HISTORIC CATTLE PRICES MASKING INTEREST RATE RISK
By Matt Clark Rural Economy Analyst for Terrain
The phrase “ historic run in cattle prices ” has become commonplace among industry professionals and media outlets . There are a few reasons why the current cattle markets are historic , but for a whole generation of cattle producers , the current state of and outlook for interest rates are also historic . Although cattle prices — and profitability — may be masking the impact of rate increases , producers should make plans now for how to navigate interest rates when their market environment changes .
Since 1970 , there have been only nine instances when fat cattle prices increased for at least six consecutive months . Two such instances have happened since 2020 . Moreover , September 2022 through June 2023 was the longest period of consecutive monthly increases since 1970 , according to USDA data .
No Slowdown Despite Headwinds
The price of cattle after adjusting for inflation has also increased at a historic pace . Typically , adjusting a commodity price for inflation flattens prices such that long-term gains are less pronounced ; however , after adjusting fat cattle prices to current dollars , September 2022 through June 2023 was still the longest period of consecutive monthly increases since 1970 .
Further , the increase in prices from 2022 to 2023 coincided with one of the sharpest increases in interest rates in decades . The Federal Reserve uses interest rates as a tool to tamp down consumer demand to slow the pace of inflation . When the Fed increases interest rates and tightens monetary policy , commodity prices typically decline as businesses expect consumer demand to wane .
In the cattle market , there have been only four instances since 1970 when inflationadjusted fat cattle prices increased for six or more consecutive months and the federal funds interest rate increased in the same period . The most recent occurrence was in 2022 / 2023 ( see chart ). Although supply drove the most recent example , the fact that cattle prices were still able to increase on an inflation-adjusted basis despite the headwinds from monetary policy and a less-flush consumer with plenty of alternative options is very “ historic .”
Prices Are High , but Rates May Be Higher for Longer
Perhaps the most important part of that last statistic is the reminder that the rising cost of interest is lurking behind this historic run in prices .
For many producers , interest is a relatively small portion of expenses . For example , Kansas State University ’ s cow-calf budget estimates interest expense represents around 6 % of operating costs and 5 % of total costs in 2023 . Likewise , Iowa State University ’ s budget for finishing yearling steers estimates that interest accounts for about 6.5 % of total costs excluding the calf purchase .
Despite the lower share of costs , the total interest expense cost has sharply increased in the last two years . Since the start of 2022 , the federal funds rate has increased by 5.25 %. At the same time , the higher cost of cows , feed , labor , land , etc . due to inflation has ballooned lines of credit and loans for purchases such as cow expansion and ranchland .
The Federal Reserve Bank of Kansas City estimates about 70 % of loans originated since 2022 for “ feeder livestock ” carry a floating , or variable , interest rate . If interest rates stay “ higher for longer ” as the Fed has stated , it is likely interest costs , which are at their highest since 2007 , will remain elevated .
Moreover , the current average interest rate on “ feeder livestock ” is about 8 basis points above the 40-year average .
Although the current historic run in cattle prices may be masking interest rate risk , producers should work carefully with their lender to manage their risk . At some point , the market will correct , profits will thin , and unmanaged risks will be laid bare . The pain from those unmanaged risks will be more acute if interest rates are indeed higher for longer and have not been hedged by operators during this time of relative market strength .
Terrain is a team of economists who provide expert analysis to the customers of American AgCredit , Farm Credit Services of America and Frontier Farm Credit .
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