Capital Needs

by Lauren Caggiano

No matter what business you’re in, it takes more money to operate than it did just five or ten years ago. Feed prices have reached a new “normal,” and rising fuel prices make everything more expensive. Add to that record high land prices, and cattlemen are finding they must make a decision. Either find more capital or decrease the number of head in their operations.

What does this trend mean for producers? An executive from Rabo Agrifinance, Managing Director and Senior Vice President Van Dewey, offers some insight:

To what do you attribute the need for more capital?
Working capital requirements are higher now than ever, due to ever-increasing costs associated with feeder cattle, feed, equipment, and land. While we are not requiring a higher percentage of money down on these items as compared to the past, the dollars required to margin anything, from feeder cattle to land purchases, are twice as much as they were four years ago.

How are organizations such as Rabo AgriFinance responding to this need?
Rabo AgriFinance takes a balanced approach, and considers five basic factors when lending money: character, capital position, cash-flow capacity, collateral and loan structure. So, just because it takes more cash or working capital to margin purchases, we may offset a weakness in working capital with strength seen in other areas of the business.

Has the company become more selective as a result of the growing demand?
If so, please explain.
We continue to stay true to the fundamentals of sound lending practices. We choose clients who have a history of managing through the volatility we have always had in the cattle business, while learning from their mistakes and improving at the same time. We have seen a marked shift from cattle clients who rarely hedged their cattle, feed, and interest, to today nearly all of our clients are hedgers, as they focus on more consistent margins and earnings, while trying to manage the volatility.
Our clients have become ever more curious about what the future may hold, as they worry about all the volatility at play in the market today. The way we respond to this volatility (and client concerns), creates a differentiation from other banks by providing information to our clients about what we see in both the near and long term. This insight, based on reports from our Rabobank International Food & Agribusiness Research and Advisory (FAR) group, gives clients knowledge that may impact their business. Being bold enough to have an opinion of what we think the future holds, backed by global and local Rabobank industry research, gives our clients a chance to plan and prepare for the future.

How has this need affected how you do business?
The sizes of our loans are increasing. We increased our cattle operating loan commitment sizes substantially, often 50 percent bigger in 2011 alone, as compared to the previous year. Obviously, as a producer you need a bank that has the capacity to grow with you.

Do you think this need is just a trend in the market, or here to stay?
We think the greater volatility in our world, and in the cattle industry, is here to stay. This means producers and their lenders need to constantly talk strategy of risk management, preservation of liquidity in the balance sheet, stable profit margins, and succession of management and continuance of the successful business model.

Anything else you'd like to share?
We see our top clients worried most about successfully transferring their knowledge and business skills to their kids. As a result, we will continue to work out ways to assist our clients with generational strategies. As bankers, we need to remember why our clients are in business, and nine times out of 10, it is their family. If we can assist our clients succession plans, we then insure our own business model is sustained. At the end of the day, we need each other.   

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