Cautious lenders predict hog industry recovery

Cautious, yes. But, at least two major Canadian agricultural lenders say they aren't giving up on investing in the hog industry, producers attending the recent Banff Pork Seminar heard.

Representatives of Farm Credit Canada (FCC) and the National Bank of Canada agreed times have changed, but forecast a strengthening hog industry in the mid- to long-term.

FCC, Canada's largest agricultural term lender, has seen a steady growth in its hog portfolio, says Lori Lane, an FCC account manager based in Red Deer, Alta. Nationally, hog industry loans reached about $926 million as of Dec. 31, 2003, representing about 9.6 percent of FCC's total $9.7 billion agriculture portfolio. The size of an average hog industry loan increased from about $225,000 in 1999 to more than $377,300 in 2003.The average hog industry loan is 2.5 times larger than FCC's average agricultural loan.

However, it's not all good news, says Lane. The percentage of pork industry loan payment arrears has increased in the last year, after a string of decreases over the past five years. As of December 2003, about 5 percent of all dollars loaned to hog producers were at risk because of arrears compared to 2.74 percent in 2002.

"Those figures have to be kept in perspective," she says. The percent of dollars loaned to the hog industry in arrears has increased, but that's after making a dramatic comeback from 1997. Five years ago the hog industry had the highest percent of arrears - 9.53 percent - followed by 8.98 percent in the crops sector, and 4.28 percent in the dairy sector. The percent of the FCC loan portfolio in arrears has decreased in all three sectors since 1998.

Over the past five years, "it's interesting to note the dramatic improvement in the health of the hog portfolio, and its migration closer to the performance of supply managed industries," she says. "Perhaps this is an indication of the reduction in volatility that the 'business network' concept has created. Coming off a disastrous year in 1997, the hog portfolio has recovered to the extent that it performs better than the overall FCC portfolio."

However, with an increase in loans in arrears in the last year, "and the fact arrears are a lagging indicator, we are watching this one closely," says Lane. FCC equity requirements for loans vary depending on the existence of supply contracts with packers. In the current market if a borrower does not have a supply contract, FCC is looking for about 50 percent equity to secure loans.

The Quebec-based National Bank also has a sizeable investment in the hog industry, says Claude Bilodeau, senior manager of agribusiness development. The company, which is increasing its presence nationally, has a total agricultural loan portfolio of about $3 billion with about 30 percent in hog industry loans. Quebec produces about 31 percent of the hogs in Canada.

Bilodeau didn't forecast any immediate improvement in hog industry economics, still predicting a further decline in the number of hog operations in Quebec as the least efficient producers exit the industry. Quebec, which produces about 7.2 million head of hogs per year, has about 2,400 producers. It has followed the pattern of other provinces over the past 15 years with fewer, but larger, hog operations.

With venture capital investors looking for a 15 percent rate of return, Bilodeau says none are looking at the hog industry these days. "Bank financing is still the best option for expansion of the hog sector," he says. "We view the sector as having moderate risk and are confident it will improve."

The Banff Pork Seminar is co-ordinated by the Department of Agricultural, Food and Nutritional Sciences, University of Alberta, in co-operation with Alberta Pork, Alberta Agriculture, Food and Rural Development and other pork industry representatives. This year's seminar played host to more than 700 delegates from throughout North American and Europe.

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