Low interest rates help | Producers must understand the risks of expansion, say experts
CYPRESS HILLS PROVINCIAL PARK, Sask. — Low interest rates present an attractive option for livestock producers looking to expand their herds.
However, Paul Hammerton of MNP cautioned producers to look before they leap.
He told the recent Saskatchewan Stock Growers Association convention that the combination of low interest rates, high cattle prices and optimism allows some to get into the industry, some to expand and some to get out.
“Profit creates opportunity,” he said.
However, Hammerton said producers should know their businesses inside and out before making a change. He said they have largely relied on optimism since BSE devastated the industry in 2003 and can now channel that optimism to fit new opportunities.
“Look what’s out there that works for you,” he said in a later interview with reporters.
“Better profits (and) cheap money are two things that can enable you to grow your business a bit and may also be instrumental in helping you transition it to the next generation, which is a huge challenge still for ranchers.”
Although profitability has returned to the sector, it still isn’t that great, Hammerton said.
He sees successful, efficient ranches that generate a return on investment of only two percent.
He used the example of a client’s ranch with 1,000 cows on 50,000 acres. He said the producer might be making $250,000 to $300,000, but the return is small when looking at the value of the ranch’s asset base.
“Somebody I bounced that off in the office said, ‘oh, I think their land is worth more than that,’ and I said, ‘well, in which case it’s worse,’ ” Hammerton said.
Young producers who want to get into the business have to factor that in when borrowing money.
He told them to make sure they get the details if they want to consider Farm Credit Canada’s young farmer program because the main banks are more competitive.
Hammerton likes the current interest rates of just more than three percent on a fixed five-year loan or 3.5 percent fixed for 10 years.
“That can bring some real stability to a business and give you the opportunity to do some things, whether it be transition or expansion or development of the business,” Hammerton said.
He told the meeting that low interest rates, fueled by competition among the mainstream banks, might present a once-in-a-lifetime opportunity to borrow money or restructure existing finance arrangements.
“This is maybe now as good as it’s going to get,” he said. “You’ve got a combination of better prices, cheap money, a very positive environment within the industry, some investors in the industry who some may see as a threat but to some it’s an opportunity to reposition their business.”
He said the heifer retention that is now occurring will at some point result in an explosion of supply and affect the high prices producers are enjoying.
“I guess the message is seize the moment,” he said.