. r1 ~r 8-1128 , December 1972 The Capital Structure and Financial Management Practices of the Texas Cattle Feeding Industry TEXAS A&M UNIVERSITY, The Texas Agricultural Experiment Station, J. E. Miller, Director, College Station, Texas In Cooperation with U. S. Department of Agriculture, Economic Research Service Acknowledgment v This research was conducted by The j_ Agricultural Experiment Station in cooperaé. with the Farm Production Economics Divis‘ Economic Research Service, U. S. Department‘ Agriculture. ’ x 4 5 ‘cs of the Panhandle-Plains W‘ Feeding Industry .............................. .. 6 it cture 8 ' tructure 8 i Asses 8 Assets 9 tructure 9 If ~ t Liabilities. 9 i-Term Indebtedness .............................. .-10i Equity and L; -- Business Ratios .............................. -.11 ‘ieedlot Operating Capital ...................... -.12 of Custom Feeding to ~ Requirements 15 Feeding Arrangements ...................... .-15 ce of Custom Feeding ...................... --16 1< and Fund Offerings ...................... .16 17 g i - Cited 19 HIGHLIGHTS The Texas cattle feeding industry, which is characterized by large commercial feedlot oper- ations, has undergone rapid development and change during the last decade. The predominance of large and highly mechanized feedlot operations, with large investments in capital equipment and resource inputs, has generated a strong demand for loanable funds as reflected by the levels of capital requirements and methods of feedlot fi- nancing currently being employed. This study examines the capital structure and financial management practices of feedlots in the Panhandle-Plains area of Texas. More specif- ically, the study considers the characteristics of the Panhandle-Plains cattle feeding industry, the asset-debt structure of feedlots, their sources and levels of operating capital, the extent and im- portance of custom feeding, and the debt and equity capital organization of various size feedlot operations. Feedlots in the Panhandle-Plains are predom- inantly large-scale commercial feedlot operations. Almost half of all fed cattle marketed are fed in feedlots with one-time capacities in excess of 30,000 head. More than 90 percent of the cattle in the Panhandle-Plains feedlots were fed on a custom basis during 1969-70. A high proportion of the larger lots and a majority of all feedlots are incorporated. These incorporated feedlots account for about 80 percent of the cattle fed in the Texas Panhandle-Plains area. Approximately 50 percent of the total assets of the Panhandle-Plains feedlots consisted of cur- rent assets, fixed assets accounted for 48 percent, and the remaining assets were prepaid leases, investments and so forth. The major items of current assets were feed, customer accounts re- ceivable and feedlot owned cattle. Data showed that feedlots in the Panhan _ Plains were in a relatively strong and solv‘ financial position. Current assets averaged A times the level of current liabilities, although t, ratio varied by size of feedlot. The fixed G to total asset ratio averaged almost 0.5 and ran from 0.4 for the smaller feedlots to 0.57 for f - ;_ lots in the 40,000 head and greater size gro r The fixed asset to long-term debt ratio was _ and the total equity to total liability ratio a eraged about 1.3. The major capital requirement for Panhan f Plains feedlots were operating capital which eraged about $2.5 million per feedlot during 19 fl p 70. Commercial banks are an important so ' “ of operating capital, as are Production Associations. However, the major source of w; erating capital for feedlots is “internal capi ~ which is derived from services provided for M. tom clients. Approximately 70 percent of the f i lot operating capital during 1969-70 origina through services provided for custom clients. Capital leveraging is important in cus ~: feeding. Financial institutions generally about 80 percent of the total cost of feeding ; animal for the custom clients of commercial f - =; lots. On a per head basis and at current pri x less than $70 is generally required to finance i enterprise which often requires a total investm of $350. Although cattle feeding is gener considered a risky venture, the possibility of -r atively high returns per working dollar has stim lated much interest and participation in cus w; feeding. i The rapid expansion and growth of the Te .3‘ Panhandle-Plains cattle feeding industry has =3 couraged some of the incorporated feedlots I seek sources of equity capital other than th_ provided by financial institutions. These consis primarily of public offerings of common stock Q gffregings of limited partnerships in cattle feed‘ t un s. t 1 '9. . = Texas livestock and meat industry, es- the cattle feeding and fed beef sector, is rapid development and change. Much * development and change has been gen- a dynamic and expanding cattle feeding ' which is characterized by large and high- _' anized commercial feedlot operationsl. f“ increases in size and numbers of large ial feedlot operations in Texas, along ntinuous adaptation of advanced technol- i” new techniques in feeding, at generally investment costs, have brought about "f" g demands for capital. The ability to and attract the necessary capital by '33- the cattle feeding industry has important tions for industry growth and development f; as ability to compete with other indus- Pf» cattle feeding regions for the required v1 pjor changes have been and are occurring ‘Texas cattle feeding industry with regard tion, structure of the industry, techno- innovations and marketing and manage- l_-~ ctices employed. The rapid emergence intinuing expansion of cattle feeding in fhas raised questions concerning the capital ‘as. ents and financial management practices f feedlot industry. Accordingly, a detailed p; of the financial aspects of the cattle feed- ustry was undertaken concerning (a) cap- i, cture and capital flows, (b) financial }; ment practices relating to fixed invest- I‘ and operating expenditures, (c) equity re- and collateral basis and (d) future l requirements of the feeding industry in _. as Panhandle and High Plains. Work is ively, associate professor, Department of Agri- ” l Economics and Rural Sociology; agricultural -- ist, U.S. Department of Agriculture, Economic f1 h Service, Farm Production Economics Division; J-associate professor, Department of Accounting, 4' A&M University. ‘é as Panhandle-High Plains includes crop Reporting ,1 i = 1-N, 1-S, 2-N, 2-S, and 3. p? CAPITAL STRUCTURE AND FINANCIAL AGEMENT PRACTICES OF THE TEXAS ans FEEDING INDUSTRY R. A. Dietrich, J. R. Martin and P. W. Ljungdahli‘ underway on a second study dealing with loan characteristics, borrower characteristics, collater- al requirements and various lending arrangements and restrictions on loans to the cattle feeding industry by commercial banks. Data for this study were obtained through A personal interviews of feedlot operators in the Texas Panhandle-Plains area for September 1969 through August 1970. The Panhandle-Plains area (Figure 1) includes the Texas Panhandle, the Southern High Plains and Rolling Plains feeding areas} Respondents were selected on a stratified random sample basis (Table 1). Data were ob- tained only from feedlots with 1,000 head and greater capacity since these larger feedlots were accounting for about 98 percent of the Texas fed cattle marketings. PANHANDLE %UTHERN ROLLING PLAINS Figure 1. Texas cattle feeding areas included in this study. 5 TABLE 1. THE NUMBER OF FEEDLOTS IN THE PANHANDLE-PLAINS WITH 1,000 HEAD AND MORE CAPACITY ON AUGUST 31, 1969, THE SAMPLING PERCENT, AND THE NUMBER OF COMPLETED QUES- TIONNAIRES, BY SIZE OF FEEDLOT Feedlot Number capacity of Sampling Completed (head) feedlots percent questionnaires g Number Percent Number 1,000- 9,999 50 25 7 10,000-l 9,999 24 33 5 20,000-29,999 19 5O 5 30,000-39,999 l2 67 6 40,000 and more 8 100 8 Total 1 13 41 31 The completed questionnaires represented data from feedlots which handled 50 percent (of the fed cattle marketed by Texas Panhandle- Plains feedlots from September 1969 through August 1970. Uncompleted questionnaires were generally due to one-time visits employed during the survey, mergers, incomplete cost data for the survey period by new feedlots, and expansion of existing facilities and movement into a higher size classification. Characteristics of the Panhandle-Plains Cattle Feeding Industry Highly specialized, commercial feedlot oper- ations are relatively new in Texas. Feedlots with 1,000 or more head capacity increased from 102 on January 1, 1960, to 257 on January 1, 1971 (2). Abundant supplies of locally produced feed grain, ready access to feeder cattle, favorable climate, economies of size in feeding, favorable market location and so forth have contributed to this rapid growth (1) (3). The one-time capacity of these large feedlots in Texas increased from 350,- 000 head on January 1, 1960, to 2,507,600 head on January 1, 1972. The Panhandle-Plains area (Figure 1) accounted for more than 80 percent of the cattle on feed in Texas on January 1, 1972. TABLE 2. FEEDING CAPAClTY AND NUMBER OF CATTLE ON FEED, PER FEEDLOT, AUGUST 31, 1970, AND NUMBER OF CATTLE MARK l‘ PER FEEDLOT DURING 1969-70, BY SIZE OF FEEDLOT, TEXAS PANHANDLE-PLAINS AREA " Cattle on feed in the Texas Panhandle-Plains a , on January 1, 1972, represented more than l, percent of the U.S. cattle on feed. The Panhan j area, alone, accounted for almost 65 percent 5 the cattle on feed in Texas feedlots. One-time feeding capacity per feedlot av =1! aged more than 15,000 head per lot in the P handle-Plains on August 31, 1970 (Table 2). y average capacity ranged from 4,286 head for with less than 10,000 head to more than 54, head for the 40,000 head and greater size grouj The feedlot occupancy rate averaged about g percent and varied from 62 percent for lots _, the 10,000-19,999 head size group to more t ~ 80 percent for the 30,000-39,999 head capaci feedlots. Cattle marketings from the Panhan 1.; Plains feedlots during 1969-70 revealed a tu < over ratio of about 1.7. This relatively low r ~i was the result of the generally unfavorable pro , margins in cattle feeding during much of 19 and early 1970 (Table 2). » More than 90 percent of the cattle fed i PanhandleePlains feedlots were non-feedlot own during 1969-70 (Table 3). As feedlots increase size, they tend to feed substantially higher p ' portions of the cattle in their lots on a custor basis. Feedlo-ts with 20,000 head and greater ‘ pacity fed almost exclusively on a custom bas‘, whereas, lots of less than 10,000 head capaci, , owned one~third of the cattle marketed from th; z lots during 1969-70. A study conducted during 1966-67 reveal that Panhandle-Plains feedlots fed two-thirds the cattle in their lots on a custom basis com = with 25 percent for the remaining areas of Te w; (1 . Almost 57 percent of the cattle fed on custom basis by Panhandle-Plains feedlots a owned by farmers and ranchers during 1969- x (Table 4). This is approximately the same p W portion owned by farmers and ranchers du 1966-67 (1). Farmer and rancher ownership 1,000 to 10,000 to 20,000 to 30,000 to 40,000 head Aver 1 9,999 head 19,999 head 29,999 head 39,999 head and more T‘ Item capacity capacity capacity capacity capacity — — — — — — — — — — — ——— Head —-—-——----——-—--——-—— Feeding capacity per feedlot, August 31, 1970 4,286 11,600 21,800 33,167 54,250 Cattle on feed per feedlot, . August 31, 1970 3,409 7,195 17,200 27,333 37,312 11,47 Cattle marketed per feedlot, 1969-70 6,990 23,000 33,356 55,834 94,325 26,194,; ‘Feeding capacity per feedlot is 28,730 head when the average capacity in each size group is weighted by that size group's proportion total capacity. zCattle on feed per feedlot were 21,238 when average numbers on feed within each size group are weighted by that size group's proporti,“ of the total cattle on feed. ‘Cattle marketed per feedlot were 48,935 head when average marketings within each size group were weighted by that size group's proper; tion of the total marketings. 6 NUMBER OF CATTLE MARKETED AND OWNERSHIP OF CATTLE MARKETED, BY SIZE OF FEEDLOT, TEXAS PANHANDLE-PLAINS AREA, g rketings 1,000 to 10,000 to 20,000 to 30,000 to 40,000 head ‘ type of 9,999 head 19,999 head 29,999 head 39,999 head and more nership capacity capacity capacity capacity capacity Total marketed 349,514 552,001 633,760 670,000 754,600 2,959,875 __ Ip: — — — — — — — — — — -— Percent — — — — — — — — — — — — — — — -—- g 33.1 10.3 3.4 8.4 4.4 9.6 gffpoedlot owned 66.9 89.7 96.6 91.6 95.6 90.4 aI 100.0 100.0 100.0 100.0 100.0 100.0 4 OWNERSHIP OF CUSTOM FED CATTLE, BY SIZE OF FEEDLOT, TEXAS PANHANDLE-PLAINS AREA, 1969-70 1,000 to 10,000 to 20,000 to 30,000 to 40,000 head Type of 9,999 head 19,999 head 29,999 head 39,999 head and more owner capacity capacity capacity capacity capacity Total _ Z i i i i i i X i __. __ Pefcenf i ? Z i i i i i i i i i .__ _._ officers and directors 38.7 11.3 25.2 13.8 17.3 18.9 1' and ranchers 37.5 59.3 52.4 - 77.0 48.8 57.5 3.9 12.9 10.5 3.1 11.2 8.7 d). 19.9 16 5 11.9 6.1 22.7 14.9 total 100.0 100.0 100.0 100.0 100.0 100.0 t cattle was most prominent in the 30,000- "N capacity feedlots. Feedlot officers and di- a accounted for almost 20 percent of the fl- fed on a custom basis. “Others,” which ies cattle feeding clubs and various other , duals, such as doctors, lawyers and bankers, nted for 15 percent of the total. Packer f» hip accounted for less than 10 percent of tal custom cattle in the Panhandle-Plains I -: 1969-70. '1 type of feedlot organization and own- varied by size of feedlot (Table 5). In- F“ ted feedlots, which comprised 60 percent g feedlots in the Panhandle-Plains, accounted _ percent of the cattle on feed in that area. A higher proportion of the feedlots tended to incorporate as feedlot size increased (Table 5). It is also interesting to note that all feedlots with 40,000 head and greater capacity were in- corporated and that two-thirds of these lots were divisions of a general corporation. Partnerships were most common in the 10,000-19,999 capacity lots, while the single proprietor form of owner- ship was found primarily among feedlots in the 1,000-9,999 capacity feedlots. The number of stockholders associated with incorporated feedlots generally increased as feed- lots increased in size (Table 6). For example, in- corporated feedlots of less than 10,000 head ca- pacity reported 10 or less stockholders, while half ,5. LEGAL FORMS OF OWNERSHIP, BY SIZE OF FEEDLOT, TEXAS PANHANDLE-PLAINS AREA, 1969-70 Q 1,000 to 10,000 to 20,000 to 30,000 to 40,000 head - of 9,999 head 19,999 head 29,999 head 39,999 head and more ership capacity capacity capacity capacity capacity Total -_ — — — — — ~ — — — -—— -— Percent — — — — — — — — — * — — — --- é proprietor 42.0 0 0 0 0 18.6 . a ip 14.0 41.7 21.1 0 0 18.6 W Ion 44.0 58.3 78.9 83.3 100.0 61.1 tive 0 0 0 16.7 0 1.7 " I 100.0 100.0 100.0 100.0 100.0 100.0 t 770 l 6. NUMBER OF STOCKHOLDERS ASSOCIATED WITH INCORPORATED FEEDLOTS, BY SIZE OF FEEDLOT, TEXAS PANHANDLE-PLAINS AREA, l,000 to l0,000 to 20,000 to 30,000 to 40,000 head of I‘. ~ 9,999 head 19,999 head 29,999 head 39,999 head and more ders " capacity capacity capacity capacity capacity Total p. — — * — — — ~ — — —- — Percent — — — — — — — — — ~ — — - — " less 100.0 84.3 73.3 80.0 37.5 78.8 ~24 0 0 26.7 0 0 5.8 I 0 0 0 20.0 12.5 4.3 more 0 35.7 0 0 50.0 l3.l 100.0 100 0 100.0 100.0 100.0 100.0 of the feedlots with 40,000 head and greater ca- pacity reported 50 or more stockholders. Approximately 30 percent of the incorporated feedlots of less than 20,000 head capacity had made a Sub-Chapter S election for tax purposes at the time of the interview. The Sub-Chapter S classification is generally considered beneficial for newly organized firms which may be faced with operating losses during their formative years. Corporations often do not choose the Sub-Chapter S classification, since they do not anticipate losses and, in addition, eligibility is limited to corpor- ations having 10 or less stockholders. Capital Structure An analysis of the capital structure and financial management practices of commercial feedlot operations must be concerned, among other things, with capital requirements for initial in- vestments in fixed facilities and operating funds for day-to-day operations. The asset and debt structures provide clues concerning solvency, li- quidity and ability to borrow additional capital. Demand for operating funds by commercial feed- lots is influenced by ownership of cattle on feed, type of cattle on feed and other factors. The capital structure of the Texas Panhandle- Plains cattle feeding industry as of August 31, 1970, was made up of 55 percent equity capital, 25 percent current liabilities and 20 percent long- term debt (Table 7). These data indicate that, generally, feedlots in the Panhandle-Plains were in a strong and solvent financial position. Asset Structure Current Assets Approximately 50 percent of the total assets of the Panhandle-Plains feedlots consisted of cur- rent assets with fixed assets accounting for 48 percent. The other 2 percent was represented by TABLE 7. ASSETS, LIABILITIES AND OWNER'S EQUITY PER FEEDLOT, BY TYPE OF ASSET AND SIZE OF FEEDLOT, TEXAS PANHANDLE-PLAI AREA, AUGUST 31, 1970 other types of assets, such as prepaid leases, vestments, et cetera (Table 7 ).‘~’ Current ass i averaged almost $35 per head of one-time capaci compared with $69 for total assets. Feedlots I“ the 1,000-9,999 size group had a current =:=- to total asset ratio of about 57 percent as if; pared with slightly more than 40 percent for f - a lots with 40,000 head and greater capacity. t larger feedlots have undergone rapid expansi and growth in the Panhandle-Plains area in c ~ trast to the smaller feedlots which have --___ generally more conservative and have declined if relative importance. i" The amount of current assets per f - -~ f ranged from about $250,000 for lots with 1,0 i1 9,999 head capacity to almost $1.5 million for l: with 40,000 head and greater capacity (Table The major items of current assets consisted customer accounts receivable, feedlot owned ‘ tle and feed inventories. Feedlot owned ca made up a high proportion of the current ass, for feedlots in the 1,000-9,999 head size group f compared with feedlots of 10,000 head and grea =[ capacity, since the smaller feedlots generally a larger proportion of the cattle in their feedlo The larger dollar amounts of accounts receiva held by feedlots with 20,000 head and grea -_ , capacity primarily result from these lots feedi a high proportion and larger number of ca ii on a custom basis. Larger feed inventories, by lots in the 20, t? .1 39,999 size category, were generally associa , with larger feed grain storage facilities tained by these feedlots as compared with f q lots of 40,000 head and greater capacity. As general rule, feedlots maintain feed grain stor 1f facilities equivalent to about two to six wed? feed grain requirements. However, several f >4 lots in the 20,000-39,999 size groups mainta’ feed grain supplies equal to a six-month feed : i _ requirement. I, ‘Fixed assets represent valuations net of depreciati l‘ 1,000 to 10,000 to 20,000 to 30,000 to 40,000 head Ave 9,999 head 19,999 head 29,999 head 39,999 head and more pert Item capacity capacity capacity capacity capacity feed — — — — — — — — — -——— Dollars--—--—------——------—--"i Assets: Current’ 248,705 302,401 718,400 1,296,500 1,487,809 538,0, Fixed’ 174,573 264,832 600,200 1,279,500 1,964,314 509, v.9 Other‘ 12,003 4,163 18,700 34,500 53,892 16,8 k Total 435,281 571,396 1,337,300 2,610,500 3,506,015 1,064, q Liabilities and owner's equity: Current liabilities 99,286 155,306 543,000 400,416 912,822 275,3 u Long-term liabilities 37,714 27,889 207,800 759,167 818,927 196,1 = Owner equity 298,281 388,201 586,500 1,450,917 1,774,266 592,7 v Total 435,281 571 ,396 1,337,300 2,610,500 3,506,015 1,0643 - ‘Feedlot owned cattle, feed, cash, accounts receivable, notes receivable (clue within one year), other assets, etc. ‘Feeding facilities, water system, milling equipment, storage facilities, motor vehicles and tractor equipment, land, office and office equipme scales and scale house, feedlot owned housing, horses, cattle treatment equipment and handling equipment, etc. ; ‘Patents, copyrights, stocks, bonds, deferred loan expenses, prepaid leases, deferred tax expenses, investments in subsidiaries, long-term not receivable, etc. a ‘It I CURRENT ASSETS PER FEEDLOT, BY SIZE OF FEEDLOT, TEXAS PANHANDLE-PLAINS AREA, AUGUST 31, 1970 Type of 1,000 to 10,000 to 20,000 to 30,000 to 40,000 head Average current 9,999 head 19,999 head 29,999 head 39,999 head and more per ~ assets capacity capacity capacity capacity capacity feedlot — — — — — — -—-—--Dollars————--—-——-——-—-—-————-—--—-— 18,964 21,329 (-—23,600) 5,833 21,061 11,063 ._. ~ of deposit and marketable securities 1 24,000 ‘ ‘ ‘ 5,097 fjtccounts receivable 43,329 95,961 210,600 424,500 552,594 159,165 lflnotes receivable ‘ 1 1 2,667 ‘ 283 I ned cattle 122,473 67,662 205,400 54,333 513,501 145,223 t‘ 57,857 86,432 266,600 733,167 286,749 186,944 __3 nt assets 6,082 7,017 59,400 76,000 113,904 30,304 243,705 302,401 718,400 1,487,809 538,079 1,296,500 by feedlots interviewed. I; '14. assets, which tended to increase as T»: increase-d in size, consisted primarily of “i leases, prepaid insurance, prepaid feed , employee accounts receivable and over- j» of taxes. Although cash on hand varied ~ ably by size of feedlot, most lots main- cash balances at minimal levels. Several interviewed stated that they occasionally ‘nced overdrafts, but that such situations i‘ l temporary in nature. 5 sets f estments in equipment and facilities by yile-Plains feedlots vary by size and type t (Table 7). Total undepreciated invest- in feedlot facilities and equipment in the Qdle-Plains area averaged about $45 per 1 one-time capacity on August 31, 1970. fis- completed in 1969 revealed that pens and “ ‘O equipment and milling equipment ac- for approximately 30 and 25 percent, re- “ly, of total investments in equipment and ‘a: in Panhandle-Plains feedlots (4). Feed facilities and equipment, the third largest y caipital investment, accounted for another n . p er assets, consisting of such items as I receivables, investments in securities, , tended to increase as feedlots increased These assets generally accounted for less percent of the total assets. Debt Structure Panhandle-Plains feedlot indebtedness was broadly defined to include current liabilities and outstanding long-term debt. Current liabilities accounted for almost 60 percent of the indebted- ness as of August 31, 1970 (Table 7 ). Long-term debt made up the other 40 percent. Current Liabilities Current liabilities, those due within one year, represented a substantially higher proportion of the total indebtedness of Panhandle-Plains feed- lots with less than 30,000 head capacity as com- pared to feedlots with more than 30,000 head ca- pacity (Table 7 ). This is primarily because more than 80 percent of the feedlots in the 30,000 head and greater category were constructed during or after 1967 as compared with only 35 percent of the feedlots of less than 30,000 head capacity. Current liabilities varied from about $100,- 000 per fe-edlot in the 1,000-9,999 size group to more than $900,000 for the 40,000 head and great- er capacity feedlots (Table 9). Current liabilities averaged about $18 per head of one-time capacity as of August 31, 1970. Although the sources of credit for current liabilities varied by feedlot size groups, more than 70 percent of the current liabil- ities were outstanding to commercial banks and on open account to creditors for feed and other supplies utilized by feedlots. Open accounts repre- sented less than 10 percent of the current liabil- CURRENT LIABILITIES PER FEEDLOT, BY SOURCE OF CREDIT AND SIZE OF FEEDLOT, TEXAS PANHANDLE-PLAINS AREA, AUGUST 31, 1,000 to 10,000 to 20,000 to 30,000 to 40,000 head Average Source of 9,999 head 19,999 head 29,999 head 39,999 head and more per credit capacity capacity capacity capacity capacity feedlot fl’ ,3 — — — — — — — — -- —— Dollars — — — — — — — — — — — -— —- Tpayable (open account) 8,571 49,848 251,400 105,917 410,792 97,087 banks 52,857 79,400 110,000 197,500 275,029 99,192 Credit Association 29,285 7,117 110,200 8,388 125,000 42,784 finance Credit Corporation 8,572 ‘ 1 29,883 1 5,951 ‘ - t notes ‘ 14,800 1 85,000 48,875 8,151 _ t liabilities 1 4,541 71,400 22,883 58,125 21,280 t-current liabilities 99,285 155,805 548,000 400,415 912,822 275,855 rces were not utilized by feedlots interviewed. TABLE 10. INTEREST RATE ASSESSMENTS ON CURRENT DLE-PLAINS AREA, AUGUST 31, 1970 LIABILITIES, BY CREDIT SOURCE, FOR VARIOUS SIZES OF FEEDLOTS, TEXAS PANH u‘ l 1,000 to 10,000 to 20,000 to 30,000 to 40,000 head Source of 9,999 head 19,999 head 29,999 head 39,999 head and more credit capacity capacity capacity capacity capacity -7 — — — — — — — ———-Percent———--——-—-—-—---—————'I Commercial banks 8.8 7.5 8.3 8.3 8.9 I Production Credit Association 8.6 8.5 8.9 8.5 9.6 National Finance Corporation 9.5 ‘ 9.0 ‘ Other current notes 1 ‘ 8.1 9.0 Total 8.8 8.6 8.3 9.1 ‘Operating capital was not obtained from these lending agencies ities for feedlots of less than 10,000 head capacity as compared with 25 to 50 percent for feedlots of more than 10,000 head capacity. Credit ob- tained from Production Credit Associations ac- counted for another 15 percent of the current liabilities. Other current liabilities, which repre- sented another 8 percent, included such items as accrued income and property taxes, accrued in- terest, bank overdrafts, et cetera. Interest rates assessed on current liabilities averaged 8.6 percent and ranged from 7 .5 percent to 9.6 percent during 1969-70 (Table 10). Com- mercial banks generally provided operating cap- ital at the lowest interest rates, followed by “other” current notes, Production Credit Associ- ations and the National Finance Credit Corpor- ation. Most of the feedlots of less than 20,000 head capacity initiated feeding programs prior to 1967 and generally reported slightly lower interest rates on operating capital, compared with feedlots of more than 20,000 head capacity. Financial institutions are often reluctant to raise interest rates to older customers with established lines of credit. In addition, interest rates varied con- siderably during 1970 when data for this study were obtained.“ Long-Term Indebtedness Outstanding long-term indebtedness averaged almost $200,000 per feedlot and ranged from about $40,000 per lot in the 1,000-9,999 head size ‘Factors affecting interest rates will be analyzed in detail in a later companion publication. TABLE 11. OUTSTANDING LONG-TERM DEBT, PER FEEDLOT, BY SOURCE OF CAPITAL AND SIZE OF FEEDLOT, TEXAS PANHANDLE-PLAINS 1' AUGUST 31, 1970 by the respondents interviewed. ‘ compared to commercial bank and Produc», group to more than $800,000 per lot in the 40, ' head and greater capacity feedlots (Table 1 s The major sources of credit for long-term w’ were insurance companies, which supplied 32 1S cent; “others,” including Savings and Loan A ‘ ciations, parent firms, and other financial w, porations, 28 percent; Production Credit =1», ations, 20 percent; commercial banks, 15 perc and most of the remainder was accounted for the Small Business Administration and indivi als. Insurance companies were the predomi J source of credit for feedlots in the 40,000 and greater capacity group. The Produc»; ‘ Credit Associations were an important source long-term credit for the intermediate size f == »_ ' lots, while the Small Business Administration an important source for lots with less than 10,, head capacity. Commercial banks were y, important for 30,000 head and greater capac’ feedlots. ,. The loan period for outstanding long- >1- indebtedness averaged almost 10 years and ra 1f from about 4 to 20 years (Table 12). The q’ period for long-term debt generally increased , feedlots increased in size. For example, outs : i’ ing long-term loans averaged almost 7 years j, feedlots in the 1,000-9,999 size group com 0'1 with more than 12 years for feedlots in _ 40,000 head and greater size group. Howe the larger lots were also generally the m recently established feedlots. Long-term 1Q from insurance companies averaged 15 an . i. l. 1,000 to 10,000 to 20,000 to 30,000 to 40,000 head A Source of 9,999 head 19,999 head 29,999 head 39,999 head and more capital capacity capacity capacity capacity capacity fe — — — — — — — — — — ——-—Do|lars-—-—--—--——-—--———-——-~. Commercial banks 10,286 ' 1 166,667 109,750 so, Insurance companies ‘ 1 74,800 122,500 527,750 62, Production Credit Association ‘ 21,534 100,000 136,167 56,250 39, Small Business Administration 14,286 1 1 ' ‘ 6, _ Individuals (non-feedlot) 3,571 1 ‘ 8,333 1 2 Other 9,571 6,355 33,000 325,500 125,177 54, Total 37,714 27,889 207,800 759,167 818,927 196,11 ‘None reported by feedlots interviewed. l0 PERIOD OF LOAN FOR OUTSTANDING LONG-TERM DEBT, BY SOURCE OF CAPITAL AND SIZE OF FEEDLOT, TEXAS PANHANDLE-PLAINS _ 31, 1970 1v. 1,000 to 10,000 to 20,000 to 30,000 to 40,000 head Average ‘rce of 9,999 head 19,999 head 29,999 head 39,999 head and more per k pitol capacity ca pacify ca pacify capacity capacity feedlot . — — ~ ~ — * — * — — —— -— Years — — — — — — — — — — — -— — banks 3.8 ‘ 1 10.0 4.8 7.9 companies ‘ 1 10.4 10.0 18.6 14.5 Credit Association ‘ 7.0 7.0 7.0 7.0 7.0 q noss Administration 5.0 1 1 5.0 (non-feedlot) 10.0 1 2.0 5.8 9.3 10.0 7.0 9.6 5.2 7.8 7.6 8.6 9.1 12.2 9.7 flirted by feedlots interviewed. l. Association loans, which averaged 8 and it, respectively. terest rates on outstanding long-term debt i» -~ almost 8 percent and ranged from less ',' percent to 9 percent (Table 13). Among = institutions, insurance companies gener- vided long-term capital at the lowest rates, , t.» by commercial banks and the Small Busi- “J I inistration. It is also interesting to note "ize of feedlot apparently had little effect long-term interest rate structure. Feedlot Equity and Selected Ratios 1 ner equity, or net worth, averaged almost 7H per lot and ranged from $300,000 for i, = in the 1,000-9,999 size group to $1.8 mil- iAucusr s1, 1970 lion in the 40,000 head and greater capacity feed- lots (Table 14). The major item of stockholders’ equity was retained earnings which accounted for 80 percent of the stockholders’ equity for lots in the 40,000 head and greater capacity. Stockhold- ers’ equity averaged about $38 per head of one- time capacity in the Panhandle-Plains as of Au- gust 31, 1970. Stockholders’ equity ranged from almost $70 per head of capacity for feedlots in the. .. 1,000-9,999 size group to about $27 per head ca- pacity for feedlots in the 20,000-29,999 size range. Owner equity per incorporated feedlot was somewhat higher than that for the total feedlots in the Panhandle-Plains area (Table 15). This results primarily from a higher proportion of the larger feedlots being incorporated compared with the smaller feedlots. T13. INTEREST RATES ON OUTSTANDING LONG-TERM DEBT, BY SOURCES OF CAPITAL AND SIZE OF FEEDLOT, TEXAS PANHANDLE-PLAINS i 1,000 to 10,000 to 20,000 to 30,000 to 40,000 head Average ;_‘Source of 9,999 head 19,999 head 29,999 head 39,999 head and more per capital capacity capacity capacity capacity capacity feedlot — — — — — — — — — — —— —— Percent — — — — — — — — — — — —- - iaI banks 8.6 ‘ ‘ 8.0 7.6 8.0 companies ‘ ‘ 7.1 7.6 7.7 7.5 _, »- Credit Association ‘ 8.5 9.0 8.5 7.0 8.5 ‘.3- siness Administration 8.0 ‘ ‘ ‘ ‘ 8.0 ols (non-feedlot) 5.8 ‘ 8.0 ‘ 7.0 ; 6.9 6 0 7 7 7.8 8.7 8.0 H ge 7.5 8.0 7.9 7.9 7.9 7.9 i’ reported by feedlots interviewed. 14. OWNER EQUITY PER FEEDLOT, BY SIZE OF FEEDLOT, TEXAS PANHANDLE-PLAINS AREA, AUGUST 31, 1970 I 1,000 to 10,000 to 20,000 to 30,000 to 40,000 head Average 9,999 head 19,999 head 29,999 head 39,999 head and more per Item ;=__ capacity capacity capacity capacity capacity feedlot t, — — — — — — — — — — —- —- Dollars — — — — — — — — — — — -— - investment or capital stock 96,215 108,040 181,000 226,667 257,667 138,266 vi’- ol paid in. capital 14,805 1 1 8,333 77,833 12,946 '_-- earnings 187,261 280,161 405,500 1,215,917 1,438,766 441,527 298,281 388,201 586,500 1,450,917 1,774,266 592,739 I reported by feedlots interviewed. ll TABLE I5. STOCKHOLDERSIEQUITY PER INCORPORATED FEEDLOT, BY SIZE OF FEEDLOT, TEXAS PANHANDLE-PLAINS AREA, AUGUST 31, I9 t 1,000 to 10,000 to 20,000 to 30,000 to 40,000 head Ave '5 9,999 head 19,999 head 29,999 head 39,999 head and more Item capacity capacity capacity capacity capacity f ~ -'= — — — — — — — — — — -—-—-DoIIars—-———-——--——-—-———-—, Capital stock 54,168 50,000 226,250 240,400 257,667 141 Additional pOIcI in capital 34,545 1 1 10,000 77,833 21 , Retained earnings 207,775 415,150 486,625 1,452,700 1,438,766 633, Total 296,488 465,150 712,875 1,703,100 1,774,266 796, _ ‘None reported by feedlots interviewed. Important to an analysis of financial struc- ture are various selected ratios which provide insights concerning financial structural character- istics, solvency, ability to acquire additional loans, et cetera. The current asset to current liability ratio, which is indicative of a firm’s ability t0 meet current debts with current assets, averaged almost 2.0 for Panhandle-Plains feedlots as of August 31, 1970 (Table 16). This ratio varied from 1.3 for lots in the 20,000-29,999 size group to more than 3.0 for feedlots with 30,000-39,999 head capacity. Financial institutions occasionally require borrowers to maintain a one-to-one cur- rent asset to current liability ratio to assure pay- ment of current liabilities. Only one feedlot in- dicated that such a requirement was included in their loan arrangement, but stated that the pen- alty for failure to maintain this ratio, a small increase in interest rate assessments, had never been utilized. The fixed asset to total asset ratio provides an index for indicating over or under investment in physical facilities. This ratio averaged almost 0.5 and ranged from 0.4 for the smaller feedlots to 0.56 for feedlots in the 40,000 and greater head size group. This ratio was generally lower for the smaller feedlots since these lots were also "often the older lots and had depreciated their assets to a greater extent than the larger and generally newer feedlots. Another ratio, fixed assets to long-term debt, which provides a measure of a firm’s ability to acquire additional long-term financing and is in- dicative of the security of long-term debt, re- vealed a ratio of 2.6 for Panhandle-Plains feed- lots (Table 16). This ratio varied from about 1.7 for feedlots with 30,000-39,999 head capacity to 9.5 for lots in the 10,000-19,999 head size group. Here again, the smaller lots were generally older TABLE 16. SELECTED RATIOS CONCERNING ASSETS, LIABILITIES, AND EQUITY, BY SIZE OF FEEDLOT, TEXAS PANHANDLE-PLAINS '1? AUGUST 31, 1970 all other selling, general, and administrative =_. than the larger feedlots and exhibited a gene q lower debt structure. '- The total equity to total liability ratio, w ’ indicates the extent that feedlot firms are trad I; on the equity, averaged about 1.3 and varied f r a low of 0.8 for feedlots in the 20,000-29,999 =1, group t0 more than 2.0 for lots of less than 20, head capacity. i Annual Feedlot Operating Capital Annual feedlot operating expenses were I fined as feedlot owned cattle purchases, feed, _ penses, excluding depreciation and amortizati Annual operating expenses for Panhandle-Pl feedlots, where more than 90 percent of the f w" ' er cattle were non-feedlot owned, averaged ‘i a million per feedlot during 1969-70 (Table 17).‘. Feed accounted for 77 percent of the ann feedlot operating expenses in the Panhan Plains during 1969-70. This was not unexp - since feedlots in that area feed predominantly a custom basis. Selling, general and other t- f ing expenses accounted for another 12 percent,‘ the operating expenses, while feedlot owned ca made up the remaining 11 percent. Feedlot " cattle accountedfor a substantially larger pro tion of the operating expenses for feedlots in 1,000-9,999 size category than for feedlots -~ v 10,000 head and greater capacity because ' smaller feedlots own a larger proportion of . cattle in their lots. The major source of operating capital Panhandle-Plains feedlots is internal capital -’ is generated through charges assessed for f‘ and feedlot services to custom clients (Table 1, Approximately 70 percent of the feedlot opera n ; capital during 1969-70 originated through ~~§_ 1,000 to 10,000 to 20,000 to 30,000 to 40,000 head 9,999 head 19,999 head 29,999 head 39,999 head and more Item capacity capacity capacity capacity capacity _ _ _ — — — — — — -——-Ratio—--——-———-—---—---- Current assets to current liabilities 2.50 1.95 1 32 3.24 1 63 Fixed assets to total assets 0.40 0.46 045 0.49 0 56 Fixed assets to long-term debt 4.63 9.50 2 89 1.69 240 Total equity to total liabilities 2.18 2.12 078 1.25 1 O2 12 TAL OPERATING EXPENSES PER FEEDLOT, BY SIZE OF FEEDLOT, TEXAS PANHANDLE-PLAINS AREA, 1969-70 l1 ‘ of i. 1,000 to 10,000 to 20,000 to 30,000 to 40,000 head Average “‘- ing 9,999 head 19,999 head 29,999 head 39,999 head and more per ‘r - se capacity capacity capacity capacity capacity feedlot — — — — ~ — ~ — — - — -——-DolIars——--—-—--——--—----—-- - cattle purchased 319,604 304,401 230,000 29,167 535,867 285,776 417,818 1,385,402 2,339,999 4,802,500 7,605,753 1,921,032 I, and other Ive expensesz 78,971 227,323 353,000 688,833 968,159 284,271 816,393 1,917,126 2,922,999 5,520,500 9,109,779 2,491,079 - purchased for feedlot owned cattle and custom clients. 1;, lode depreciation and amortization expenses. , eived from custom clients. Internal Commercial banks were the principal source urces were especially important for feed- of credit for feedlot owned feeder cattle purchases 30,000 and greater head capacity. (Table 19). Production Credit Associations sup- . plied another 25 percent of the total. It is interest- r second most Important Source of opcrat‘ ing to note that feedlot or internal capital was t.’ was commercial banks which Pmvided relatively unimportant for feeder cattle purchases ~‘2° Pertentr f°11°Wed by Pr°du°tl°n Cred“ with the exception of feedlots with 40 000 head jHOIIS Wlth 8 percent of the total. Feedlots and greater capacity Margin requirehlents on a‘ n attcoo head capacity tcttcd more on feeder cattle purchases by feedlots ranged from l~~ tat banks for operating capital than did 0 to 25 percent Interest rates assessed on feeder with more than 2o'ooo head capacity" cattle purchases averaged about 8 percent and ct feedlots own a higher proportion of varied from 6 5 percent to almost 10 percent ti»? in their lots’ which arc a readily accept‘ The lower rates were generally assessed the older gage iteltl- Thefiarger feedbtsr in “"1" feedlots that had a well-established line of credit. j- '0 a relatlvely h1gher proportion of the 4r their lots on a custom basis. These feed- In contrast to feeder cattle purchases, feedlot heavily dependent on 30 day credit, pri- or internal capital provided more than 80 percent pen account, which is facilitated by the of the capital for feed purchases by Panhandle- payment schedule of their custom clients. Plains feedlots during 1969-70 (Table 20). Among SOURCES OF ANNUAL OPERATING FUNDS PER FEEDLOT, BY SIZE OF FEEDLOT, TEXAS PANHANDLE-PLAINS AREA, 1969-70 rce of 1,000 to 10,000 to 20,000 to 30,000 to 40,000 head Average 'rating 9,999 head 19,999 head 29,999 head 39,999 head and more per ‘funds capacity capacity capacity capacity capacity feedlot I‘ — — — — ~ — — — — — — —- —- Dollars — — — ~ — — — — _ _ _ _ _ banks 217,774 526,541 499,260 897,342 896,273 450,884 Credit Association 152,151 14,613 691,200 59,093 245,960 210,335 once Credit Corp. 105,714 1 ‘ ‘ 1 46,776 ‘cers and directors 1 14,613 ‘ ‘ 1 3,104 ”pital (internal) 340,754 1,324,827 1,732,539 4,358,732 7,667,546 1,729,177 V, 1 36,532 1 1 ‘ 7,759 1 t t 205,333 300,000 43,044 816,393 1,917,126 2,922,999 5,520,500 9,109,779 2,491,079 ces were nct utilized by feedlots interviewed. SOURCES OF CAPITAL FOR FEEDLOT OWNED FEEDER CATTLE PURCHASES, BY SIZE OF FEEDLOT, TEXAS PANHANDLE-PLAINS AREA, 1969-70 i‘ 1,000 to 10,000 to 20,000 to 30,000 to 40,000 head AQSource of 9,999 head 19,999 head 29,999 head 39,999 head and more credit capacity capacity capacity capacity capacity Total fi, — — — — — — — — — —— —— Percent — — — — — — — — _ _ _ -_ 1 banks 62 2 95 7 39.1 100 0 50 0 66 9 Credit Association 29.6 4.3 48.7 26 9 24.5 f‘ Finance Credit Corporation 5.6 t 1 1 1 2.8 internal) 2.6 t 12.2 1 23 1 5 8 100 0 100.0 100.0 100.0 100.0 100.0 , rted by feedlots interviewed. t V TABLE 20. SOURCES OF CAPITAL FOR FEED PURCHASES, BY CREDIT SOURCE AND SIZE OF FEEDLOT, TEXAS PANHANDLE-PLAINS AREA, 196)‘ 1,000 to 10,000 to 20,000 to 30,000 to 40,000 head Source of 9,999 head 19,999 head 29,999 head 39,999 head and more - credit capacity capacity capacity capacity capacity __ — — — — — — — — — ——Percent--—-——-—-— ,_ Commercial banks 16.3 11.4 16 2 14.9 5 5 Production Credit Association 6.7 ‘ 8 7 4.7 1 National Finance Credit Corporation 10.8 1 1 1 ‘ Feedlot (internal) 66.2 88.6 75.1 80.4 94.5 Total 100.0 100.0 100.0 100.0 100.0 1i ‘Credit sources were not utilized by feedlots interviewed. feedlot size groups, feedlots with 40,000 head and greater capacity were especially dependent on internal capital for purchasing feed supplies. " Commercial banks provided most of the remaining capital for feed purchases or about 72 percent of the capital provided by financial institutions. In- terest rates assessed on capital for feed purchased by financial institutions averaged slightly less than 8.5 percent. Margins required on the feed purchase price by financial institutio-ns averaged about 5 percent, but ranged from 0 to 25 percent. In most instances, feedlots were not required to put up a margin on loans for feed purchases. More than two-thirds of the feedlots reported that compensatory balances were not required on loans for operating capital (Table 21). Since 70 percent of the feedlot operating capital was generated through internal sources, compensatory balances were required on less than 10 percent of the total feedlot operating capital requirement. Of the operating loans requiring compensatory balances, 40 percent of the loans required com- pensatory balances from 10 to 15 percent, and 30 percent carried compensatory balances ranging from 16 to 20 percent. Although compensatory balances are required primarily on loans to indi- viduals who have cattle fed on a custom basis, such balances tend to raise the effective interest rate. For example, the total loan and effective interest rate on $1,000 effective dollars at an an- nual interest rate of 8 percent with a 15 percent compensatory balance requirement may be com- puted as follows: (1) Required principal or total loan: (a) P -—- .15P = $1,000; where P = principal. (b) P(1 —— .15) = $1,000 (c) .85P = $1,000 (d) P = $1,176.47 (2) Effective interest rate: (a) i = iT T—-C where: i’ = effective interest rate, i = contract (stated) inter' rate, T = total loan, I C = compensating balance. i’ = (.08) (1,176.47) = 94.12 = __. 1,17 6.47 —17 6.47 1,000 Compensatory balances are simply a means; raise interest rates. Financial institutions -' erally cite such reasons as riskiness of the l‘ insufficient collateral, no established line of exce-ssive demand for certain loans and so f L. for requiring compensatory balances. * - More than 90 percent of the feedlots es lished revolving lines of credit for operating v7 tal obtained from financial institutions (Table -' The major source of revolving lines of c originated from commercial banks which f 1: tated about thre-e-fourths of such arrangeme- Productio-n Credit Associations provided an i; one-fourth of the total. Two-thirds of the f 5 lots had established maximum loan limits on erating debt ranging from $150,000 for the i- _ er feedlots to $4 million for feedlots with 40, head and greater capacity. i; TABLE 21. COMPENSATORY BALANCE REQUIREMENTS ON LOANS FOR OPERATING EXPENSES, BY SIZE OF FEEDLOT, TEXAS PANHA PLAINS AREA, 1969-70 Compensatory 1,000 to 10,000 to 20,000 to 30,000 to 40,000 head balance 9,999 head 19,999 head 29,999 head 39,999 head and more required capacity capacity capacity capacity capacity _ _ L * _ _ i i _ -----Per¢en1-_-_.._._______.______t None 86.0 41.7 42.1 83.3 75 0 Under 10 percent 0 0 21.1 16.7 0 10 to 15 percent 14.0 0 36.8 0 0 1 16 to 20 percent 0 37.5 0 0 25.0 Over 20 percent 0 20.8 0 0 0 Total 100.0 100.0 100.0 100.0 100 0 l l4 REVOLVING LINE OF CREDIT FOR OPERATING CAPITAL AND SOURCE OF CREDIT, TEXAS PANHANDLE-PLAINS FEEDLOTS, 1969-70 “i? 1,000 to 10,000 to 20,000 to 30,000 to 40,000 head p, 9,999 head 19,999 head 29,999 head 39,999 head and more ‘a Item capacity capacity capacity capacity capacity Total L — — — — — — — ~ — —- —— Percent — — — — — — — — — — —— - .» Iine of credit: 85.7 100.0 80.0 100.0 100.0 92.6 14.3 0 20.0 0 0 74 V . 100.0 100.0 100.0 100.0 100.0 100 0 revolving line of credit: 'al banks 50.0 80.0 50.0 100.0 80.0 72.0 I - Credit Associations 33.3 20.0 50.0 0 20.0 24.0 “Finance Credit Corp. 16.7 o o o o 4 o if 100.0 100.0 100.0 100.0 100.0 100.0 f- Relationship of Custom Feeding to Capital Requirements I Feeding Arrangements “Av-- of non-feedlot owned cattle, common- a0 custom feeding, has become more pre- t in the Panhandle-Plains as feedlots in- h.» in size. An earlier study revealed that ‘idle-Plains, feedlots owned 25 percent of tle in their feedlots during 1966-67 (1). idle-Plains feedlots currently own less than ” nt of the cattle in their lots (Table 3). ' ' ary source of revenue for these large cial feedlots is from feed sales and man- “t services for feeding and marketing the gpowned by their various clients. Approxi- 70 percent of the operating capital for mmercial feedlots was from services pro- ior custom clients during 1969-70. , "f-N tom clients of the large commercial feed- ‘fi...»i arranged their own financing for 1 cattle. Commercial banks were the pri- gsource of financing for cattle fed on a k basis. Banks generally require a margin ent to or ranging from 0 to 30 percent of j ue of the feeder cattle and, in addition, w ~ to cover the total feeding costs. De- pi: on the reputation of the client or buyer feeder cattle, banks and other lending insti- Q normally secure only the cattle as col- ‘for the loan. Feed bills are generally for- f‘- directly to the banks by the feedlots who f make payments to the feedlot as such bills Payments for custom cattle are made directly to the owner of the cattle or to y. ots, depending on prior arrangements the feedlot and the client. Commercial banks and other lending institutions, however, retain a first lien on the client's cattle. Although one-third of the feedlots assisted clients in obtaining loans during 1969-70, cattle financed by feedlots for their customers repre- sented only 2 percent of the total non-feedlot owned cattle. The assistance provided by the feedlots for their clients was primarily arranging for loans. Of the feedlots providing loan assist- ance to custom clients, about one-third reported that they occasionally co-signed notes and as- sumed contingent liability for such notes. Texas Panhandle-Plains feedlots bill their cli- ents for feed and services on either a semi-month- ly or monthly basis (Table 23). Billings on a monthly basis represented almost 60 percent of the custom cattle fed by Panhandle-Plains feed- lots. Feedlots generally assess custom feeding charges as follows: (a) a basic feed charge per ton of feed consumed; (b) a markup above feed costs to cover handling, feed, milling, labor, et cetera; and (c) an assessment, as required, to cover vaccination, medication, branding, dehorn- ing and dipping. The feedlots reported that almost two-thirds of the custom clients paid their feed bills within 10 days of the billing date (Table 24). Almost all of the remaining one-third paid their bills with- in 30 days of the billing date. These customer payment schedules enhance the ability of large commercial feedlots to generate the majority of their operating capital requirements through internal sources. Customer accounts receivable (Table 8) varied from about 20 percent of the current assets for the smaller feedlots to almost CUSTOMER BILLING PRACTICES, BY SIZE OF FEEDLOT, TEXAS PANHANDLE-PLAINS AREA, 1969-70 1,000 to 10,000 to 20,000 to 30,000 to 40,000 head 9,999 head 19,999 head 29,999 head 39,999 head and more capacity capacity capacity capacity capacity Total — — — — — — — — — —--Percent——--—-----__---__ 6.3 ‘ 74 8 41 9 56.4 42 5 93.7 100.0 25 2 58 1 43.6 57 5 100.0 100.0 1000 1000 1000 1000 ed by feedlots interviewed. TABLE 24. ELAPSED TIME FROM CUSTOM BILLING DATE TO COLLECTION DATE, BY SIZE OF FEEDLOT, TEXAS PANHANDLE-PLAINS 1969-70 1,000 to 10,000 to 20,000 to 30,000 to 40,000 head 9,999 head 19,999 head 29,999 head 39,999 head and more ' Days capacity capacity capacity capacity capacity " _ _ _ 1 _ _ _ _ _ i-_.Per¢enf__._.__________.ii Less than 10 days 61.9 75.5 34 1 75.0 67 1 10 to 30 days 38.1 24.5 22.1 30.5 More than 30 days 1 1 2.9 24 Total 100.0 100.0 100.0 100.0 100 0 ‘None reported by feedlots interviewed. 40 percent for the larger feedlots. At the same time, accounts payable, generally a 30-day open account, represented more than 35 percent of the - current liabilities of Panhandle-Plains feedlots (Table 10). Importance of Custom Feeding Commercial feedlot operations, like most big business operations, generally require fixed cost financing and variable or operating cost financ- ing. While capital requirements for fixed invest- ments in feedlot facilities are high, capital re- quirements for annual operating expenditures are considerably higher. Total fixed investments in a 10,000 head Pan- handle-Plains feedlot is currently about $450,000 or $45 per head of one-time capacity. The costs associated with purchasing and feeding a 600 TABLE 25. OPERATING CAPITAL REQUIREMENTS, PER HEAD, FOR NON-FEEDLOT OWNED CATTLE, TEXAS PANHANDLE-PLAINS AREA, MARCH 1, 1972 Item Dollars per head Feeder cattle purchase price‘ $225.00 30 percent margin on feeder cattle price $ 67.50 Financing required: Feeder cattle cost 157.50 Feed - cost of gain’ 105.75 Vaccination, branding, etc. 3.50 Transportation and buying 5.00 Total $271.75 Interest cosh’ Feeder cattle 5.52 Feed ' 1.90 Total interest cost $ 7.42 Total financing required $279.17 Death loss (1 percent) $ 2.93 Total operating capital required $349.60 1600 pound, Choice feeder steer at $37.50 per cwt. '450 pound gain at 23.5 cents per pound of gain. ‘Interest cost: (a) feeder cattle-—8.0 percent for a 160 clay feeding period; (b) feed was assessed an interest charge of 8.0 percent for a 160 day feeding period and divided by 2 to obtain an average interest charge. 16 pound, choice, feeder steer to 1,050 pounds, ‘I of March 1, 1972, were estimated to be appr mately $350 per head (Table 25). Given th statistics, and a turnover ratio ranging from , to 2.25, the annual operating expenditures fr: 10,000 head capacity feedlot exceeded by 12 to); times the initial fixed investment. 1 Since 90 percent or more of the cattle in =1 Panhandle-Plains are currently fed on a cusj basis, Table 25 was developed to provide esti i Y of operating capital requirements on a per ' basis for non-feedlot owned cattle as of Marc i1 1972. This table shows that the total finan required for purchasing and feeding a 600 feeder steer would be approximately $272 head. The total feeding cost to the custom cli _ 1 after allowing for purchasing costs, finan costs, and death loss, is estimated to be app i. mately $350 per head. These costs do not inc if‘ a compensating balance requirement for f cattle purchases or insurance costs, which i", increase costs from $1 to $2 per head. Panhandle-Plains feedlots reported 1.4 u if head of cattle on feed as of March 1, 1972. Panhandle-Plains feedlots are feeding about‘, percent of the cattle in their lots on a cu basis, the total financing required for these feedlot owned cattle was approximately million. The importance of these statisti s.‘ that the Panhandle-Plains feedlots are gen _ able to maintain their feedlots at desired l, of capacity without incurring the financing L: to cli) so or the price risks associated with f -=i,_ catt e. J One of the major contributors of lower; nual fixed costs per pound of gain is the a; feedlot utilization rate. The ability of comm feedlot operators to maintain high levels of ‘f lot utilization rates, thereby spreading . I .,_ fixed costs over greater units of output, has ~'_ an important factor in the growth and expa of custom feeding in the Texas Panhandle-P =~g Public Stock and Fund Offerings Feedlot firms raise operating and long- j capital by various methods, including (a) pro’ (b) borrowings from financial institutions '_ other individuals, (c) investments by stockhol within a corporation, (d) services provided -. ~2- (e) mergers with other fe-edlots Y“: (f) public stock offerings and '1; » g funds. These sources of capi- discussed previously with the f» - gers, public stock offerings, and funds. i iii percent of the feedlots with 40,000 a capacity reported that they had i?» ther feedlot or firm as of August the feedlots surveyed, only one feed- t 40,000 head capacity reported a [other feedlot. However, since the P several Panhandle-Plains feedlots Ii 9,999 size category have merged if feedlot or firm. The parent firm i“ all the outstanding obligations 4;: feedlot. Approximately half of ._ -dlots stated that capital was easier ‘is ' the merger, but that the merger effect on interest cost. The feed- that mergers had little or no im- y. t on the volume of cattle placed on "5 e emergence of large commercial w ch have adopted sophisticated busi- ‘hues in the Panhandle-Plains. area, i]. feedlots also are raising capital lic offering of common stock, through .1; limited partnerships in cattle feeding 2th. As of this writing, four Texas merate corporations, which control eedlot facilities in Texas, and to some . "ighboring states, have offered com- ff of stock to the public after filing a with the Securities and Exchange , p The use of the net proceeds of such "7 specified in the prospectus and may purchase of additional feedlot facil- _ion of current facilities, the retire- rt-term borrowings or long-term ob- __ investment in various other enter- uch corporations. 4 corporations in the Panhandle-Plains j§| ently offering some form of limited ‘u arrangement to the public. Such f.‘ are predominantly cattle feeding erings of these limited partnership - securities that must be registered i» by the Securities and Exchange Com- f . s.» partnership arrangements have been lveral years in oil and gas exploration {but such arrangements are relatively cattle feeding industry. In such limited f,‘ arrangements, the feeding firm gen- p lishes a subsidiary corporation as the t; ner.” The general p-artner is often as a “cattle fund” and specifies the I amount of subscriptions that are of- ese pre-organization subscriptions in " nership interests are normally offered 1'- of limited partnerships, each of which a “partnership.” Each partnership en- éthe purchasing, grazing, feeding and marketing of cattle and is terminated in a speci- fied number of years, generally five, unless ter- minated sooner as specified in the prospectus. The maximum amount of offerings by such funds has ranged from $4,000,000 to $6,000,000 per fund with a maximum subscription for each partner- ship set at $1,000,000. The minimum amount necessary to initiate a partnership program is normally $200,000 to $250,000 and, in addition, the various funds generally specify a cutoff date for subscribing to a particular partnership. The minimum subscription in the past has generally been set at $5,000 per subscription, while addi- tional subscriptions may be made in smaller in- crements as specified in the prospectus. These partnership interests are limited to the extent that the liability of a limited partner is restricted to his capital contribution plus his pro rata share of undistributed partnership profits. Partnership income may be distributed dur- ing the life of the partnership as specified in the prospectus. Upon final liquidation, after pay- ment of liabilities, the general partner distributes the cash remaining to the partners and selling brokers. Conclusions The rapidly expanding cattle feeding industry in the Texas Panhandle-Plains area, where custom feeding predominates, has generated numerous changes in financing and management of the cat- tle feeding business. Such changes are especially important to variable or operating cost financing, to fixed cost financing, and to management de- cisions concerning the amount and type of re- source inputs. Such factors as the current and future sources of credit, the prevailing capital structure, and the ownership patterns of cattle on feed also are important to the growth and competitive potential of the Texas cattle feeding industry. This study is based on a sample survey of 31 large, commercial feedlots in the Texas Pan- handle-Plains area from July 1969 to August 1970. The Panhandle-Plains area currently accounts for more than 80 percent of the Texas fed cattle mar- ketings. Respondents included in the study ac- _ counted for about 50 percent of the fed cattle marketings in the Panhandle-Plains during 1969- 70. Selected financial ratios from data obtained in the study revealed that Panhandle-Plains feed- lots were in a relatively strong and solvent finan- cial position. For example, feedlots in the Pan- handle-Plains area exhibited a current asset to current liability ratio of almost 2; the fixed asset to long-term debt ratio was 2.6; and the total equity to total liability ratio was 1.2. These ratios compare favorably with similar data for all manu- facturing corporations in the U.S. for the same time period. Ratios for these corporations were as follows: current asset to current liability 2; fixed assets to long-term debt 2.4; and total equity to total liability 1.2 (5). 17 Approximately 50 percent of the total assets of the Panhandle-Plains feedlots consisted of cur- rent assets with fixed assets accounting for an- other 48 percent. The remaining assets were represented by other types such as prepaid leases, investments, et cetera. Current assets per feedlot ranged from about $250,000 for lots with 1,000-9,999 head capacity to about $1.5 million for lots with 40,000 head and greater capacity. The major items of current assets were customer accounts receivable, feed- lot owned cattle and feed inventories. Feedlot owned cattle made up a higher proportion of the current assets for feedlots in the 1,000-9,999 head size group as compared to feedlots with 10,000 head and greater capacity because the smaller feedlots generally owned a larger proportion of the cattle in their feedlots. Feedlots with 20,000 a head and greater capacity revealed substantially larger dollar amounts of accounts receivable than the smaller feedlots since they are able to feed more cattle and also generally feed a higher pro- gortion of the cattle in their lots on a custom asis. Current liabilities accounted for almost two- thirds of the Panhandle-Plains feedlot indebted- ness with long-term debt accounting for most of the remaining indebtedness. Current liabilities represented a substantially higher proportion of the total indebtedness for feedlots with less than 30,000 head capacity as compared to those with 30,000 head and greater capacity. Long-term in- debtedness generally accounted for a higher pro- portion of the total indebtedness of the larger feedlots because more of these larger feedlots were constructed during or after 1967. Although the sources of credit for current liabilities varied by feedlot size groups, more than 70 percent of the current liabilities was outstanding to com- mercial banks and on open account to creditors. Interest rates assessed on current liabilities av- eraged 8.6 percent with commercial banks gen- erally providing operating capital at the lowest interest rates. Long-term indebtedness averaged almost $200,000 per feedlot and ranged from about $40,- 000 per lot for the smaller feedlots to more than $800,000 per feedlot for those with 40,000 head and greater capacity. The major sources of credit for long-term debt were insurance companies, Production Credit Associations, commercial banks and Savings and Loan Associations. The loan period for long-term indebtedness averaged almost 10 years and generally increased as feedlots in- creased in size. Interest rates on long-term in- debtedness ranged from less than 6 percent to 9 percent. Annual operating expenses averaged $2.5 mil- lion per feedlot and ranged from about $816,000 per lot in the 1,000-9,999 size group to more than $9.1 million for the 40,000 head and greater ca- pacity feedlots. Feed accounted for about four- fifths of the annual operating expenses for Pan- handle-Plains feedlots during 1969-70. Feed rep- l8 resented a significantly larger proportion of ,_ annual operating expense-s for the larger feedl since these lots also fed a higher percentage f the cattle in their lots on a custom basis. "- The major source of operating capital f -,; Texas Panhandle-Plains feedlots is internal tal generated through the feedlot services p T, vided for custom clients. Approximately 70 w cent of the operating capitalif; for these feedl was derived from services provided for cus I, clients. Other important sources of operat’ capital were commercial banks and Produc Credit Associations. Custom feeding is hig important to the financial structure of the handle-Plains feedlot industry as evidenced if the fact that almost half of their current t; ities were on open account. In addition, two-th' q of the custom clients’ feed bills were paid witf 10 days of the billing date. i Custom feeding appears to provide adv tages to the custom clients, the feedlots, and ' financial institutions. For example, custom clie t are able to feed cattle without investing in f‘