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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