax: (314) 567-4678
E-Mail: [email protected]
Contact Information