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Grow Your Herd: Smart Ways to Expand

Tuesday, December 29, 2015

Business Management Practices

You’ve been in the hog business for a few years now. Your farm has nine sows and you have been able to afford to successfully breed and farrow them, selling several of the pigs as show pigs, and you are happy with the results you have accomplished. But now it’s time to expand. You need some capital to grow the herd, purchase more equipment and make investments.

How do you begin? What is the best way to do expand financially? Is it smart to take out a loan and if so,  for how much and how long?

Paul Burdick is vice president and a lending manager with American AgCredit, Wichita, Kan., part of a national agricultural lending firm. He says when a person comes into his office and asks for financing he seeks specific information including the borrower’s financial plan and where they are in the process, their target for expansion, and their current situation. Then he asks about numbers, questions like has the borrower calculated his or her break-even and do they have a plan for growth. For example, if the borrower wants to grow the herd immediately, Burdick would ask if they could accomplish this goal in five years.

“Our strategy is that this should not be the lender’s plan for growth, it should be the producers’ plan,” he says. “We tailor-make products to help with that plan. It’s the producer doing their homework that is important.”

If an initial meeting doesn’t provide the answers Burdick is looking for, he’ll encourage the borrower to find the answers and come back with the information. He says the question may not be when the right time to expand a sow herd is, but rather whether a borrower is in a position that allows them to expand.

“Working capital is important,” Burdick says. “And do you have the equity to withstand shocks in the market? That’s basically like shock absorber for the ebbs and flows in the marketplace. We will review what the market opportunity is and keep producers from being overextended in credit.”

Burdick says if a producer is in a financial position to grow, a lender serve as a coach or council on how fast and how much the operation can expand during a certain period.

“It may be you are in a financial position to grow from 50 head of sows to 100 today,” Burdick says. “We will help you, based on what we’re seeing, to determine what is reasonable or what creates a significant amount of risk.”

Expanding a sow herd not only means buying more females but also purchasing equipment. Burdick says it is important to shop around for the best price option on farrowing crates, feeders, waterers and other equipment. He recommends pricing three different sources to compare prices. Purchasing used equipment can also save on costs.

“I would encourage producers that when they purchase equipment, they should remember the rule that low cost products are the most profitable,” he says. “During the interview process a lender can determine the breeders management ability to make those decisions. If they get three estimates on either new or used equipment they can really pencil it out and see what makes sense economically.”

For younger breeders, Burdick says it is critical to show good credit history. There are many traps that can sabotage producers at a young age, including the misuse of credit cards and taking out loans without paying them off. This, he says, goes on a credit record that lenders review so they know whether they can partner with that borrower.

Using credit cards can be an option for sow purchases, but they are not a long-term lending solution. And while many online sale options exist with an opportunity to buy great gilts or sows, Burdick says it’s okay to use a credit card for the initial purchase then pay off the card with loan proceeds.

“The point here is that we would utilize an opportunity to establish good credit now and show responsible credit activity while they’re young,” he says. “But we don’t want to get ourselves in trouble at a young age because it takes a while to roll off.”

Burdick says interest rates are still at an all-time low, but he does expect them to begin to increase during the next year. This means now is a key time to lock in low interest rates and manage the fixed costs of an expansion plan.

“We would offer a variety of interest rate products,” he says. “I would advise our clients to take advantage of the current low rate environment and consider fixing interest rates now. Over time variable rates will likely increase, which would cut into their cash flow.”

Burdick says no matter the lender or the timing, a breeder looking to finance an expansion of their sow herd should have a plan and stick to it. He says the key is to expand at a reasonable rate that doesn’t jeopardize their current situation

“When you come in for a loan you are asking the lender to be a partner with you,” Burdick says.  “It is only good business for that partner to understand who they’re doing business with.”