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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




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Input Cost Risk Mitigators

• Feed Purchase Agreements

• Dedicated Feed Mills

• Hedging Policies

• Facility Location

• Available Labor Force

• Fixed Interest Rates




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Environmental Risk Mitigators

• Site Selection

• Local Acceptance

• Quality Facilities and Location

• Legal Resources

• Contract Production

• Compliance with Regulation




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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

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