Expert Q&A: The Proteins Industry


Food and beverage expert Jim Lightburn, Senior Managing Director in our Industrial practice, answers questions about the current state of the protein industry, the impact of tariffs on operators, and the critical metrics to monitor in this dynamic sector.

How are tariffs affecting domestic pricing and demand for U.S. pork exports? Is U.S. meat now being stockpiled due to lower foreign demand?

In recent years it has been reported that about 1 in 4 hogs raised in the U.S. has been sold overseas, with China being the world’s top end user of pork. With the recent tariffs imposed on pork in the U.S., farmers have seen exports to China almost halt given the increased per head costs associated with the tariffs. This loss of significant export volume, in what was an expanding market, has hurt farmers financially both in the short term and the long term, as they have stopped investing in potential expansion projects. Many family farms and smaller businesses are concerned about being able to weather the storm and remain in business.

In the early days of the imposed tariffs, farmers were dealing with an abundance of hogs on hand. For the month of July 2018, industry data showed a record level of protein products being stockpiled in cold storage warehouses. As a result this increased inventory supply lowered the cost of goods to U.S. based processors, bolstering their economic performance but hurting the long-term expansion of the individual farmers.

What are the most important questions a lender should ask before lending on protein assets? What are the most important metrics to monitor when lending on protein assets?

When a lender is looking to underwrite a deal involving protein assets, it is important to have a strong understanding of the following key points:

  • Are their potential borrowers vertically integrated (farming, slaughter, processing)? If so, how do they manage/control the internal supply chain and associated transfer cost between business units?
  • What is the age and what are the production capabilities of their current equipment? What is the mechanical performance history and is there deferred maintenance?
  • How does the company track and perform against key production metrics, for example:
  • How does the company manage their food safety requirements?
    • What is the company’s SQF Level? What were the company’s recent scores on both announced and unannounced visits?
    • Do they have product recall and contamination insurance?
    • Any recent recalls? Do they conduct mock recalls? If so, how often?
  • Gross margin: How is this calculated? How often do they update cost sheets?
  • Fixed costs vs. variable costs: What are the company’s true fixed costs? How are these spread amongst product lines/individual SKUs?
  • What are the supply chain & vendor compositions? 


Can you speak to the importance of brand awareness in the food & beverage sector?

The protein space is extremely competitive both nationally and regionally. It is important for companies to have strong brand awareness and customer loyalty, particularly within their region. For example Carolina Pride outperforms several major international brands in the southeast due to fierce customer support and brand awareness. The strength of a brand allows companies to command a premium, in some instances, for their products.

What are the important considerations in selling goods to big box or supermarket customers?

When dealing with big box stores as well as larger volume supermarkets, it is really important to have a strong working relationship with the individual retailers. The key metrics that retailers measure are order fill rates, in stock rates and sell through rates. Given the commodity nature of the business, retailers expect their suppliers to have a strong understanding of comparable costs/market driven data and manage pricing up or down in line with industry standards as opposed to production inefficiency.

In addition to the above metrics, retailers are looking for suppliers in the protein space who will support them. In terms of support, retailers are looking for both in-store marketing support (coupons/promo’s/etc.), product support (new products/demos) and external advertising support.

What insight have you gained from managing the day-to-day Carolina Pride business that may be helpful to asset-based lenders lending on protein assets?

The protein space requires consistent monitoring, and measuring and tracking key metrics on a daily and weekly basis. Given the commodity nature of the business and the tight margins, management as well as lenders should understand market fluctuations, raw material fluctuations, key production metrics and underlying cash flows. Lenders must also ensure that their borrowers consistently update SQF, USDA and manufacturing best practices to adjust to changing regulations, demands and quality standards.