By Josh Davis | Vice President Food & Agribusiness - Cattle & Timber, Farm Credit Mid-America
As record-breaking inflation continues to make headlines, few consumers or industries aren’t feeling the impact of higher prices and interest rates. Cattle producers are no exception. But even during times of incredible market volatility, producers can mitigate their risk and create staying power for the future.
Inflationary Impact
Interest rates hikes entered the scene last year to mitigate rising inflation, while other existing challenges remained:
- The USDA estimates farm production expenses to be up 28% compared to 2021.
- The costs of nitrogen, potassium and fuel more than doubled between 2021 and 2022.
- Severe drought and post-pandemic market conditions have tightened the U.S. cattle herd, driving the price of cattle up more than 40 percent over one year ago.
Beef producers have reacted to these shifts in the market in different ways. While lower interest rates invite new producers to enter the market and existing producers to expand through capital investments or increased production, higher interest rates have the opposite effect.
Today, some producers are putting expansion plans on hold, and some have decided to take advantage of the record-high prices to liquidate their herds. Most have accepted that a dollar doesn’t go as far today as it did 18 months ago, resulting in requests for increased lines of credit from their lenders.
In many ways, the markets may seem to be more volatile than ever. In the absence of a crystal ball that can foresee the course interest rates and inflation will take, it has never been more important for beef producers to manage costs and understand the opportunities and options available to them.
Here are strategies producers can put to work today to protect their financial position in the future:
Term Out Capital Expenditures on Amortized Loans
The rate environment has changed. One year ago, long-term interest rates were moving up more quickly than short-term interest rates. That is not the case today. Rather than use an existing line of credit for big-ticket capital expenditures, producers can put those expenditures on a more appropriate term at a lower, fixed interest rate. Producers should ask their lenders if they offer loan conversion when interest rates come down. This approach sets a ceiling on the interest rate, while leaving the bottom open for when rates come down.
Use Risk Mitigation Tools
Livestock risk protection insurance, hedging and forward contracts are existing tools that can help mitigate price risk, and many producers put these tools to work for their operations today. The right risk mitigation tool will vary from producer to producer. This is why it is critical that every producer have a circle of trusted advisors who can provide insight and guidance tailored to the unique needs of the operation. A producer’s lender should be part of that trusted circle, and the producer should work with the lender to understand the products and options available to them.
Have a Well-Defined Plan
Seasoned producers – and their lenders – understand that the beef production market goes in cycles. A well-defined plan is a critical staple for any producer who wants to stay in the market long-term.
Know Your Risk
Producers should determine how much risk they can afford to take if the market fluctuates by doing a stress-test analysis with their lender and other advisors. Analyze what happens to your operation if the market goes up, if the market falls, or if it is impacted by an unforeseen “Black Swan” event. A producer should think about what happens to their balance sheet in any given situation, how they will respond, and then determine how much risk they can afford to take.
Protect Working Capital
For many producers, it may feel easier to use working capital to purchase equipment or make other capital investments, but in the absence of risk management and mitigation tools, using working capital could put you at higher risk. Every situation is different. A producer with no debt is going to view things differently than a producer who has debt. Each producer should do a self-assessment and discuss their findings with their advisors.
Cut Costs, Not Corners
As with any business, there are areas where producers can cut costs, and there are areas where they shouldn’t. For example, cutting back costs on an animal health program isn’t advisable. But if an operator has been diligent about fertilizing their pastures and hay ground for the past several years, that may be an area where they can cut costs in a pinch. Being cognizant of the budget, and above all, be disciplined in sticking to it.
Know Your Options
When it comes to selecting a lender, producers should look for one that offers specialized industry knowledge and expertise in addition to financial products that work for their operation. Do they offer fully fixed rate options, or do they offer to convert loans to lower interest rates without refinancing? Some lenders also offer cooperative benefits, which means you could be eligible to receive a portion of net earnings back each year in cash through a patronage program.
In any time of volatility, there is also opportunity. Have conversations with input providers, lenders and other trusted business partners to identify the unique opportunities that exist for the operation. Sound business practices can help producers make the most of even the most volatile markets.
