For some time now, both inflation and interest rates have been low. But they've begun to rise. For ranchers, that can spell trouble.
Already, producers are feeling inflation's pinch — notably in fuel prices, health insurance and construction materials.
Interest rates have also begun to inch up, especially on short-term loans, which often are tied to interest rate hikes by the Federal Reserve Board. The board has made 10, ¼ point hikes since the federal funds rate hit a very low 1%. It now stands at 3.5%.
Interest rates and inflation interact to fuel each other. When they appear to be headed up, it may be time to re-evaluate your finances so the ranch doesn't get caught in a bind if both start skyrocketing.
Two immediate steps
There are two immediate steps ranchers can take to protect their interests. First, renegotiate long-term, high-interest loans before the rates increase.
“We renegotiated after the rates went down,” says Carol Hamilton, operator of a cow-calf and yearling operation in southwest Wyoming. “It came down about 2.5%, saving us thousands of dollars a year.”
This tact won't work for every ranch since some loans are so close to being paid off that refinancing costs can exceed the savings from a lower rate. It pays to check first if that might be the case.
Second, keep a close eye on the size of short-term loans. Rates for short-term loans are likely to go up further as the Federal Reserve continues to hike the federal funds rate.
“We pay 5.5% for our operating credit line,” says Rob Hendry, Clear Creek Ranch in central Wyoming. “A year and a half ago, we were paying 4%. Our rate is tied to the Federal Reserve rate. If that rate goes up today, ours will go up by that amount.
“We watch that rate because we don't want to get overextended. We keep an eye on what Fed Chairman Alan Greenspan does. He and the Federal Reserve hold the cards on our interest rates, and right now there's a lot more pressure on the upside than the downside,” Hendry adds.
There are many reasons inflation and interest rates are inching up. The economy is picking up after an extended downturn. And, supplies are tighning in the world's oil markets, driving prices higher.
Doug McInnis is a Casper, WY-based writer on business management topics.
Then, there's China
China is pumping up demand for many goods, thanks to its immense economic growth. Rising demand tends to create shortages, which drives up prices.
“The Chinese have bought up a lot of oil and gas reserves around the world and that's helping drive up the price of oil,” says Rob Hendry, Clear Creek Ranch in central Wyoming. “Concrete is being rationed in some places because of demand from China.”
In addition, the Chinese have begun to follow the West by buying cars by the millions. Their auto-buying spree has created a new demand for oil that wasn't there just a few years ago. As the more than 1 billion Chinese continue to buy cars, the worldwide oil supply squeeze will worsen.
One indication of China's need for oil is the recent proposal by China's state-owned oil company, CNOOC, to buy American oil producer, Unocal. China has already bought into oil and gas interests in Indonesia, Australia and Canada.
Conversely, China is also one reason long-term interest rates have remained low. China is piling up cash as it collects payments for the flood of imports it sends to the U.S. and other western nations.
China has used part of its cash haul to invest in U.S. Treasury debt. If it hadn't, the U.S. government would probably have had to raise rates on Treasury bonds to attract enough buyers to finance the federal government's huge and growing budget deficit. That process would help push up other long-term interest rates, including land loans. If China should cut back on its purchases of government securities, long-term rates could rise, economists warn.
So the watchword is caution. For the moment — with high calf prices and low interest rates — times are pretty good in the cattle industry. But it wouldn't take much for calf prices to fall while the price of everything else — from oil to the cost of a loan — takes off.