This information comes to us from the latest newsletter of the University of Nebraska-Lincoln’s Center for Grassland Studies. As part of its mission, the Center is home to the Beef Systems Initiative, an effort to provide producers the information that supports production systems that optimize feed resource use, natural resource conservation, healthy grasslands, and successful integrated crop/beef cattle production.
The Initiative focuses on working with a variety of producers with different management strategies as part of figuring out what works best and what practices enhance success. Five producer panels from different regions help ground truth results. The agricultural lenders panel focuses on the economics of practices. This panel met recently to share their thoughts on what producers should consider when developing an integrated cropping/beef enterprise. This summary of their findings was put together by UNL’s Jay Parsons, Department of Agricultural Economics, Darren Refearn, Department of Agronomy and Horticulture, and Mary Drewnoski, Department of Animal Science.
Whether or not you’re planning to borrow money, this input from lenders will give you a good idea of first planning steps to help you consider how this change will affect your operation’s economics. They’re also good practices whenever you’re considering a new enterprise for your operation.
Cash Flow Sensitivity Analysis
All of the lenders emphasized the importance of completing a thorough cash flow analysis. Producers need to understand a one-year snapshot of expectations is not enough. A three-year cash flow projection would be ideal to provide to a lender when seeking a loan for a new enterprise or an enterprise expansion. Producers should also consider what will happen in a bad year. A sensitivity analysis that includes a worst case scenario is extremely important information to have available to share with their lender. Multiple lenders described a need for validation of the cash flow. In particular, it is important to make sure all expenses are included and, in the case of a new enterprise, provide information about the origin of the numbers. If the farm is expanding to support more families, it is especially important to validate that family living expenses are being fully accounted for in the projections.
Cattle Industry Learning Curve
Several lenders expressed concerns about the cattle industry learning curve for producers looking to add a cattle enterprise to their operation. One lender described looking for evidence that the producer has a commitment to the cattle industry with a good network of people to work with including a nutritionist and relationships with feedlot operators. Others described producers new to the cattle industry not understanding the scale needed to make it work from an income standpoint. For example, do they understand how many cows it will take to feed a family? Do they have enough capital and access to enough pasture to make it work? Do potential new cattle producers understand the commitment and effort needed to make a cow herd a success?
Beginning Farmer Barriers
All of the lenders also acknowledged that significant barriers impede the flow of new and beginning farmers and ranchers getting started in the business. Farm Service Agency (FSA) programs and various other beginning farmer programs accessible through banks can help, but there are still major issues of concern. Land costs place a tremendous burden on cash flow commitments. At present, there is little chance for the younger generation to start without investor help or significant off-farm income. One lender mentioned that interest from the next generation in beginning a new enterprise has declined over the last six years. Another lender described how some older producers in their area are actively seeking someone from the next generation that is interested in taking over the farm someday.
Costs of Production and Costs Per Cow
One other item came up that seemed to have consensus among the lenders, the need for Standard Performance Analysis (SPA) type of data. SPA data allows cattle producers to compare their operation with other producers in the industry. Among the primary things mentioned during this discussion was the importance of understanding cost of production and costs per cow.