Mark Greenwood Corn has went from $3 to $8 per bushel back to below $4 per bushel Breakevens have ranged from $110 a head to $160 a head now around $130 -$135/hd – keeps changing rapidly by day Pig prices have went from $120 a head to $170 a head to $90 a head to now $140 a head Are we ever going to settle in a range? What is normal anymore? A Historical Review Where are we at today as an industry The Have Not’s vs. the Survivors A look ahead for producers and capital availability Q&A Prior to the 90’s the swine industry was part of the diversification of their farming operation You had crops so you had livestock Some people farrowed pigs and some people bought feeder pigs Single site production From a financing standpoint, it was just part of your overall business Many specialized systems Packer contracts Grower contracts More leverage was allowed due to contracts Very good program for young beginning farmers to enter into farming Late 90’s overexpansion $8 hogs and not enough packing capacity Ledger contracts grew exponentially Window contracts helped the down side Contracts were available to producers of all sizes Many acquisitions occurred The time of specialization 1. Farrow to wean 2. Wean to finish Large Midwest systems huge growth Many acquisitions occurred from 20002005 2004-2007 long run of profitability 2006 the game starting changing Higher demand for corn - ethanol Very little operating debt in 2007 Strongest financial position ever for many producers Many producers had cash on hand Clients built facilities out of cash Term revolvers were created Very few marketing agreements other than shackle space – you could sense the industry was over expanding Largest Equity erosion I have ever seen Largest swing in volatility I have ever seen 2009 – thank God it is over - 2010 has to be better (does it?) Producers also don’t want to leave the industry – it is their way of life and will do anything to stay in. Many producers have put all chips on the table <35% Owners Equity 70% October 2007 Working Capital ratio 1.3 to 1 October 2007 > 3 to 1 2009 Average Cost of Production $135-$140 2009 Average Revenue Per Pig $110$115 Average Loss Per Head 2009 ($25) January 2010 could be in the black first time in 26 months for many producers AgStar Gross $1,800,000,000 $1,606,816,667 $1,600,000,000 $1,440,281,629 $1,400,000,000 $1,200,000,000 $1,347,308,190 $1,387,466,906 $1,145,303,547 $1,000,000,000 AgStar Gross $800,000,000 $600,000,000 $400,000,000 $200,000,000 $12/31/05 12/31/06 12/31/07 12/31/08 YTD Many modifications have been done Many covenant changes Also producers have put all chips in – amazing amount of cash or equity that has been put in to keep raising pigs Separation from the have not's and survivors Not a function of size Function of leverage going into 08-present Function of risk management on feed risk and hog margin management Certain models struggled more than others – wean pig buyers with contracts got hit first Wean pig producers next Farrow to finish with the little risk management was next – SE was hit harder than the Midwest – cost of production is higher in SE Still have working capital Current ratio > 1.4:1 Have operating line availability Owner equity > 40% GAAP Locked in margins for 08 and 09 Sometimes minimized losses Tremendous amount of resources were dedicated in this area Have Lenders that understand risk management Hedge Lines and operating lines Alliance with a packer – CFA or marketing agreement Financial reporting is very good Monthly accrual statements Monthly cost of production – many by flow Monthly cost of inventory – we look at this number – today average cost of inventory wean to finish is in the low $70’s after latest downturn in feed If you don’t have this information- access to capital will be difficult Markets have been crazy for the past 24 months Volatility will remain for the foreseeable future Risk management is crucial to survival More producers than you think have managed this volatility well Market volatility makes producers very cautious Many producers are looking for a home run not singles and doubles But things can change quick “Successfully Managing Risk” Fundamental Information is Important The Flow of Information Leads to Volatility You need to a student of your business Here are some items to look at every day PLANT DELIVERED PURCHASE DATA FOR Friday, January 22, 2010 (As of 1:30 PM) CURRENT VOLUME BY PURCHASE TYPE WESTERN CORNBELT DAILY DIRECT AFTERNOON HOG REPORT BASED ON STATE OF ORIGIN BARROWS & GILTS LIVE AND CARCASS BASIS Estimated Actual Actual Actual Today Today Week Ago Year Ago Producer Sold Negotiated 15,901 9,792 10,780 19,563 Other Market Formula 39,348 32,741 34,912 4,992 Swine or Pork Market Formula 118,571 67,847 71,013 68,061 Other Purchase Arrangement 48,852 34,515 28,456 7,870 Packer Sold (all purchase types) 9,719 4,612 2,837 8,632 ------------------------------------------------------------------------------NEGOTIATED PURCHASE (Including Packer Sold) Barrows & Gilts (carcass basis): 9,043 Compared to Prior Day's closing weighted average (LM_HG208), 1.34 lower Base Price Range $59.00 - $68.05, Weighted Average $66.25 Base Price is the price from which no discounts are subtracted and no premiums are added. ------------------------------------------------------------------------------------------------------------------------------------------------------------NEGOTIATED PURCHASE (Including Packer Sold) Barrows & Gilts (live basis, 240-300 lbs): 2,288 Compared to Prior Day's closing weighted average (LM_HG208), 3.23 lower Price Range $41.06 - $57.00, Weighted Average $54.81 Pacific Exchange Rate Service 28 Million MT 60 Pork Production, 2000-2010 F 50 40 30 20 10 0 China EU-27 U.S. Brazil Russia Vietnam Canada Source: USDA/FAS 30 85 Sow Inventories - Global Total 82.0 -410k hd, -0.5% Million Head 80 75 70 65 60 Source: USDA/FAS 31 120 Pork Production - Global Total +1.65 mmt +1.6% Million MT 100 80 60 -153 kmt -0.3% Rest of World 40 20 China +1.8 mmt +3.7% 0 Source: USDA/FAS 32 You must be committed You must know your costs You must be disciplined It is about managing your business In looking at our portfolio here are some traits of producers that have managed through the last 2 years Breakeven on best systems are now $130-135 a head Now corn concern – molds affect performance Might effect gain and reproductive performance Watch supply and weights Liquidation values – change daily – tough decisions for Lenders We will have producers that will not have much debt at the end of 2010 because of their risk management Contract barn owners owning pigs Still not many empty barns – nursery first will be empty Appraised values on facilities Sow units size and location Very difficult to switch Lenders Why build versus acquisition Lenders will want less concentration in pork if the industry does not improve Borrowing Base values going forward More dollars on hogs that are hedged? Unhedged or locked Sows Max $100 previous $150 Grow – Fin - $40 Previous $55 2500 sows operating Max $1.25MM before $1.75MM = $500K more Capital in – plus personal signatures less patience You can never have enough working capital Leverage will be dirty word for a period of time You will need to manage margin risk from now on & it will be as important as production risk Volatility looks like it will be the norm. You will need to be even better and managing your business to survive – production – costs – margin – the people that are left are good and getting better everyday It might take another 12-24 months for this to be corrected Breakeven is $130 a head we need $70 hogs to be profitable what does supply/demand have to be? We are writing history Producers that can manage risk will grow – Lenders will allow them to manage non performing assets Capital will be very difficult to get until the industry makes money for a period of time Producer – Packer more aligned model in the future in order to have the industry be viable