Tips to survive a price drop

2017 was a record year for pig farmers. Thanks to record high piglet prices, sow farmers in particular farmed well. However, this year sentiment has turned and returns are under pressure.

The traditional pig cycle seems to be getting more and more intense, with peaks and troughs succeeding each other in rapid succession. What can you do to survive a price drop?

1. Create buffers and make a plan
The saying goes: a nest egg. "A pig farmer must be able to fall back on buffers to survive a price drop," says Erik van der Hijden of the FarmAdvies consultancy. The rule of thumb that he uses for sow farms is approximately €200 per sow. Ideally, on a farm with 1.000 sows, a buffer of €200.000 should be available to absorb 1 year of negative margins. Due to the good yields of recent years, such buffers are available on many companies. "A buffer gives an entrepreneur time to come up with a plan."

According to Van der Hijden, it is crucial to have a (financial) plan. "Not because the bank has to, but to get a grip on your money flow." This can be done by making a liquidity forecast. In this way, the cash flow becomes predictable. "Make an overview of the revenues and expenses in the coming months." The returns are not always a certainty, but in that case scenarios can offer a direction.

2. Be aware of the costs and the process
"Perhaps it is a head-turner, but cost reduction is the first gain. Often there is something to be achieved with the necessary puzzle work," says Peter Pals, director at financial consultancy Farmers Funding. Pals advises to involve suppliers and customers intensively if the circumstances so require. Feed is also a significant cost item for pig farmers. Compound feed companies are often willing to think along in times of crisis; after all, they do not want to lose customers and do not benefit from bankruptcies.

At the same time, suppliers do not want to pre-finance significant amounts. Jan Potijk, director of ForFarmers Netherlands, emphasized 2 years ago that he did not want to be a bank. "We always look at such incidents from a business, sharp and personal point of view. Suppose a livestock farmer has been buying our feed for 30 years and he/she asks whether the credit limit can be increased from 7 days to 30 days, then we do not immediately reject this request. "

In addition, the advisors point out the hidden profits in a company, for example with good technical results. "Often there is still a profit to be made", Van der Hijden knows. According to him, it makes quite a difference whether you produce 23 or 35 piglets per sow per year. "I encounter these differences in practice. If you run well technically, you will not run into problems as quickly. Moreover, you are faster on top of it, so that you can build buffers sooner."

3. Negotiate the prices and conditions
This point makes the difference between good and less good entrepreneurs. Both Pals and Van der Hijden mention that a profit can be made by negotiating, both on the purchasing and the selling side. The timing does make a difference. When a pig farmer knocks on the door of a 'push market' for an extra allowance, it is often too late. The negotiating position is logically strongest when there are few pigs or piglets. “This requires a progressive attitude and market insight,” says Van der Hijden.

A pig farmer can get a grip on the costs by making price agreements. This can be done by fixing the feed price for a longer period. Due to the relatively low raw material prices, the need to lower the feed price has diminished in recent years. However, this year the wheat price has picked up considerably, which has resulted in rising lump prices. “Pig farmers who have fixed the feed price this spring are now better off,” says Van der Hijden.

The pig price can also be fixed on the yield side. Slaughterhouses are increasingly facilitating market concepts related to this point. Vion launched a long-term price last year to offer pig farmers more certainty. The manure disposal costs are also sometimes fixed for a longer period of time. Pals advises pig farmers to place the manure directly with arable farmers. "This can be lucrative for both parties."

Receive the magazine in your letterbox
In the pig analysis of 2018, 3 more tips are mentioned. The subscribers of Boerenbusiness Pigs & Feed Pro recently received this. Would you also like to receive this magazine? Click here to become a subscriber and receive the magazine.

With Pigs & Feed Pro you get access to all private articles, data and market information on Boerenbusiness† As a subscriber you also get access to the National Economic Agricultural Congress and other interesting seminars and workshops. Curious about all the benefits? View our offer in the webshop.

Wouter Job

Wouter Baan is editor-in-chief of Boerenbusiness. He also focuses on dairy, pig and meat markets. He also follows (business) developments within agribusiness and interviews CEOs and policymakers.

w.baan@boerenbusiness. Nl

© DCA Market Intelligence. This market information is subject to copyright. It is not permitted to reproduce, distribute, disseminate or make the content available to third parties for compensation, in any form, without the express written permission of DCA Market Intelligence.