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Pork Commentary: Big Sky, Puratone Debacle on Canadian Prairies

18 September 2012
Jim Long on ThePigSite

Jim Long is President &
CEO of Genesus Genetics.

CANADA - Last week, the second and fourth largest hog producers in Canada went into financial protection.

Big Sky Farms (2nd largest) and Puratone Corp (4th largest) who collectively produce about 1.5 million hogs per year succumbed to the reality of too much debt, too high of costs, and not enough revenue. With financial losses per market hog at pushing $50 per head per week, it’s possible that Big Sky could be losing $1 million per week and Puratone half of million currently.

Puratone in their own statement that the events that are leading to restructure include:

  • The sharp rise of the Canadian dollar since 2007
  • Higher corn and soymeal prices due to intense demand related to the use of corn in the U.S. corn ethanol industry.
  • The implementation of mandatory country of origin labeling by the United States which has meat dramatically reduced prices for young pigs exported to that country.
  • The recent drought that caused feed prices to spike even more and is also limiting access to feed.

Puratone owes about C$93 million and is in breach of its loan covenants. According to loan documents it has lost about $36 million in the last four years. Through the first 10 months of this fiscal year ending July 28 Puratone has lost $9.5 million. Since the end of July hog margins have gotten worse.

When you look at Puratone’s total debt of $93 million and reported (in the Winnipeg Free Press) 28,000 sows producing 500,000 market hogs per year. The debt per sow is about $3400. Pigs marketed per sow year would be about 17. Puratone with guidance during the bankruptcy protection from Deloitte has intended to find investors and/or sell off assets. Puratone’s hog production will continue they claim.

Big Sky Farms of Humboldt Saskatchewan went into receivership last week. It had restructured 3 years ago with unsecured creditors getting 10 cents on the dollar - nice wasn’t that! Now three years later it appears despite the huge cutting of debt that Big Sky got on the backs of their unsecured creditors. Big Sky cannot meet its financial obligations without court protection.

Big Sky Farms as many of you have read in this commentary know, had significant shareholder participation by the government of Saskatchewan (C$30 million). As we wrote many times we have believed and still believe in our free enterprise system there is no need for governments to own hog farms in competition with its taxpayers.

Casey Smit the president of Big Sky calls the situation disheartening.

“It’s frustrating to have an event like this which is largely out of our control, impact our company so drastically.” Mr. Smit said “It’s the whole livestock sector.”

The company said it is losing C$40 - $50 per animal based on current prices.

Kevin Brennan a senior vice – president with firm Ernst and Young, said the receiver plans to sell the entire operation as a unit. Mr. Brennan has a big job ahead of him finding a buyer. Big Sky in big financial trouble twice in three years, millions and millions of dollars lost. It is the same management both times. It will be a challenge to find a buyer at almost any price. It’s one thing to buy something, another thing to get the people and to run it at a profit.

Summary

Big Sky Farms and Puratone Corp are themselves a sad testimony to the state of our hog industry. Their failure unfortunately reflects the grim reality of us all. There is no magic in a commodity driven industry such as ours. Productivity is key and if Puratone for example was producing at 17 pigs per year as the press reports it tells us they were lagging industry norms and this in itself pushes cost of production higher and lowers revenue. Over time the lack of capital means repairs aren’t done, good people will leave, lesser investment in new competitive enhancing technology eg. Genetics, feed gets made cheaper cutting productivity; if it becomes a death spiral.

Over the coming months we expect producers will fight for their survival and many will quit. We read last week where one of Americas celebrity ag – economists wrote that there was no sow liquidation. It must be the view from his cubicle. He needs to get out on the back roads; the North American sow herd is getting smaller every day. The pain is real. It is not an academic case study. On the upside we continue to believe hog prices will be the highest in history – summer 2013. The challenge is getting there.

Author: Jim Long, President & CEO, Genesus Genetics

To find out more about Genesus Genetics,
please take the time to visit their website at
www.genesus.com.

The opinions expressed in this commentary are entirely those of the author and can not taken to represent the views of ThePigSite.com, its owners or its management.



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