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.

Interest rates

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.

 

Subscribe now to Cow-Calf Weekly to get the latest industry research and information in your inbox every Friday!


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 [2013], 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.