By Lester Aldrich
KANSAS CITY (B)--Although each segment of the U.S. cattle industry will try to lay off the effects of the latest round of interest rate hikes onto the next links either up or down the production chain, their success will depend to a great extent upon supplies. If supplies are abundant, the extra operating expenses will be borne by the ones least able to defend themselves, the first link in the beef-production chain, the cow-calf producer.
However, tight supplies may be the best way to avoid having to eat another segment's interest rates or provide the ability to pass them on to another segment, two market economists said.
Recently, the Federal Reserve lifted its Fed Funds target rate 0.5 percentage point to 6.5%. The Fed Funds rate, the rate the Federal Reserve charges its member banks for overnight loans, now is 1.75 percentage points above its year-ago level of 4.75%.
Kansas City Federal Reserve economist Gordon Sellan explained that short-term interest rates the banks charge its customers are tied directly to the Federal Funds rate. As one goes up or down, the other makes the same move. Short-term interest rates are the Prime rate and three- to six-month Treasury Bill rates, he said.
Longer-term loans, however, are tied to the market rates for Treasury Bonds and Treasury Bills, Sellan said. These rates are more loosely associated
with fluctuations in the Fed Funds rate, but they can be affected. Examples would be 10- and 30- year Treasury rates; mortgage rates generally are linked to the 10-year rates.
Chuck Lambert, economist for the National Cattlemen's Beef Association, said the interest rate hikes would add about $1.52 to the cost of feeding a steer to market weight in western Kansas. Initially, this cost would be absorbed by the feedlot because feeding contracts with the cattle owners already would be in place.
Feedlots that own their own cattle also would have to bear the cost of the added interest charges on operating expenses, Lambert said. The cattle already have been purchased and are on feed. The feedlot owns them, so there is nowhere to turn for the added operating expenses.
The next bunch of feeder cattle the feedlot or a contract feeder has to buy, however, could feel the pressure of someone who is looking at greater operating expenses for his share of getting the animals to slaughter, he said.
bid and ask market, those selling slaughter-ready cattle to the packer can't just say the cost of operation just went up, therefore the cost of the product will go up as well.
The market being what it is, prices are determined on the number of cattle available in any given week balanced against the packers' slaughter needs to fill product demand. It has nothing to do with the cost of production or with the cost of operating the plant.
Lambert said the cattle feeding industry won't have any opportunity to pass its interest-related added operating costs up the chain to the packer for at least 90 days. There are too many cattle. Maybe when the total number of slaughter-ready cattle declines, later this year, they may have enough leverage to obtain a higher price for their cattle and pass interest rate gains up the chain in this manner.
But even then, it is more likely the costs will be passed back in the production chain, Lambert said. This means the cow-calf producer is likely to take a double hit on the higher interest rates.
Besides the $1.52-per-animal cost in the feedlot, the higher interest rates mean production costs per cow-calf unit go up about $0.85, Lambert said. This may not seem like much, but multiplied by 34 million beef cows, it adds up for the industry.
Schroeder said there was no opportunity for cow-calf producers to pass the added interest-rate costs up the chain for about three years. The current year's calf crop is already set, and a producer has too much invested for a small, short bump in interest rates. However, if interest rates keep going up (and at least one more interest rate hike is expected), cow-calf producers may reduce their herd sizes, forcing prices higher.