The financial woes facing the U.S. economy serve as a sharp reminder for Lyle Perman. The Lowry, SD, cowman and his family endured the ag-financial crisis of the '80s. Today, Rock Hills Ranch comprises a 400-head Angus cowherd, tillable ground, an insurance business and hunting outfit. He's proud to say he and his wife created an opportunity for their son Luke to join in the ranching business.
“We learned our lesson when we were young what can happen with variable interest rate loans,” Perman says. When the ranch began in 1976, he borrowed money at 8%, cows were worth $600 and calves $1/lb. Within five years, cows dropped to $400, calves to 75¢/lb. and interest was 17.5%. He learned his lesson the hard way and vows to not let it happen again.
The subprime lending fiasco in the housing industry mirrors what took place 25 years ago in agriculture. But the fallout of that, an economic slowdown, isn't good for cattlemen, Perman says.
Commodity prices reflect this; generally when corn drops, feeder cattle prices respond positively — especially with fewer cow numbers. But Perman says that's not happening — which indicates a possible softening of beef demand.
“When people don't have money and they go to the grocery store, they might pass beef up for cheaper cuts,” he says.
On the ranch is another story. Like his farming neighbors, Perman will produce his 2009 crop using high-priced inputs from 2008. To adjust, he is considering putting more pounds on calves from grass, which may mean reducing cow numbers.
Perman says credit availability hasn't affected most cow-calf producers — yet. That's because operating notes won't come due until after the first of the year. Perman says the interest rate on his operating loan hasn't increased, but rather decreased, because it's based off of prime.
Even with low interest rates, which traditionally encourage people to borrow money, Perman believes financial lenders will be more cautious than they would have been a year or two ago. Lenders remembered what happened 25 years ago and they'll be concerned about the ability to repay debt.
“We saw the potential for a wreck coming even before this financial disaster hit our national economy,” Perman says. “But the fact that the rest of the country is suffering doesn't make our job any easier because it could impact consumption of our product.”