Credit Analysis - Assessing the Risk Profile of a Pork Production Company
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Lee Fuchs, Farm Credit Services, 2009 Pork Management Conference, May 6-8, 2009, Fort Myers, Florida.
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Credit Analysis - Assessing the Risk Profile of a Pork Production Company
- 1. Click to edit Master title style • Click to edit Master text styles • Second level • Third level • Fourth level • Fifth level * * 1 Credit Analysis Assessing the Risk Profile of a Pork Production Company By: Lee Fuchs FCS Financial 2009 Pork Management Conference May 2009
- 2. Click to edit Master title style • Click to edit Master text styles • Second level • Third level • Fourth level • Fifth level * * 2 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
- 3. Click to edit Master title style • Click to edit Master text styles • Second level • Third level • Fourth level • Fifth level * * 3 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%
- 4. Click to edit Master title style • Click to edit Master text styles • Second level • Third level • Fourth level • Fifth level * * 4 FCS Financial Portfolio December 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%
- 5. Click to edit Master title style • Click to edit Master text styles • Second level • Third level • Fourth level • Fifth level * * 5 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)
- 6. Click to edit Master title style • Click to edit Master text styles • Second level • Third level • Fourth level • Fifth level * * 6 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
- 7. Click to edit Master title style • Click to edit Master text styles • Second level • Third level • Fourth level • Fifth level * * 7 Intrinsic Risk Categories • Historical Risk Elements 1. Financial Performance 2. Financial Structure 3. Stability/Longevity • Predictive Risk Elements 4. Structure/Diversity 5. Product/Service 6. Competitive Factor 7. Political/Regulatory/Tax 8. Economic Vulnerability 9. Environmental/Natural 10. Covariance/External Factors • Lending Risk Elements 11. Collateral 12. Term/Type
- 8. Click to edit Master title style • Click to edit Master text styles • Second level • Third level • Fourth level • Fifth level * * 8 Underwriting Guidelines Swine • Total Equity/Total Assets > 50% • Current Assets-Current Liabilities > 1.30 • Cashflow > 115% • Loan/Appraised Value < 65%
- 9. Click to edit Master title style • Click to edit Master text styles • Second level • Third level • Fourth level • Fifth level * * 9 Underwriting Guidelines Swine - Contract • Total Equity/Total Assets > 25% • Current Assets-Current Liabilities > 1.00 • Cashflow > 115% • Loan/Appraised Value < 80%
- 10. Click to edit Master title style • Click to edit Master text styles • Second level • Third level • Fourth level • Fifth level * * 10 Credit Analysis Format • Character • Capital • Capacity • Collateral • Conditions
- 11. Click to edit Master title style • Click to edit Master text styles • Second level • Third level • Fourth level • Fifth level * * 11 Subjective Credit Analysis • Marketing Price Risk • Production Risk • Input Cost Risk • Environmental Risk
- 12. Click to edit Master title style • Click to edit Master text styles • Second level • Third level • Fourth level • Fifth level * * 12 Marketing Price Risk Mitigators • Marketing Agreements • Hedging Policies • Quality Genetics • Location of Finishing Operations • Management’s Marketing Skill • Counter-Party Risk • Strong Liquidity Position
- 13. Click to edit Master title style • Click to edit Master text styles • Second level • Third level • Fourth level • Fifth level * * 13 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
- 14. Click to edit Master title style • Click to edit Master text styles • Second level • Third level • Fourth level • Fifth level * * 14 Input Cost Risk Mitigators • Feed Purchase Agreements • Dedicated Feed Mills • Hedging Policies • Facility Location • Available Labor Force • Fixed Interest Rates • Strong Liquidity Position
- 15. Click to edit Master title style • Click to edit Master text styles • Second level • Third level • Fourth level • Fifth level * * 15 Environmental Risk Mitigators • Site Selection • Local Acceptance • Quality Facilities and Location • Legal Resources • Contract Production • Compliance with Regulation • Strong Liquidity Position
- 16. Click to edit Master title style • Click to edit Master text styles • Second level • Third level • Fourth level • Fifth level * * 16 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
- 17. Click to edit Master title style • Click to edit Master text styles • Second level • Third level • Fourth level • Fifth level * * 17 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
- 18. Click to edit Master title style • Click to edit Master text styles • Second level • Third level • Fourth level • Fifth level * * 18 Production Measures 2008 - 2009 2003 Measure Good Very Good Good P/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
- 19. Click to edit Master title style • Click to edit Master text styles • Second level • Third level • Fourth level • Fifth level * * 19 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 ??
- 20. Click to edit Master title style • Click to edit Master text styles • Second level • Third level • Fourth level • Fifth level * * 20 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
- 21. Click to edit Master title style • Click to edit Master text styles • Second level • Third level • Fourth level • Fifth level * * 21 Industry Observations • Outlook for Producers • Outlook for Lenders
- 22. Click to edit Master title style • Click to edit Master text styles • Second level • Third level • Fourth level • Fifth level * * 22 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: capital.markets@myfcsfinancial.com Contact Information