Some markets are open and transparent and easy look into. Just take a look at the Dow Jones Industrial Average: I am able to see that at this minute it’s at precisely 9,971 because it’s a public market. (Finally under 10,000. How far down will it go? Last time it was under 10,000 was early November). No, wait a minute, it’s up to 10,003 in the time it took me to check that last fact. I’m able to keep up with it minute to minute. What’s hard red spring wheat selling for? Well, 15 minutes ago in Minneapolis it was $4.98 on the March contract. (Under $5 – worst price since September.) Those are open, public markets and we know what prices are.
Read Also
Worrisome drop in grain prices
Prices had been softening for most of the previous month, but heading into the Labour Day long weekend, the price drops were startling.
It’s tougher in the real, cash world where farmers live. Farmers have to consider basis and other major factors that produce the farmgate price. And some of the smaller crops force farmers to do a lot of phone work to determine what today’s prices really are. It’s a less transparent marketplace, but one where most prices can be calculated if you have a calculator.
But there’s one terrifically opaque market in agriculture right now, one that allows virtually no price discovery and which is profoundly illiquid: bankrupt hog barns. There are lots of barns on the prairies right now in which the farmer can’t meet his financial obligations, but lenders haven’t seized the asset and tried to sell it. They’re sitting there in financial limbo, with the farmers hoping to hang on until profitable prices return (for more than a few weeks) and the lenders hoping they never get into the situation of owning a barn that they would have to sell at a loss.
So with few selling, there’s not too much price info out there about what a hog barn is worth. I was at the Manitoba Swine Seminar this week for two days and there was lots of talk and a panel discussion about the financial plight of hog barn operators. I’ve talked to lots of people about what shutdown hog barns might be worth. Some people guess 20 cents on the dollar. Others 40 cents. Some 60 or 80 cents. And they could be worth 100 cents if they get through to the other side of this crisis. That last prospect is what is keeping a lot of hog farmers and lenders onside right now. If profits come back, these multi-million dollar operations can become recapitalized, farmers will have equity to retire with and bankers won’t have to write down the loans. So there’s a version of the “extend and pretend” situation going on in the hog industry.
But lawyer John Stewart raised an alarming possibility at the conference, one that might eventually break the present cooperation between lenders and farmers: “The consensus out there is that we’re going to turn a corner one morning and everybody who is still in business is going to become wonderfully profitable, at which point no one is going to want to do anything because the return to profitability means that everybody’s going to be paid. The concern that I have is that we may see a situation develop where we return to profitability in the future, but only minimally so, and the problems we see financially in some of these operations will continue in spite of profitability. At that point I’m not sure what the institutions are going to do.”
If the lenders decide to move in if big enough profits don’t return, then we’ll learn a little more about the value of a hog barn operation. Prices will appear. But there might be one unforeseen factor that holds back the lender: the value of an empty hog barn may not equal much. Stewart said zoning complications that might prevent hog barns from ever restarting could hold banks back from shutting operations, or being willing to OK a farmer to take part in the barn mothballing program that the federal government has been funding. Barns that are “non-conforming” or only “conditional use” in terms of local zoning bylaws may be grandfathered-in now, but if they shut down for more than two years they may never be allowed to be repopulated with pigs. That’s a nightmare for a bank, who would join the farmer in having nothing at the end of the day.
“The question that’s winding around the room that nobody seems to answer for me is ‘Is the barn worth nothing once it’s been depopulated?’ And if it is, I can think of a couple of creditors that might want a head’s up on that before we turn around and shut the operation down.”
Generally, opacity in a market is a bad thing. But if the hog barn market remains opaque because lenders aren’t foreclosing, shutting down operations and trying to sell them, then maybe this is one of those exceptions in which it’s better to live in an illiquid, opaque market than out in the harsh light of day where the price of zero is a possibility.
