I’m sometimes accused, as I go about my efforts to bring you useful information, that I have a very acute sense of the obvious. I have no comeback to that because it’s true.
So, with that in mind, consider this: You need a lot more capital to run your operation than you did 10 or 15 years ago. Yet your returns haven’t kept pace. If you’re feeding cattle, they’ve done an about face and are in full retreat, at least as the cash market is concerned.
In fact, according to Randy Blach with CattleFax, whether you’re talking about feedyards, stocker operations or cow-calf, it now takes 110% more working capital than it did in 2000.
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That’s just working capital. An accounting definition of working capital is current assets less current liabilities. A cowboy definition is the portion of the equation you bring to the table when you sit down with your lender to discuss your operational needs. According to CattleFax analyst Mike Murphy, for cow-calf producers it took 20% more capital in the form of credit to operate in 2012 than it did just in 2010, and 60% more than 10 years ago.
But you already know that. So if I have any hope that you’ll read the rest of this article, ask yourself this: How well positioned, given the information above, are you to compete in the years to come?
That’s the question Bob Campbell, senior vice president with Farm Credit Services of America in Lincoln, NE, asks his customers.
He bases that question off the observations of Danny Klinefelter, Texas A&M University Extension finance specialist. According to Klinefelter, if a market is in equilibrium, the top end of operations are profitable and growing, the average are hanging in there, and the bottom end are losing money and exiting the industry.
Logic would indicate that in times when the cattle market is not in equilibrium, such as now, those distinctions are even more acute.
Clearly, positioning yourself to be in the top end takes a multifaceted approach, both from the cost and revenue perspective. From Campbell’s perspective as a lender, the operation’s balance sheet looms large in the discussion.
Right off the bat, he’ll tell you that working capital is the key. “This is not an environment to be highly leveraged in.”
With that in mind, and given that input costs will likely continue to rise, “What we’re worried about is an inappropriate balance sheet structure,” he says. “So if you’re keeping everything in your line of credit – your equipment purchases, land purchases, whatever, you’re structuring your balance sheet wrong. In today’s industry cycle, make sure your balance sheet is right, make sure you’re amortizing the things you’re buying, and make sure you can pay for them.”
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Given that volatility and uncertainty are playing hard and fast on the financial ropes you’re climbing, Campbell offers this thought for producers: “If I make a decision, whether I’m buying, selling, or decide to do nothing, what if I’m wrong? If you can’t answer that question, you’ve got some homework to do.”
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