Whether the current weather supports this claim or not, spring is here. And, with this time of year, many cattle producers are faced with decisions surrounding their breeding program. Should I buy this bull? Is this the right time to purchase replacement heifers or cows? How much should I spend?
With the decline in cattle prices in the last part of 2015, many producers are reevaluating how they will operate profitably. While we aren’t hearing a siren call that the “sky is falling,” there is cause for pumping the brakes a bit given the growth of the national cattle herd, the strength of the U.S. dollar, etc.
For many cattle producers, purchasing breeding stock is a decision that fits into a long-term plan or philosophy. Breed choice, EPDs, and physical composition generally match up with the cattleman’s overall approach to calf production.
Once the producer decides what they’re looking for, they should evaluate the best way to fund these purchases. Sometimes, using available cash may very well make sense. But, one should consider their upcoming expenses and the repayment of accounts payable and/or lines of credit before doing this. If calves or other marketable inventory can be sold to cover these short-term commitments, then using cash may make sense. However, if there is not enough “liquidity” to meet these obligations, then preserving cash and using external financing for the purchases may be a better route.
When borrowing money for breeding stock, the producer will be required to make a down payment or pledge equity found in other assets. The amount required is usually based on how the purchase price compares to the market price of the animal. One rule of thumb for valuing standard quality cattle is to base them on the most recent trading day at the local stockyards. This “market price” becomes the baseline for evaluating the collateral position on a cattle loan. Depending on the financial institution, the amount of cash or equity required for a cattle loan can range from 20 to 30 percent of the market price.
If a producer is buying registered or higher-end genetics, the purchase price is often much higher than the market price. In this case, a better quality, higher costing animal isn’t guaranteed to be worth more than a standard quality animal if it had to be sold at the stockyards at a later date. This is where open communication between the producer and their respective lender is essential so this is known ahead of time.
When borrowing to purchase breeding stock, the producer also needs to determine the best repayment structure. A common amortization schedule for younger breeding stock is four to five years, depending on the useful life of the animal and how it fits into the overall program. If a producer is borrowing to purchase older cattle, then a two- to three- year schedule would be more appropriate since these animals have a shorter useful life.
Finally, it’s important that the repayment terms fit the cash flow cycle of the operation. If a particular producer markets calves in the spring and the fall, then it makes sense to have semiannual payments that are due shortly after the normal marketing periods. A producer with strong wage income may be better with monthly payments. Again, the best plan needs to be worked out between each producer and their lender.
