Swine Market Losses Demand Prudent Planning—Now

Posted on: January 31st, 2024 by

Back in October, we brought you the story of a hog-integrator client who had been suffering tremendous losses since early 2023, their 200,000+ swine business hemorrhaging as much as $1 million per month. It would be nice to be able to say this was an isolated incident or even an isolated year … unfortunately, it seems more of a harbinger of a shrinking livestock sector.

a sow lying in a farrowing crate with 12 piglets, 9 suckling.

Ag and Business Legal Strategies is working with more clients hit hard by the major swine market contraction that has been going on for at least 18 months. Several others have contacted us to discuss how they can wind down their business by filing for bankruptcy or negotiating a settlement with creditors. Entire sow complexes are closing because of supply/demand mismatch. Much of this goes back to California’s Proposition 12, and, more importantly, the U.S. Supreme Court (SCOTUS) decision to uphold its gestation pen requirements that reach outside state lines and into most commercial pork barns.

Last year’s SCOTUS ruling seemed to surprise many producers and integrators, on top of market demand contractions in progress. Many have either not had time to modify their operations to comply, or are still trying to decide if they can afford to stay in business. While the meatpacking and other Covid market disruptions that forced liquidation of so many surplus hogs in 2020 were traumatic, it was a temporary setback and does not really seem a factor in current producer and integrator woes.

Over decades, U.S. hog production and integration was fine-tuned to Swiss watch-like precision, with occasional hiccups from disease pressure or changes in productivity. And if there was a surplus, production would pare back by a small percent for a period of time, then resume numbers when demand rose again. What is going on now is different, longer-term, and with consequences for many more integrators and producers who may be highly leveraged and have no alternative buyer.

Failure to prepare is preparing to fail

In addition to integrators trying to gauge if they can pay the bills, we see producers who supply integrators who had taken out loans to finance construction of specialized hog facilities. Their first concern is usually how they can pay their bills if they stop receiving income from a shuttered integrator and cannot immediately find another buyer; another is how to continue making payments on the facilities, which are difficult to sell. There really is no other use for buildings fitted specifically for swine.

Even if they are doing well now, questions integrators and producers may want to ask themselves to determine if they will be able to stay in business include:

  • How do I continue making money?
  • How do I continue paying the feed bill? Labor? Insurance premiums?
  • How do I retain or secure processing plants to timely harvest my animals?
  • How do I adjust my building design to meet new demand requirements? Will my end consumer be willing to pay more for pork if I do so, or will they switch to a cheaper protein such as chicken?

Producers who feel secure in their integrator relationships should still consider:

  • How is my integrator’s financial health? You may be able to gauge this in a number of ways, from asking directly (depending on your relationship) to researching the company through its public stocks, news coverage, or fellow producers.
  • What are the length and terms of my contract with my integrator? If you see your buyer is closing confinements and paring down, particularly near your location, and worry if you’re next, it’s likely that month-to-month contracts will be first on the chopping block because they require fewer to no legal consequences to break. If instead you have a five-year contract, it’s possible the integrator will have to go out of business entirely to stop paying you.
  • Check loan documents related to spending for your hog operation. Did anyone sign a guaranty on them? Is someone else responsible if you can no longer make the payments—Parent? Grandparent? Sibling?
  • If your income stream from the integrator stops, can you find another buyer for your animals? If not, can you afford to make the loan payments for a while without that income, in anticipation of picking up another integrator at some point—and if so, for how long? Would you need to file for bankruptcy or reorganize your debt?
four juvenile pigs gathered near the edge of their pen.

Other Impacts

Then there are downstream businesses the swine sector impacts. Many rural communities with large integrator or production facilities depend on it as a sizable employer. There are the truckers, local unrelated businesses, and, to some extent, corn growers. Feed usage has not dropped greatly so far, but if it does because of fewer hogs, growers will need to find a different market—and there is only so much ethanol capacity to supply. Normally exports might absorb surplus corn, but U.S. corn sales have dropped globally in the past year or so.

None of the above is meant to make those in the swine industry panic—our hope is to help you get ahead of any potential losses and plan for them even if they never come to pass. Once an integrator does stop filling their buildings, producers typically have only a few months, if that long, to find another buyer or likely lose that income. And if that income stops, many producers have only a few months (if that) before they can’t make their payments.

As for October’s hog-integrator client, in the end our attorney was able to work with their creditors to negotiate a settlement which required them to liquidate their hogs and close the business. But that integrator also had 102 producer suppliers who each had to find another buyer or make some hard decisions for their own farming future.

Don’t wait until it’s down to the wire to decide—if you work in or adjacent to pig production and you have questions about planning for the future, please reach out to Ag and Business Legal Strategies to discuss potential options. The longer you wait, the fewer financial options you have, so protect the future of your operation by reaching out … and soon!

At Ag & Business Legal Strategies, we want our clients to be honest with themselves and have a solid business plan. Our attorneys and financial strategist will help you create and execute that business plan, and, if necessary, assist you with the legal, tax, and practical aspects of debt restructuring or bankruptcy. Don’t wait for the problems to become insurmountable. Connect with someone you can trust today, not tomorrow.

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