Note: The following is an unedited AI-generated transcript.

Lynsey McAnally (00:02):

Angus At Work, a podcast for the profit-minded cattleman, brought to you by the Angus Beef Bulletin. We have news and information on health, nutrition, marketing, genetics and management. So let's get to work, shall we?

Lynsey McAnally (00:26):

Hello and welcome back to Angus At Work! Challenges come in all shapes and sizes for livestock producers. But when it comes to expanding your operation, building a home or embarking on a new business venture, interest rates are probably at the top of your list. I'm Lynsey McAnally, and on today's episode, we invite you to take a seat and join the conversation as our host Miranda Reiman chats with Don Close, chief research and analytics officer at Terrain, regarding the mission of their company, what influences interest rates and where those rates are headed in the near future. So, let's dive in!

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Miranda Reiman (01:40):

Welcome to Angus At Work!  I'm your host, Miranda Reiman, and today I have a special guest, chief research and analytics officer for Terrain, Don Close. How are you doing today, Don?

Don Close (01:49):

I'm doing great, thank you.

Miranda Reiman (01:51):

Well, thanks for joining us on the podcast. Why don't you start by giving our listeners just a little bit of background on who you are?

Don Close (01:56):

Boy, that could burn up the whole podcast. So, years ago I started off in the industry as a cattle buyer, was a licensed commodity broker for 33 years, was part of Future Beef Operations there for a short span and then market director at the Texas Cattle Feeders Association. A number of years with Pioneer Hybrid, then went to Rabobank. I was there a lot of years and for the last three years I've been with Terrain.

Miranda Reiman (02:34):

Alright, so tell me, Terrain's a fairly new name in the ag business. Tell me what you do there.

Don Close (02:39):

So three years ago a group of farm credit associations — American Ag Credit, Farm Credit Services of America and Frontier Farm Credit — created a partnership. That partnership provided the funding for Terrain. We're a complete market research group covering grains and oil seeds, all the protein sector, farm and macroeconomics, dairy, specialty crops and tree nuts, and viticulture and wine. So let's say at the creation, I was asked to come in and start this new research group. Went through the process of creating the website and the entity and all of that stuff and then hired the analysts. And at this point in my career, it has been hugely rewarding. It's just been a fun project to finish up my career on.

Miranda Reiman (03:37):

Fun to see something start from the ground up. So today we're going to tap into a little bit of that expertise and start out by talking about interest rates. Anybody who's gone into their local lending organization probably is not surprised to know that they're higher than they have been typically. And maybe just give us a little bit of a download on the trends in interest rates?

Don Close (03:58):

Okay. So the first thing I would say is that essentially interest rates are double what they were two years ago. So is that a big shock wave through anybody's operation? It is. At the same time, if interest rates have been so artificially low from Fed interventions for the last string of years that the rates we're back to now are actually just the historical average that we haven't really seen interest rates go to what would be considered high levels. If there's a point for all of that, it's that we probably better get used to rates kind of in this ballpark. Now, if you take for months now and the 2% inflation rate and Secretary Powell's or President Powell's comments of the 2% target note, the Fed will lower rates. Certainly if you take the market action late last week and the meltdown in the markets today, we'll certainly be getting the Fed's attention and the economy slowing down. So I think this will ultimately accelerate the move to lower interest rates.

Miranda Reiman (05:12):

But you don't think that's a long-term thing?

Don Close (05:15):

I think we'll see that. I'd still probably say the likely timeframe for the first cut is September, where I would differ with the acceleration of market pressure instead of the risk of one or two 25-point declines, this could very well put us in position to see three full quarters of declines to really have a meaningful decline in interest rates. For the short term, if it were to expand that discussion and talk term. If you just look at the level of federal debt, if you look at the changing demographics with the Baby Boomers retiring out against a smaller Gen X, Gen Z workforce that by those two factors alone are going to be pushing interest rates higher long-term. So short-term intermediate, yeah, I think we can see some relief longer term, probably pretty close to where we're going to be. Sure.

Miranda Reiman (06:19):

As I visited with producers who've maybe started their operations in the last decade to 15 years, they often tell me that it's a shock to them because they've always had access to really cheap money. Talk about what things that a higher interest rate is going to maybe trigger or impact and what kind of maybe decisions are different based on that.

Don Close (06:42):

The first two I think of, and especially from the perspective of a young producer, if you look at the long-term impact, if you're buying farm, whether farm ground or pasture ground, but a long-term loan certainly going to have a big influence. If you are looking at a 30-year mortgage on a house, that's a big decision. On a shorter term perspective, when you talk that young producer, and as we continue to see net liquidation of the cow herd in '24, in a very high risk that we could see that continue into '25. If we take, probably the biggest driver with that is still ramifications of the drought, the transition from El Niño to La Niña, and are we going back into drought conditions. So that has producers concerned, but the other big answer that we get is if you take replacement cow prices today and let's just put them something in the $2,200 to $2,600 bracket, and you're looking at that difference in interest rates from a 4 to 5% rate, and now I'm talking 8 to 10% interest rates, it's a big influence on that break even point for that cow.

Miranda Reiman (08:05):

Sure. So it makes that decision on, 'Do I want to get into this?' harder? So I want to expand on this point. We often hear about labor being one of those too, and labor is also another thing that's experiencing inflationary rates so that labor is going to cost you more.

Don Close (08:19):

Absolutely true. Not only from the production ag side of it, but if you look at the inflationary pressure, we've all seen all the noise this summer from the $22/hour, wage rate in California. The number of quick serve restaurants that are closing because of that, if you look at the quarterly earnings reports that McDonald's released just a week ago, interest rates and that wage pressure on fast food restaurants is having a negative impact on them.

Miranda Reiman (09:01):

Sure. So that's good to know. It's not just in our, well, I mean not good to know. I guess it makes us feel a little bit like everybody's in the same boat maybe?

Don Close (09:08):

But I think the real point to be made there is, while high wholesale and retail beef prices are getting a lot of the blame for consumer pressure, when you look at it from a quick serve restaurant perspective, that impact from higher labor cost is actually a bigger impact on them than higher raw food input cost.

Miranda Reiman (09:31):

And that is very interesting. So as we're looking ahead to the expansion, you're saying it's still going to be tempered for a while?

Don Close (09:38):

I think so. Where I would go first with that conversation is we very closely like everybody else, but we very closely monitor that percentage of heifers on the feed yard mix. And we came out of the July report with heifers on feed at 39.4%. The break point on that is 36 to 37%. So we've got to go from let's say 39.5 to below 36% to go from liquidation to having available supply of heifers outside of feed yards. We're a long way from that happening.

Miranda Reiman (10:23):

Sure. So as you look at that, we talk about the supply shortage, but what's that done on the demand side? We've got higher beef prices. Is this a sustainable equilibrium here? I mean it's not equal, but is it sustainable?

Don Close (10:36):

That is a great question. One that we've been, because of the known tight supply, we've been spending more time on the demand side of the equation and trying to watch that. And we've gone at it several different ways. Dave Weber does a real per capita expenditure calculation monthly. So we're deflating the beef price. We're looking at year-to-date and year-over-year. And comparing the species, beef demand has been unbelievably solid and even at the expense of pork and poultry through this time of price pressure. So from the expenditure data is very, very good. We've also taken a look at comparing the all fresh beef price to the consumer price index, the all fresh price against the comprehensive cutout values and the point when, if you look at it in that context, even though prices are high, beef prices are very much in line with all other consumer products. So while there's sticker shock going up to that case for a $22 ribeye as an industry, we worry about that price and consumers, 'Hey, everything costs me more money'. I think they're quicker to get over the sticker shock than the producers are.

Miranda Reiman (12:02):

That's probably really reassuring to producers out in cattle country, oftentimes they have their own freezer beef and they're not seeing that same sticker shock. So we do often wonder at what point will people say no more, I'm just going to choose chicken. That point isn't today.

Don Close (12:18):

Will that point occur before this whole rally's over with? Yeah. Yeah, it will. Any indications that we're there yet has not happened.

Miranda Reiman (12:31):

So when we talk about all of these things that we've mentioned, higher interest rates, continuing demand, a slower rebuild, those kinds of things, what are the decision points in here for a cattle producer? What can they take home and use from all this information you've been studying?

Don Close (12:46):

I think the overall that the U.S. or North, I would specifically say the North American, beef industry is in a really good position. I think the escalation in the percentage of choice and prime product consistently at 82% or better. Everything that has been done as a result of the beef quality audit to to provide consumers with a quality eating experience every time is paying untold dividends. So that's probably the biggest plus. The second avenue that I would go down is because of this longer than expected liquidation phase, a very tempered or slow start to expansion by the time, even if we start retaining this year's calf crop, so as these calves are weaned in October and November, it's going to be critically important for us to watch how those females are being managed. And if we see that more effort for retention, then we can finally get an idea of, okay, when this will impact us. The point I'm trying to work towards is even when we find that point, grow that heifer breed, that heifer gestation and for her to calve and sell her offspring, we're still talking a solid two years before we see a net increase in the raw quantity of beef going to the consumer.

Miranda Reiman (14:17):

So this might be the time if you have resources and capital available to go ahead and start retaining heifers now and get ahead of that curve.

Don Close (14:26):

Yeah, I would quickly agree to that. And we have a lot of discussion and debate amongst industrial economists today of whether this rebuild, it's not going to be as fast as historicals, it's going to be a slow build. I'm really slow to buy into that because market behavior, people all respond at the same time. And I think before this is over with that carrot driven by calf prices is going to be so high, it's going to entice people back into the market. We just got to meter that pace. They come back in.

Miranda Reiman (15:15):

It'll be a hard signal to ignore. 

Don Close (15:16):

Yes.

Miranda Reiman (15:17):

Well, on this podcast, one thing that we always try to do, we say there's enough bad news out in the beef business or out in the world today. We want some good news. So what's either some good news personally or professionally that you would like to share?

Don Close (15:30):

Wow, what a great question. So we've had a really great run with the launch of Terrain. We've been in operations for two years now. The participation level we have with people looking for the terrainag.com website, it's really been a rewarding experience.

Miranda Reiman (15:54):

Excellent. Great. Well, I'm glad to hear that. Thank you so much for sharing your insight and expertise with us today. You're

Don Close (16:00):

You're more than welcome.

Lynsey McAnally (16:08):

Listeners, for more information on making Angus work for you, check out the Angus Beef Bulletin and the Angus Beef Bulletin EXTRA. Subscribe here. If you have questions or comments, give us an email. We would appreciate it if you would leave us a review on Apple Podcast and share this episode with any other profit-minded cattlemen. Thanks for listening, this has been Angus At Work!