When the Price is Low
The British pig industry is once again experiencing a sustained period of low prices and quite possibly, simultaneously, higher contract penalties. The oxygen of business is cash-flow and some pig producers will be beginning to find it hard to breathe. How can a pig producer protect the cash-flow of the business?
It is hard to think clearly when under financial pressure because sustained financial pressure is debilitating in every sense, affecting body mind and soul. It is hard enough in these circumstances for an owner or a manager to self-motivate without the challenge of motivating staff. The BBC Countryfile programme recently aired a feature on the effect of financial pressure on farmers which was both deeply saddening and yet encouraging in terms of humanity. Farmers can lose self-esteem and purpose with tragic consequences for families and friends. But there is hope in the help and education being offered today by people who have come through these experiences and are bringing greater understanding to this crucial need in our industry.
The question of how to protect cash-flow is simply a practical response and provokes the further question can we protect the cash-flow. To a degree the answer to the second question is yes. As far as the hard working pig producer is concerned the financial model of the British Pig Industry is, in truth, a flawed anachronism. Producers are paid primarily for the absence of back-fat and possibly as a consequence intra-muscular fat. Therefore because of the relationship between weight and the deposition of back-fat, opportunity to reduce breeding herd size and increase carcass weight is extremely limited as one aspect of improving cost efficiency. So to a degree, the answer is also no.
But even with such a broken system there are opportunities at this stage. There is the current welfare premium, which I do not believe is, itself sustainable. Some producers are getting above current price levels from having agreed longer term contracts. However inherent in the achievement of qualification for a welfare premium is elevated cost of production. On the face of it, it would appear advantageous, the devil is in the detail. More people in the UK are allegedly buying British, although we have one of the lowest consumption per capita rates, and now they are getting pig meat at lower prices…or is that just the pig producer who is selling it at a lower price? If there is a strong sustainable possibility that the British brand equals a better deal for the British pig producer then should we not use this to begin to address the brokenness of the current financial model? Should we not be using this in some way towards the long-term to take the pressure off the short-term cash-flow problems that drag producers down? Instead of the politics shouldn’t we as an industry be concentrating some of our valuable time to developing genuinely workable sovereign financial controls to buffer the natural consequences of the global supply and demand market?
At present we have no long-term strategy that is protecting our cash-flow. So we are hit hard and low and quite quickly when the price goes low and stays low. Pig production is a relatively high, dynamic investment vehicle on any day of the week. It can never be regarded as a high return business. Therefore it is, in the main, populated with hard working and philosophical people who want to make a living to sustain a way of life that has many intrinsic qualities and satisfactions that other ways of making a living do not possess. It is a choice made with a rich history of information that makes that choice appear too many, to be quite bloody minded. I call this character and it has been my privilege to serve this character as a pigman and as a member of the allied industry all of my working life so far.
So how do we protect the cash-flow in the short to medium term? Why we should protect it is obvious…if we don’t we stop breathing. By the nature of business price drop is probably the most common cause of the symptoms of a struggling cash-flow. Pig health is another and breeding failure yet another. If a pig production business has got a strong foundational management strategy that has developed process controls through value engineering it is already running at a high level of cost efficiency. There will be quite a bit of daylight between the business cost of production (COP) and the pig price. For a business in this state the price will have to drop further than for others. For businesses that have less daylight panic often ensues in the form of instant cutbacks. These will include reducing or even abandoning breeding stock replacement, the selling of weaners or stores to reduce the feed bill and the risk of lowering animal welfare conditions. It is not just inefficient businesses that can experience this, a well-run business that is at the peak of investment in its current business cycle can run short of funds to support reductions in the cash-flow. When pig health hits the cash-flow it is usually a reduction in numbers or in feed efficiency or a combination of both that impacts along with increased medication and support costs. If there is a prolonged period of breeding failure or a breakdown in the replacement supply then a change in management strategy has to be a first priority in protecting cash-flow but only if the foundation mentioned above is in place can this really happen. Sows that would routinely be culled can be allowed to go through one or two more production cycles. This protects the cash-flow by maintaining output that would otherwise be lost.
If a producer is facing supply contract penalties on numbers, these have to be continually evaluated against the falling price. This enables the producer to then look at the cost efficiencies in the production process. There is a point at which the effect of reduced production is less of an impact on the cash-flow than price penalties. Cost efficiencies that reduce production include a much tougher culling strategy that reduces wasted days in the breeding herd, this in turn will reduce the herd cost of the pig born alive and weaned. This culling does not always reduce production levels by much it just reduces waste that should have not been there in the first place. If it does reduce production then the feed bill will reduce as well. Reduced production can present innovative opportunities to improve the infrastructure and health for when financial pressure eases and can lead to strengthening of the foundation of the business. Well recorded businesses with a clear management strategy can be supported by the credit of a supplier who understands and appreciates the long-term value of the business.
When the price is low or when production faces an unexpected reduction in output protecting the cash-flow has to be the first priority. It is the responsibility of everyone associated with the business to make a contribution to this strategy. Pig producers directly employ people and give them a reasonable quality of life, enabling many of these people to realise a vocational life that gets the best out of them. Pig producers by dint of their hard work day in and day out create many more employment opportunities the for people working in the allied industry and beyond. It is a massive family tree in this respect but the moment it is starved of oxygen the tree begins to die back. We must, as an industry, look at this whole subject with a serious intent, to ensure that in every genuinely well run business there is protection for the cash-flow.