Alternative Financing of Value-Added Beef Finishing Operations in North Dakota

Christina Zutz

Master of Science Study, Department of Agriculture and Applied Science

ifficulty in obtaining initial capital for livestock finishing operations is a current problem that has arisen as fewer cattle remain in North Dakota through finishing weight.  It is necessary to locate sources of credit or external capital for finishing operations in order to maximize producer returns and to support the beef industry in North Dakota. A ranchers share of the retail value of a choice yield grade 3 carcass is shown in figure 1.  In 1978, a rancher received 62.5 percent of the retail value, 59.2 percent in 1988 and 47.2 percent in 1998, according to the Economic Research Service (Ringwall).

Figure 1.  Rancher’s Share of Retail Value of Carcass (Ringwall (Economic Research Service))

The North Dakota Agricultural Statistics Service notes that in 2000, North Dakota had 30,300 farms involving 39.4 million acres, out of a total of 44.2 million acres.  Approximately 27.6 million of these acres is involved in some aspect of crop production. The net result indicates that approximately 11.8 million acres are available for other farm production, principally beef and dairy production (Ringwall).

The purpose of this study is to find effective ways to finance the operation of a commercial finishing feedlot in North Dakota and analyze the financial implications of alternative credit arrangements. 

Commonly, lenders require between 40-60% equity to secure a loan.  However, most private farmer feeders and cooperatives are only able to support 20-30% equity.  Although there are many sources of capital (loans or leases from Farm Credit System, banks and credit unions, and/or state and federal government programs), finding a feasible source of capital with little equity is difficult. 

Determining the effectiveness of different financing methods of capital includes quantifying the constraints that each financing method incurs.  Farms are especially vulnerable to these credit constraints because they are highly capital intensive relative to their levels of sales and cash flows and there is a substantial lag between the purchase of inputs and the sale of outputs (Bierlen). For commercial feedlots, a time lag exists between the purchase of feed and supplies for the cattle and when the cattle are sold to slaughter.  This study considers the presence of these constraints and their effects on the production decisions and the financing needed to construct and operate the feedlot (Bierlen).

Objectives

This study begins with construction of a finishing feedlot in North Dakota and assumes three different levels of operation: 1,500 head, 5,000 head, and 10,000 head.  For each level, feeders are purchased near 673 pounds and sold at 1155 pounds.  The purpose of this study plans to find effective ways to finance the operation by analyzing their financing constraints and changes that affect the operation.  Objectives include:

1. Develop a comprehensive set of financial statements and enterprise budgets for a cattle finishing feedlot, including investment and operating costs for varying sizes (1,500 head, 5,000 head, 10,000 head).
2. Test alternative financing methods and identify constraints for the feedlot that impact feasibility and effectiveness of operation.
3. Within each type of financing, different types of  risk, necessary start-up equity,  net returns to each entity, debt-to-asset ratios, liquidity, and solvency will be evaluated.

A 1,500 head feedlot would be representative of the type of operation an existing farmer feeder would add to their operation to more efficiently utilize home grown feeds and labor that is available.  A 10,000 head feedlot represents the start up of a commercial yard or family operated small commercial yard with all inputs purchased.  Finally, a 15,000 head feedlot is a larger commercial facility designed to capture greater economies of scale, while still purchasing all inputs.

Developing the Model

This study intends to simulate the financial performance of a feedlot to test the survivability under different financial and cattle price environments using @Risk.  The model begins with a finishing feedlot income statement on a per head basis.  Inputs for this model include the current prices for barley (bu), corn (bu), corn silage (lb), alfalfa hay (lb), grass and other hay (lb), alfalfa haylage (lb) and oats (bu).  The number of head to be finished annually on the feedlot varies between 1,500, 5,000, and 10,000 head.  Finally, the price per cwt in the beginning and end of the feedlot rotation must be inputted. 

The costs and figures used in the budget are an average of data found in per head budgets of varying states with public finishing feedlot budgets published between 1998-2001 including: Iowa, South Dakota, Minnesota, North Dakota (Barley County Feeders, Dakota Prairie Beef) and Nebraska values obtained through the Dickinson Research Extension Center (Decatur County Feed yard Inc., Decatur Beef Alliance).  From startup, the facilities, equipment and environmental structures are valued by the Iowa State University (ISU) Extension and Iowa Beef Center in their Beef Feedlot Systems Manual for both the 1,500 and 5,000 head feedlots. 

Table 1. Balance Sheet for 1,500 Head Finishing Feedlot

Table 2. Balance Sheet for 1,500 Head Finishing Feedlot Continued

The balance sheet in Table 1 and 2 represent an example of a financial statement created for a 1,500 head feedlot.  These financial statements were then presented to several lenders to determine the type of rates, loan conditions, length of term and any other lending constraints that they would offer.  Lenders chosen to participate in this study were: Farm Credit Services (FCS), Bank of North Dakota (BND), Farm Services Agency (formerly FHA), Banks for Cooperatives, commercial banks, various government programs (i.e. FUFA), and leasing. 

For each financing source, there is consideration of the length of term of the loan or lease, the type of rate (variable or fixed), the interest rate, the limiting amount of the loan or lease, the total principle used, and the accumulated interest for the entire term of the financing.  Each of these variables is applied to three different types of financing necessary for a finishing feedlot, including facilities, working capital and livestock. 

To determine how viable the feedlot will be with different levels of initial equity, we will vary the amount of equity available from 20-60%.  The remaining amount of financing needed can then be allocated to a lender, thus allowing the model to reflect the individual lenders constraints.

Costs

The economy of scale provided by these facilities and state-of-the-art equipment creates distinct operating advantages for the feedlot.  Of the five classifications studied by the ISU Extension, the earthen lot with windbreak was the facility chosen for cost estimates in this model, followed by a concrete lot with shed.

It is necessary to further estimate the cost for land for the facilities and waste disposal.  This facility will need to be located near the crops required to support this type of operation for economic and efficiency reasons.  According to the North Dakota Agricultural Statistics 2001 Report, of the 53 counties in North Dakota, there are four counties that rank in the top 9 for the number of beef cow livestock on hand on January 1, 2001, as well as in the top 21 for crop production of barley and corn grain.  The North Dakota Agricultural Statistics Service then provided the average 2002 county rental rates per acre for these counties.  Of them the rental value was Emmons ($25.00), McHenry ($30.80), Morton ($23.9) and Stutsman ($33.30).  Thus, the average land value used in this model is the average of these four county rental values at $28.25.

Summary                                                                                                                                                 The intention, at the close of this study, is to determine the feasible strategies for financing a finishing feedlot in North Dakota while considering various financial intermediaries, feedlot sizes and entities, thus maximizing the economic return for North Dakota’s beef industry.

A report summarizing the conclusions of this study will be available in December 2002.  Funding for this study was provided by the State Board of Agriculture Research and Education.

Literature Cited

Bierlan, R. et al.  "Credit Constraints, Farm Characteristics, and the Farm Economy:

      Differential Impacts on Feeder Cattle and Beef Cow Inventories."  American

      Journal of Agricultural Economics.  V. 80, n4(November 1998): 708-723.

North Dakota Agricultural Statistics Service (NDASS).  North Dakota 2002 County

Rents & Values.  April 2001.

Ringwall, Kris.  Beeftalk: Considering the Future of Animal Agriculture – Should It Expand Here?  http://www.ext.nodak.edu/extnews/newsrelease/2002/050202/02beefta.htm.  2 May 2002.