More than a low-cost way to finance cattle
Government backing for a percentage of bank loans taken out by feeder associations was a product of the Depression years in Alberta. Though it took nearly 50 years for the loan guarantee program to start gaining a foothold in other provinces, the long-standing success of feeder finance co-operatives and the addition of breeder finance co-operatives in recent years speaks for itself.
In 2012 alone, the 150 feeder associations from British Columbia to Ontario purchased nearly half a million feeder cattle for members at an average price of $900 per head and a total of $450 million worth of business.
All the co-operatives are run by members who hire an administrator and inspector to look after the day-to-day business. Provinces oversee the program and most guarantee 25 per cent of the loans. Alberta guarantees 15 per cent.
Despite a decade of turmoil in the beef industry, co-op financing of cattle has held its ground. While the number of associations has decreased with amalgamations and changing industry demographics, the number of cattle financed by co-ops has rebounded with the turnaround in the market. Loan limits vary by province but all have increased in recent years to accommodate higher feeder prices. The standard program design across Canada calls for each association to secure its own lender. Once a member’s credit limit is approved, that amount is available like a revolving line of credit without having to reapply. Ontario has tighter controls and requests for financing are approved on a regular basis.
Unlike financing schemes that require cattle to be sold in certain markets, association members are free to buy and sell where they please. Cattle are purchased in the name of the association, identified with the association’s brand or tags and notches, and sold in the name of the association or jointly, depending on the province. Payment is sent directly to the association, which retires the member’s loan and forwards the remainder.
All associations require a refundable five per cent security deposit be set aside in the co-op’s assurance fund held by its lender. In the event of a default, the member’s deposit and then the pooled fund are used to cover the debt before the government guarantee kicks in. Security deposits for breeder financing are higher (at least 10 per cent of borrowing) because of the higher risk associated with the longer repayment period of five to seven years, versus one year for feeder cattle.
Low interest rates, a one-time application to obtain a credit limit, and the comfort of dealing with peers who understand the business were common replies when we asked why people finance cattle through an association.
Rob Smith of MacGregor, Man., is a former member and current supervisor of Green Tree Cattle Feeders Co-op as well as executive director of the Association of Manitoba Feeder Co-operatives. He says most members in Manitoba are cow-calf producers who finance their own calves to free up cash flow for other obligations or purchase calves for backgrounding on their own farm or custom operations.
Competitive interest rates are a strong draw. “Green Tree members are currently paying a half per cent over prime, which just wouldn’t be available to individual producers,” he says. The one-time approval process and not having to tie up farm assets as security just to buy cattle are other benefits. The cattle purchased and security deposit are the only security requirements.
The shared-risk aspect can be both a drawback and an advantage. “The disadvantage is that someone else’s bad management can seriously affect your operation,” explains Dennis Edwards, a founding director and the only president in the Craik (Sask.) Feeder Association’s 22-year history. He speaks from experience because his association endured two member bankruptcies and one crooked accountant, two of which resulted in all members sharing the losses. On the other hand, an association is more likely than a commercial lender to stand behind its members in times of turmoil. Edwards still wonders whether the lender would have had the same confidence in him and agreed to increase his borrowing limit had it not been for the association’s support and sharing the risk.
Edwards says the shared risk and the various fees every association has to charge to cover operating costs are things you have to accept if you want to use the livestock loan guarantee program.
He finances all of his cattle purchases through the association, mainly using the feeder option to retain replacement heifers. The biggest advantage in his view is having standing credit approval, which makes it possible to take advantage of market opportunities without going to a lender, doing the paperwork, and waiting for approval each time.
Stacy Esau, who runs a cow-calf and backgrounding operation in the Dawson Creek, B.C. area, says the program’s flexibility on the marketing side is all important to him.
Timing is everything with a commodity that can lose a quarter of its value depending on marketing, so you have to focus on marketing and the association is very accommodating in that respect, he explains. For instance, if a member has a 12-month contract coming up and the market isn’t right, the association will allow an extension. Banks may not understand how to work with a volatile market and tend to have more of a set plan, whereas, the co-op is managed by cattlemen who understand the market, why you do what you do and why you need to change your plan.
“The ultimate would be not having to finance cattle, but that’s not really an option for most beef producers,” he adds. “Feeder co-ops are popular because any system that allows flexibility is the ultimate financing choice.”
Esau has been a member of the South Peace Feeder Co-op for the past 21 years and his dad for at least 30 years. They have also participated in the South Peace Breeder Co-op through the years because their operation fluctuates as the market dictates. Currently, the cow-calf end is in expansion mode after a significant retraction in the wake of BSE. They also background 2,500 head a year, mainly heifers because that market seems to click the best for them.
He estimates half their members finance their own calves to extend cash flow, but like him, lots buy and sell on a seasonal basis for a backgrounding lot, grass, or on the bred heifer side. Having access to a standing financing limit allows members to purchase more heifers than they intend to keep, watch how they develop, and then choose the best for their herd.
Tom Cunningham of Wiarton, Ont., is president of the Bruce Grey Breeder Finance Club. It was the very reasonable interest rates that first drew his attention to the club three years ago when he and his wife were in the middle of a herd expansion that has taken them up to 200 cows.
He especially appreciates the ease of doing business through the club. “I fill out my application, talk with the association’s supervisor, then go before the board and tell my story. It’s relaxed and more comfortable than going to a lender because all of the directors are farmers from the area who know the business.”
He and others use club financing to retain and purchase heifers, not only to expand but to keep their herds on the younger side than they would if reasonable financing wasn’t available.
He says it’s a great tool for young guys wanting to expand or get back into beef cows because it’s really tough for them to get financing through a bank. Financing your own calves also frees up money to use elsewhere. The Bruce Grey club works closely with the Twin County Feeder Club, so some members with feeder loans roll them into breeder loans to retain heifers, giving them six years to repay with the first year being an interest-only payment.
Ross and Wilma Jeffray, along with their son, Mike, 26, run a mixed beef, hog and grain farm near Wroxeter, Ont. Jeffray, who is a past chair and current vice-chair of the Ontario Feeder Committee, agrees young farmers can be hard pressed to secure funding from a bank without the feeder finance co-op membership. Clubs are always looking for more members, especially younger ones to keep the ball rolling.
His membership in the Queen’s Bush Feeder Finance Co-op since it was formed in 1994 and Mike’s for eight years now has helped finance more calves through the years than they would have been able to buy independently, and at more favourable interest rates. The backgrounding operation is set up for 500 head, with approximately half financed through the co-op and the remainder fed on a custom basis. To spread marketing risk, they buy calves or light yearlings about four times a year to sell as short-keeps and 200 head to go to grass on rented pasture.
Reg Schmidt of Thorsby, Alta., says just having access to capital and the low equity requirement through the 21 years he was a member of the Pigeon Lake Feeder Association were instrumental in the transition from a family dairy operation when he and his wife established their beef business. By custom feeding, financing their own calves when they ran cows, and purchasing calves, they went from backgrounding a few hundred head to 2,800 head a year up until their recent exit from cattle feeding.
Putting on his cap as Feeder Association of Alberta (FAA) general manager, Schmidt says two barriers to producer participation that he frequently came across have recently been addressed.
As in other provinces, all of the cattle purchased under a contract have to be sold as a group, which can be an issue in terms of cash flow. Now, Alberta members are allowed to draw on equity they build in the cattle as the feeding period progresses.
The borrowing limit per member has also been increased from $300,000 to $500,000 per family member or business partner with a maximum of $3 million per operation and more with special provisions. Even at that, there is demand to boost it again due to continued consolidation within the industry.
The FAA is optimistic about the November launch of its first-ever breeder finance program even though it will have to operate without a loan guarantee. It will run under a unique model wherein loan management, borrowing and security deposits will be leveraged across all breeder associations to maintain reasonable operating costs and attract competitive lending without a guarantee. It is their hope that the 15 independent breeder co-ops now in existence will come on board.
An initiative that will encourage participation in Alberta and Saskatchewan is an agreement in the making to allow members of their associations to background, grass or finish calves in either province. This mirrors the practices of many beef producers to capture economic advantages in both provinces.
Program details vary from province to province. For more information on provincial programs or Ag Canada’s advance payment program, which offers interest relief on the first $100,000 of borrowings for feeder association members and full cash advances contact:
- Ontario — Cheryl Russwurm, 519-367-5590; www.ontariobeef.com
- Manitoba — Michael Knudson, 204-746-7507; www.masc.mb.ca
- Saskatchewan — Ken Hamilton, 306-642-7232; www.agriculture.gov.sk.ca
- Alberta — Reg Schmidt, 780-674-2622; www.feederassoc.com
- British Columbia — Lindy Gilson, 250-992-8483; www.bcbfa.ca