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What are some of the options with livestock finance in a dropping market?

Eric Barker, 03/10/2023

WITH the livestock market dropping so quickly in the past year and putting pressure on margins, it is worth looking at some of the options available in managing shortfalls on livestock finance.

The emergence of dedicated livestock finance has made a significant impact on the industry in recent years, giving producers an opportunity to capitalise on good seasons without tapping out the overdraft.

But like many others in the finance sector, livestock financiers are having tough conversations with clients in recent times, with livestock quickly losing value and margins going backwards.

Banks have reportedly had to fill shortfalls in some cases through means like extending overdraft facilities and in other cases producers have been looking to trade out of the losses.

Beef Central has been talking to some of the livestock financiers to see what the options are in the current market.

Trading margins into the negative for the first time in decades

Richard Brimblecombe co-founded Legacy Livestock in June 2021 and commenced providing livestock finance to clients in July 2022 – right as the cattle and sheep markets started to drop.

Mr Brimblecombe said it was important to recognise how quickly the market had dropped this year and how much pressure had that had put on trading margins. Legacy has done a detailed analysis of trading profits going through Meat & Livestock Australia’s Eastern Young Cattle Indicator since it began in 1996 to June 2023.

The analysis found trading margins had gone into the negative for the first time since the EYCI began – assuming one steer was purchased every day and traded nine months later with following assumptions.

  • Purchase weight – 250 kg liveweight
  • Term of funding – 270 days
  • Average daily weight gain (ADWG) – 0.6124 kg/day
  • Sale weight – 412 kg liveweight
  • Steer purchased at prevailing EYCI for the day, converted to liveweight, and sold at prevailing EYCI on sale date

An analysis of livestock trading margins based on a nine-month trade using the Eastern Young Cattle Indicator. Graph: Legacy Livestock

Mr Brimblecombe said in the current environment many producers were selling trading livestock at a loss due to the significant and sustained price declines. He said the incidence of this occurring for Legacy Livestock clients to date had been minimal.

“Where this has occurred most of our clients have been able to address those shortfalls by selling livestock that are not financed by us or from other sources of income,” he said.

“In some cases, the bank has provided additional funding to replenish the clients working capital position, which is appropriate in current circumstances.”

Mr Brimblecombe said the company had also been working up strategies with its clients to help them trade their way out of realised losses.

“With some of our clients we have agreed to carry the loss from the previous trade and keep them trading in the market if they have the pasture to do so, with the intent that the loss on a previous trade will be repaid from future profits or other future income. We are comfortable to do this because we target clients who have good overall equity in their business, giving us the comfort to support them through the cycle” he said.

“Some of our larger clients have irrigation infrastructure, so they are able to keep trading and it feels like a good time to get back in the market.”

Opportunities in the current market

Antony Glynn is a director and founder of New South Wales-based livestock financier Ottley Capital. With a lot of his clients working up strategies to manage shortfalls, he said it was important for producers not to panic.

“We knew the market was going to drop away this year, but I don’t think anybody thought it would be as dramatic as this,” Mr Glynn said.

“I think it is an over-correction and there is a good chance it will catch producers on the uptick – season will be the main driver and if there is a bit of rain it will turn again. We have heard a lot about El Nino, but there are still bits of rain around and more on the forecast this week, which is different to 2019 when there was no rain anywhere.”

Light restocker-type cattle have taken the biggest fall this year and are now cheaper per kg than heavier feeder cattle – as highlighted by this previous Beef Central article. Mr Glynn said the cheap cattle presented opportunities.

“The restocker market was the one that got really carried away couple of years and has now taken the biggest drop off, which is seasonally driven and cyclical,” he said.

“That is where the real opportunity is and if someone has feed then we are really comfortable financing them – we are doing a lot of new business on that basis at the moment.”

Communicating with funders

Holding repayments is a tough sell for many of the livestock financiers, who are backed by other funds. Mr Brimblecombe said it was important for companies like Legacy to keep up communication with their funders.

“We have a fortnightly hook up with our funders, they have bought into our business philosophy and they recognise that the industry we are in is seasonal and cyclical in nature,” he said.

“Whilst we have recourse back to our clients, our focus is on supporting good quality family livestock businesses through the cycle, because we know they will honour their commitments in the long-term, and the funders are very supportive of that approach.”

A similar sentiment was echoed by Mr Glynn, who said funders were understanding of the fluctuations the livestock faces.

“Our funders made a conscious decision to back our industry knowledge, because we have been involved for many years before we became financiers,” he said.

“They know the industry is cyclical and that it will come back. We also haven’t had to ask them for any waivers or presented them with any losses we couldn’t manage.”

  • Beef Central contacted StockCo who preferred not to offer a comment.

 

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