Despite encouraging signs in the livestock industry, rangeland bankers say it could take a couple of years to rustle their cattle customers back to profitability.
"We can start to see that light at the end of the tunnel," said Bret Fox, a research analyst at Cattle-Fax, an Englewood, Colo., information company serving livestock producers. "It's just a question of ... summoning the ability to make it through the next couple of years."
Lenders to cattle producers have watched their customers struggle in recent months, beset with low prices and high feed costs after a period of expansion and good profits since 1990. Such price declines are a typical part of the economic cycle after a period of expansion, analysts said, but this one is especially hard.
Though observers predicted a recovery in about two years, followed by several years of a strong cattle market, getting borrowers to that point is the challenge for lenders.
The recent price declines have pushed some operators out of business and forced others to begin liquidating cattle. As pricing uncertainties continue, lenders don't yet know the full impact of the downturn and what potential losses their loan portfolios may contain.
"We've just kept our loan-loss reserves steady," said Jeff Klick, vice president of First American Bank, Woodward, Okla. "We are recognizing that the agricultural sector could tap it a little bit."
Some bright news came last week when the U.S. Agriculture Department reported the number of cattle in feedlots as 14% lower at Aug. 1 than a year earlier. Feedlots fatten livestock before they're sold for slaughter.
"We're short on feed cattle supplies through December," said Dean Witter vice president and senior livestock analyst Dale Benson in Chicago. "If we combine shorter numbers with seasonal strength, we should see higher prices."
But things may worsen before they get better.
Liquidations will continue to send more livestock to market. "We've still got a large number of cattle outside the feedlot waiting to be placed," which would weaken prices again, Mr. Benson said.
Nonetheless, said Mr. Fox, "we probably have seen the low." However, "that doesn't mean the cash flow and financial position of these producers is going to improve significantly over the next couple of years."
Thus, he said, he's been encouraging lenders to stay with customers who haven't been damaged beyond salvation.
Bankers may have troubled loans that should be called to minimize losses, Mr. Fox said. But if they can hold on, "those producers who survive will be in a position to profit nicely from the recovery."
Mr. Klick, for one, is willing to help his ranch customers who can profit from bulking up their livestock on wheat, which this year has been relatively inexpensive. Those larger cattle can subsequently be sold to feedlots at a better price.
First American is helping some customers buy additional cattle to position themselves for the potential profit. "If they've got some equity, we're going to go for it," Mr. Klick said. "In the past 18 months, (customers) haven't really seen any profit in any of these sectors."
Mr. Benson also cautioned that livestock producers should try to avert soaring feed costs.
"At least for the next couple of years, we're looking at constant higher corn prices," he said. "Feedlots need to be very aware of locking in prices for corn and kind of protecting margins."
