It will be a good-news, sort-of-bad-news scenario for cattle producers looking for a loan in the coming years. The good news is there are plenty of lendable funds available. The sort-of-bad news is that the level of risk and uncertainty, even in the face of much better times for cattlemen, may tamp down some of the enthusiasm.
“I’m generally positive on the beef sector,” says Bill Brush, president of Security State Bank at Ansley, NE, looking at the good-news side of the ledger. He says funds are generally available and interest rates , so far at least, have remained low. Add to that much higher cattle prices  and a downturn in input costs, particularly feed, and the next few years look good.
However, for every silver lining there’s usually a dark cloud somewhere. Many of the same factors that give the lending environment a positive glow come tinged with uncertainty, and that creates a situation that will cause cattlemen and lenders alike to do plenty of thinking and figuring as they anticipate loans in the coming year.
Take interest rates . According to Ernie Goss, the Jack A. MacAllister Chair in Regional Economics at Creighton University in Omaha, NE, short-term interest rates are likely to stay low. “At this point in time, they’re saying — ‘they’ being the Federal Reserve — until 2015,” he says.
Long-term interest rates, however, will begin to tick up, and perhaps will do so even as this article goes to print. Some of that depends on the outcome of deliberations in Washington, D.C., on the debt ceiling. 
Whether the politicians have the resolve to tackle the problem or just continue to kick the can down the road will determine the level of uncertainty that financial markets will have to digest, says Danny Klinefelter, Texas A&M University Extension economist. And financial markets, as a general rule, don’t deal well with political uncertainty .
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But the Federal Reserve will probably take the lead in sending signals on interest rates , Goss says. “On the long end, I think interest rates could begin rising as early as December,” he says (Goss spoke before the Fed’s Dec. 17-18, 2013, meeting). “I think the Fed will begin taking some of the stimulus away. Of course, it’s $85 billion/month, so we’ll probably get some tapering. And the tapering may not begin until the first part of 2014, but they may announce it during the December meeting.” That would cause rates to begin to increase as the market anticipates the Fed’s actions.
Brush agrees. “I think interest rates are going to go up 300 basis points,” he says. “I just don’t know whether it’s in December , or if it will gradually move up in the next 3-4 years.”
In fact, Brush says his bank has been working with customers to lock in lower interest rates in anticipation of that inevitable increase.
“Unlike grain farmers , our guys haven’t paid down debt. In fact, their debt has gone up. We think the way to manage that is to get them to get term loans, lock in these low interest rates, generate some working capital  — and if they’re a year or two early, so be it. But I think it’s time to get it done now rather than later, when rates start moving up,” he says.
Cattle, land prices
The other good news-bad news consideration for lenders and borrowers alike is high cattle prices . While those high prices greatly improve profit potential, particularly for cow-calf producers, the level of price risk is much higher.
Brush heard a quote at a recent ag bankers’ conference that he thinks sums up a community banker’s perspective very well: “Be conservative in good times so you can be courageous in bad times, but consistent all of the time.”
That’s a philosophy he’s followed for years. To that end, the amount his bank will loan per cow hasn’t changed, even though the value of those cows has more than doubled.
“We took on a really wonderful ranch in 2009 at a time when their banker was telling them to sell cows . We said, ‘This is the bottom of the cycle; we want you to buy cows.’ In 2009, those cows were on the balance sheet at $800.”
Brush’s bank loans $600/cow. “We’d prefer to stick to our standards and loan $600. If a producer is going to buy a $1,600 to $2,000 cow, that means they need to come in with a heck of a lot more equity than they did in 2009.” That being said, however, Brush says no two customers are the same. “It’s all about repayment capacity.”
What that means is a well-capitalized ranch with a good land base for collateral will be in a different situation than an operation that rents every blade of grass the cows eat. “In general, banks are anxious to make good loans,” he says. “The condition is the ability of the operator to manage risk .”
That’s where borrowers need to prepare as they plan a visit with the banker , he says. Borrowers need to understand their costs and have a plan to protect the risk.
“There’s really nothing new [in what a borrower needs to bring to the table to discuss a loan], but the dollars are getting so large that they need to anticipate the risk question and be able to provide that information. Let that banker know you understand all that risk out there and have the management ability to deal with it.”
However, high prices  and the risk that trails behind them don’t necessarily mean that young or undercapitalized borrowers are out of luck.
“One of the offsetting opportunities to high-priced cattle is low-priced money,” Brush says. “So if we were to have a young man that we had a sense could cash-flow down the road, we would encourage him to let us get a Farm Service Agency guarantee, and then we would try to lock in that money over a 10-year period.”
So, even though the borrower would be starting or growing at a time when cattle prices are at a historic high, “By the fact that we could lock in the interest at pretty low rates, maybe we could keep his annual payment within a range that will work for him,” Brush says.
Watch land prices
Another thing to watch is land prices , Klinefelter says. In some areas that are more crop-dominated, land values have surged and may be poised for a correction . In the short term, however, Klinefelter says it’s more likely that land values will stagnate. “And land is big, even if you’re not buying, because it’s collateral.”
Klinefelter advises that borrowers maintain enough liquidity to allow themselves some wriggle room, should conditions change. He says it’s too soon to say whether the drought  is truly over. “You’re going to pay quite a premium right now — and if you had to turn around and liquidate them, or feed the cows, then I’d want to have a pretty good liquidity position of my own.”
But in general, lenders are optimistic  about the cattle industry’s future. The grain farmer  is in the eighth inning of one heck of a ball game, Brush says, remembering another quote from the ag bankers’ conference. The protein sector — cattle, hogs, dairy — is in the third inning of a good ball game.
“I think it’s going to shift. It looks to me that the next 2-3 years, the cow-calf guys  are the ones who are in the driver’s seat.”
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