Banking crisis: Impact on feed and livestock industry?
But a much more important issue in the feed industry that does not seem to be getting much discussion is the sharp turn in profitability of livestock production
By Richard Brock, Brock Associates
It seems as though we have to deal with one crisis after another. Covid, wars, droughts, floods, labor issues, the list can go on and on. The most recent is the banking crisis. In a nutshell this crisis should have minimal impact on agriculture. Here is my view as to why.
The first bank to go collapse was Silicon Valley Bank (SIVB), the 2nd biggest bank failure in U.S. history. The bank was unique in its structure and clearly not well managed. It’s off-balance-sheet funding was unlike any other bank. 23% was in early-stage technology (as of Q3 2022), 31% in technology, 22% early stage scientific/healthcare and 13% in life science/healthcare. Mostly high-risk loans.
More importantly, Silicon Valley Bank invested heavily in long duration bonds when interest rates were “low”. For example, Silicon Valley Bank’s bond holdings which were designated as “available-for-sale” grew from $14 to $27 billion dollars from 2019 to the end of 2022, while its bond holdings designated as “held-to-maturity” grew from $14 to $99 billion dollars over the same time period. The problem grew bigger as a result of the Federal Reserve raising interest rates. As interest rates rose, the bank’s bond investments declined substantially in value, resulting in big realized losses on bonds that were sold and even bigger unrealized losses on the remaining bonds in their portfolio. To cover the losses on the bond holdings, the bank needed to either raise additional capital or go out of business. The latter occurred.
The collapse of Signature Bank, coming just 2 days after the collapse of Silicon Valley Bank, was the 3rd largest bank failure in U.S. history, with events somewhat similar to those at Silicon Valley Bank but not nearly as dramatic. First Republic Bank may be the next bank to fail, possibly by the time you read this.
Add Credit Suisse bank, headquartered in Switzerland, to the list of troubled banks. Credit Suisse is one of only 30 financial institutions globally that are designated as being “too big to fail”. To prevent a catastrophic bank failure from occurring, the 167-year-old bank needed to be rescued over the weekend. UBS bank, with backing from the Swiss National Bank (the central bank of Switzerland), took over troubled Credit Suisse.
There are, no doubt, other banks facing similar issues. But it is unlikely that any are as serious as the ones just mentioned above.
More important, the banks and lending institutions that specialize in agriculture are much more conservative in their investments. There is not even a rumor of any of the major ag lenders facing similar issues. The only two issues that may come out of this for the agriculture industry include:
Lenders will become more risk adverse.
Lenders will be less interested in shaving margins.
Much more important issue
A much more important issue in the feed industry that does not seem to be getting much discussion is the sharp turn in profitability of livestock production—particularly pork. The chart on page 2, with data supplied by Iowa State University shows that the profitability for farrow-to-finish hog operations is looking at the biggest losses since the fourth quarter of 2012. Some of this is due to the fact of high-priced feed which has just recently broke significantly. That will help alleviate some of the losses. But at the same time that was happening the price of pork has also plummeted which is going to squeeze margins. Labor costs have obviously skyrocketed. The cost that is going to hurt the most over the next few months, however, is the cost of money. For the last 20 years, we have never been too concerned about the cost of borrowing money. It was cheap. But the livestock industry relies heavily on borrowed capital. The prime rate of interest rates has more than doubled in the last two years. This is going to be a much bigger issue for the livestock industry than the failure of Silicon Valley Bank.
Watch our Feedstuffs 365 interview with Richard Brock. To view.
