As producers take advantage of the cattle market upswing, they are also grappling with inflation and a volatile market. Agriculture lenders say there are key strategies producers can implement to benefit from the market while managing risk.

“Prices are much higher than where they've been, which is a profit opportunity, but it also has capital requirements,” said Todd Moore, Farm Credit Mid-America senior credit officer.

Farm Credit Mid-America: Josh Davis, vice president of Food and AgriBusiness, left, and Todd Moore, senior credit officer. (Photo by Shelley E. Huguley)

The current climate comes with good opportunities and challenges, Moore told Farm Progress at the recent National Cattlemen’s Association Trade Show in Orlando, Fla.

“I’ve heard producers say profits are better, and you’d think, given how much prices have gone up as a percentage, that profits would be even higher than where they are. But then you look at the rest of the producer’s cost structure: feedstuffs are higher, and so is every service and other input for cattle production. Inflation hit the beef industry, like it did the others.”

As one customer put it, profitability isn’t as much about the price, as it is the margin, said Josh Davis, Farm Credit Mid-America vice president of Food and AgriBusiness.

“In this inflationary cycle that we've been in since COVID, we’ve seen everything trending higher: the prices are higher, but also the cost structure is higher and certainly interest is higher.”

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Davis said it requires a different mindset – not just selling cattle and looking at the gross revenue. “The producers who are most successful tend to be those good margin managers where they understand there is a margin.

“This is commodity agriculture. It is a thin margin, and how do I expand that margin just a little because the number of heads our customers have adds up?”

Challenges

Moore said cattle producers need to carefully consider their available capital to take advantage of the market upswing. “Everything costs more to produce a pound of beef, so access to capital is clearly an area that Josh and I spend a lot of time discussing with customers about their needs and what it takes for their operation.”

“It takes a lot more dollars to handle the same amount of cattle,” Davis added.

Today’s volatile market also must be taken into consideration. “It’s not just the cattle market,” Davis said. “There seems to be a lot of volatility in these markets and that's certainly a challenge that our producers and lenders have to work through.”

“The more capital an operation needs and the more volatile that market is, the more need there is to ensure that the operation will remain sound for the future,” Moore added.

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To help manage risk, Moore suggested producers consider the following:

Operations are diverse. “One operation really has a limiting factor of one thing and another operation will have a limiting factor of something totally different,” Moore said. “So, those conversations are as diverse as our customer base itself.

“For some, it's labor – labor is a big challenge. Or for some it’s succession planning, depending on the age of those producers and who's looking to take that operation over. It just varies a lot from one operation to the next.”

Be strategic

Moore and Davis provided four recommendations that will help cattle producers navigate “the good and the bad,” in the current cattle market.

First, be strategic. In this market upswing, Moore said it’s important producers know the direction they’re headed and how they're going to spend capital and what their plans are today, “and the good times can pay off down the road.”

Expansion may not be the answer for every producer in this cycle, he added. “Some may say we're going to take some of these profit opportunities and use this as a chance to reduce debt or to make capital investments in things that make the operation more efficient for when we return back to more normal times.”

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Balance sheet

Second, complete a balance sheet. Moore said it’s important producers understand their financial position and how much risk they can afford to take. “It can look different from one customer to the next depending on how much leverage they’re carrying or how liquid their operations are.

“An operation that's carrying a lot of liquidity can probably afford to take more chances on maybe not being as hedged and having as much price mitigation tools in place as another producer that doesn't have that liquidity.  How much of that liquidity is the producer, and their lender comfortable, with the operation risking or losing during a market downturn?”

Relationships

Third, leverage the right relationships. While much has changed within the cattle industry over the years, Davis said what hasn’t is the need for relationships. “Relationships are still key to the beef industry,” he said. “Some people have convinced me that in 2024, they are probably more important than ever.”

One example may be partnering on equipment. A smaller producer who can't afford a specific item for their operation could partner with another producer, Davis said, especially if it’s an item they don’t use all the time or at the same time but is a limiting factor for both.

“It’s a win-win. One producer couldn't justify the cost, but together they can.”

Relationships also help create a team approach, Moore noted. “It's important that a producer has that team or network of folks who have a different perspective, whether that's an Extension agent who's helping them look into the future and say, ‘OK, what does my operation need to look like in the future to capitalize on, whether it's niche markets or whatever direction they're taking their operation?’ or to have the accountant and the lender.

“They all bring different perspectives that help the producer make good, informed decisions.”

Long-term perspective

Lastly, have a long-term perspective. “Things are good right now because there are more profit opportunities and margins have been better. When you make decisions in that environment, it's easy to lose perspective on the longer-term play. In other words, I'm going to commit to buy something to pay for it over the next five or 10 years. Today, that's easy to make that payment. What's that going to be like six years from now or 10 years from now, whichever is the term of that loan?

“So, keep a long-term perspective as we make some of those key decisions today when times are pretty good.”