Interest Rates Impact Cattle Cost of Production

Managing the cost of production is a major component of profitability in the cattle business. Cattle producers routinely evaluate input prices and technologies that increase production efficiency relative to cost. Despite producers having little to no control over input prices, management decisions can influence the cost of production. An input cost with limited management flexibility is capital. Many cattle operations require a substantial quantity of capital to operate. This often results in the need to borrow capital to purchase cattle and inputs, which means interest rates can greatly influence the cost of production for cattle operations. Since the beginning of the 21st century, interest rates have fluctuated significantly. Interest rates influence the cost associated with land, equipment, cattle and inputs when borrowed money is being used to make the purchase. When money is not being borrowed, the cost of someone using personal capital is considered opportunity cost. In other words, opportunity cost is the value such capital could be earning when invested in something else. Similarly, it is important to consider capital recovery of non-financed assets, because they will depreciate and reach the end of their useful life, which means they will need to be replaced. Thus, every producer, whether borrowing capital or not, incurs a cost when using capital. As it directly relates to cattle purchase, cow-calf producers may incur an interest expense when purchasing breeding stock while stocker, backgrounding and feedlot operators carry a large interest expense burden when purchasing feeder cattle using borrowed capital. The total interest expense per animal associated with purchasing cattle hinges on the interest rate and the total cost of the animal. Thus, higher interest rates and higher cattle prices increase interest expense while lower interest rates and lower cattle prices decrease interest expense. The purpose of this publication is to show how interest expense has fluctuated from 2001 through early 2023 for the purchase of stocker and feeder cattle. This should help cattle producers gain a better understanding of how interest rates and cattle prices influence the cost of production. This information can also be beneficial for cow-calf producers as it will help producers understand why cattle buyers have to adjust what they are willing to pay when input costs change. This information should also provide insight into the risk presented by changing interest rates.