24 Nebraska Cattleman December 2023 have a floating, or variable, rate. During Q3 2023, a record 93.6 percent of new loans for feeder livestock had a variable rate, and at 84.5 percent, cow-calf loans had the fifth-highest percentage of variable-rate new loans since the survey began in 1977 (see chart on page 20). Fed officials’ projections for the federal funds rate, often referred to as the dot plot, suggest that rates will remain steady through the end of 2023 before declining by about 1 percent on average throughout 2024. Responses to Added Costs In the short term, cow-calf producers are seeing higher rates and interest charges on their variable-rate notes. In the current environment of higher calf prices and general industry profitability, producers pay those higher costs out of cattle sales receipts, which cuts into their potential profits. Since the cowcalf producer is a “fixed-cost operator,” he has no other choice. The margin operating segments, including stocker operations and feedlots, can have a different initial approach. They can treat the higher rates like they do other variable costs in their budgets and breakeven price calculations. They add higher rates to the total cost of growing cattle from one weight class to another. Since they can’t change the expected selling price, they work on the other end of the equation: their purchase decision. This reaction effectively reduces what they can reasonably pay for replacement cattle and still expect to break even or meet their profit objective. Cow-calf operations that may plan to retain heifer calves to begin herd rebuilding face other cost impacts that can further increase exposure to high interest rates. For instance, the decision to retain a heifer calf will reduce the revenue from selling calves. With fewer funds now available to cover costs on running the rest of the cow herd, the operating loan balance will likely increase. Add to this the two years of additional carrying cost (without offsetting revenue) to get the retained heifers bred and calved and their first calves marketed, and this will likely lead to operating loan balance growth. Retained heifers will have a lower conception and calving rate and wean fewer and lighter calves than the mature cows in the herd. This is a function of biology, genetics and a whole host of management-derived factors that can be mitigated. Ultimately, these factors should be evaluated and accounted for in the operational plan, budget and cash flow projections. To fully establish enterprise cost, producers should extend the projections through another year to capture the full impact of the second year and second crop of retained heifer calves. Rate Resilience In the case of stocker and feedlot operations, the added cost of interest has become a drag on prices that, all things equal, should have been more pronounced. But all has not been equal: Prices for all classes of cattle have rallied over the past two years, all sectors have been profitable, and spreads between the various weight classes have widened. The rally has effectively allowed the added interest costs to be swept under the rug. For context, here are a few examples of how much interest costs have risen for stocker and feedlot operations: • Average interest costs for financing a $2,750 bred heifer with a 25 percent down payment for the first year of ownership have increased $49/head since this time last year and have increased $74/head since Q1 2022. • Financing costs for a 500-pound steer calf costing $3/pound going into a stocker operation for five months with a 25 percent down payment have increased $19/head vs. Q3 2022 and $26/head vs. Q1 2022. • Feedlots are facing similar increases, with interest costs for an 800-pound steer with a purchase price of $2.45/ pound increasing $30/head vs. a year ago and increasing $41/head since the beginning of 2022. Higher Rates and the Herd Expansion My analysis shows that the net impact of rising rates on stocker and feedlot replacement cattle has limited the rally in calf prices by $50/head since this time last year and $67/head since we entered a higher federal funds rate environment. I believe this impact on prices has contributed to the smaller and delayed signal for cow-calf producers to expand cow numbers. Many operations have been impacted by drought, higher costs, lower revenue and reduced profitability, resulting in a signal to expand that has been mostly ignored, or deemed too costly, by many producers. For large-scale herd expansion to truly start, moisture conditions must continue to improve and costs for pasture, forage and interest rates need to decline relative to calf price increases. When cow-calf producers are ready to expand and are deciding their expansion route, they must factor in the impact of interest rates on both the cost of capital and the opportunity cost of lost revenue from delaying a calf crop. Feedlot and stocker operations will likely respond to the tightening calf crop numbers and smaller calf and feeder cattle numbers outside feedlots by extending ownership to younger and lighter cattle in an attempt to maintain pen or pasture occupancy rates. This will likely require larger operating lines of credit and more exposure to higher rates for most operations. Rallying cattle prices can potentially increase an operation’s available borrowing base, adding a degree of financial flexibility. NC ARE HIGHER INTEREST RATES HOLDING BACK HERD REBUILDING? • CONTINUED FROM PAGE 22
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