Managing Margins in Market Downturns - Ron Durre, Farm Credit Mid-America, from the 2017 Iowa Pork Congress, January 25-26, Des Moines, IA, USA. More presentations at http://www.swinecast.com/2017-iowa-pork-congress

1. Practical, Random Thoughts From A Lender’s
Perspective
Iowa Pork Congress
26 January, 2017
1
Managing Margins in
A Market Downturn

2. Today
• About Farm Credit Mid-
America
• General Farm Financial
Situation Entering 2017
• U.S. Pork Industry – State
of the Union
• The Lending Relationship
• Stress Testing Discussion

3. About Farm Credit Mid-America
• One of 80 associations comprising the Farm Credit System
• Financial strength in numbers
• $22+ billion in assets
• Four-state territory (IN, OH, KY, TN)
• Nearly 100,000 customers
• More than 1,160 staff in 91 offices
Farm Credit Mid-America3

4. Farm Credit Mid-America4
Where are general farm finances
heading?
History does not repeat itself, but it does rhyme
Mark Twain
“Are we getting ready to repeat the 80’s?”

5. Entering the 80’s
• 7% prime interest rate in 1977 rose to 11.5% in 1978 and
peaked above 20% in 1981 – most farm debt had a
variable interest rate and rose with prime
• High general inflation: ‘77-’81 = 6.5%, 7.6%, 11.3%,
13.5%, & 10.3%
• 1976-1979 farm income averaged $51.8 billion, which
was below the average farm income for the 1960s.
• 1983 drought – no crop insurance
Farm Credit Mid-America5

6. Entering 2017
• Interest rates are at historic lows
• Much greater use of fixed rates
• 60% of Farm Credit Mid-America’s Portfolio
• No expectation of a rapid interest rate increase
• Short term rates are not expected to rise “relatively” quickly –
200 to 400 bps over the next few years
• But, could easily see 50-75 bps in the next 12 months
• Strong farm income in recent years
• Farm real estate lending caps
• Available credit
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7. Interest Rates

8. Pork Industry “State of the Union”
• Generally Speaking……
• Balance sheets are healthy
• Very little operating debt
• Credit is available
• Expansion is still underway
• Demand continues to be solid
Farm Credit Mid-America8

9. FACTS: Pork Industry
Facts About Today’s U.S. Pork Industry:
 Extremely competitive and technologically advanced
 The stakes are higher
 Continuous improvement state
 There is no such thing as “AVERAGE” anymore
 Remember, the early 90’s….we could make general
statements like “COP is $40” and a large % of the curve
would fall into that, with a small sd ($1-2)
 Today, that is NOT the case
Farm Credit Mid-America9

10. An Illustration
2012 2013 2014 2015 2016
Low Range $(4.00) $(9.00) $7.00 $(8.00) $(11.00)
ISU $(12.00) $(10.00) $62.00 $8.00 $12.00
High Range $28.00 $25.00 $80.00 $45.00 $25.00
$(20.00)
$-
$20.00
$40.00
$60.00
$80.00
$100.00
$PerHead
Profitability Per Head
Note 2016 Price through 6/30/2016

11. The Basics
5 C’s of Credit
 Character – Integrity; Structure; Management Ability
 Capital – Solvency; Liquidity; Overall Financial Position
 Capacity – Profitability; Cash Flow
 Collateral – Quality; Value
 Conditions – Structure; Terms
Farm Credit Mid-America11

12. What Lenders Look For:
 Everything! 
 Accurate, Complete & Timely Financial Information
 Trends – Is Progress in Right Direction
 Risk (Margin) Management Plan – Have a Plan; Execute
the Plan
 Cost of Production – Relative to Peers
 Communicate – Early & Often
 Liquidity – Keep it Flowin’
 Openness, Honesty & Transparency – Be Forthright
 Adaptability – Willingness and Ability to Adapt to Changes,
as the Market Dictates
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13. What You Should Look For In A
Lender:
 A Lender That’s Knowledgeable
About Your Industry
 Proven Track Record For Staying
Committed During the Down-
Turn
 Relationship – Not JUST
(Cheapest) Money
 Capacity and Willingness to Grow
with You
Farm Credit Mid-America13

14. Stress Testing Your Operation
 Do a Pro-forma balance sheet Showing:
 Best Case
 Worst Case
 Likely Case
 Then, determine your ability to withstand the down cycle
based on:
 Owner Equity
 Liquidity
 Debt Coverage Ratio
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15. Questions to Ponder
 What’s my role in the
Pork Industry in the Next
5, 10, 15 years?
 Ask yourself if your
operation is prepared and
willing to survive in the
coming industry?
 What is the succession
plan for my operation?
 What’s my risk/reward
tolerance?
Farm Credit Mid-America15

16. Take Aways:
 Remember the Things That A Lender Looks For:
• Accurate, Complete & Timely Financial Information
• Trends Risk (Margin) Management Plan
• Cost of Production
• Communicate
• Liquidity
• Openness, Honesty & Transparency
• Adaptability
 Choose a Lender That Understands Your Industry
 Stress Test Your Operation and Do Projections
 Ask Yourself Questions About Your Role in the Future…..and
Be Honest With Yourself About the Answers
 Consider Fixing Rates
16

17. Conclusion
 Believe the Long-Term Future of the Pork Industry in
Bright
 The U.S./North American Industry Has the
Infrastructure; Technology; Feedstuffs & Management
To Continue To Be a World Leader in Pork Production
 Capital is Available For Well-Managed, Profitable
Operations
 We’ll Continue to Have Headwinds and Challenges…But,
This Industry Should Still Offer Solid Returns For Those
Willing to Compete
Farm Credit Mid-America17

18. Farm Credit Mid-America18
Ron Durre
Ron.Durre@e-farmcredit.com
Follow us on Twitter at @farmcreditmid
Thank You