Ask a Banker | Protect Yourself
Banker offers advice on how to avoid a bad deal
By Katrina Huffstutler
Thomas Jefferson once said, “With great risk comes great reward.” While I don’t think he was talking about the cattle business at the time, there’s no doubt it fits.
The financial risk involved, especially when deciding to buy cattle or place cattle on the gain, can be monumental, but there are ways to minimize it. I talked with Wellington State Bank Branch President Van Baize, Bowie, about what ranchers can do to protect themselves and what banks do to avoid bad deals, too. Baize is also a director of Texas and Southwestern Cattle Raisers Association (TSCRA).
He says his first and most important piece of advice is to make sure you know who you’re dealing with.
“For example, if you’re going to be placing cattle with an individual on a gain basis for their care, go and look at their place,” Baize says. “That visit is going to tell you a lot about their management and their care, as well as their integrity.”
He says a surprise visit is best and should include a detailed look at the facilities. Are fences in good working order? Is equipment maintained well? Does it look like they take pride in what they do?
Then, Baize says, ask about prior ranchers who have placed cattle with them and call to see if there were any issues. Find out if they have repeat business, or work with someone new each year. The latter is a big red flag, he says.
Baize also recommends doing outside research through credit references and word-of-mouth.
The first stop? Your bank.
“If you’re a rancher and you’re going to place some cattle on another person’s pasture, go to your bank and say, ‘Hey, I’m about to put some cattle on John Doe’s land in Quanah. Could you help me do a background check and make sure everything is all right with this guy?’ They’ll be happy to help, because it’s a good deal for them, too,” Baize says. “As bankers, we’ll do whatever we can to protect our customers, and in turn, ourselves.”
He says a bank can make a call and find out where the person does his financing — and then see if he or she has a good relationship with the bank or if there have been issues.
There are also multiple methods of informal checks a rancher can do on his own. Baize recommends visiting the local feed store, auction barn or coffee shop to see what people say about the individual with whom you’re looking to enter a contract.
“See what people say about them,” Baize says. “Do they pay their bills on time? Are they well regarded in the community? Do people tell you they’re a good caretaker or stockman, or do you get a lot of, ‘I don’t know if I’d want to put any cattle out with them…’”
He warns that silence speaks volumes, too.
“People will be glad to tell you if someone is a good person,” Baize says. “If they say, ‘Yeah, I know John. He’s been here a few years. Good guy,’ then you’re in good shape. But if they don’t say anything, it’s likely a bad deal. Either they don’t know who he is, or they are hesitant to tell the truth about his character. Those are both big red flags.”
Of course, even if you think you know someone, you may not know them well enough to do business with them. Baize learned this the hard way many years ago when he recommended an acquaintance to a friend in dire need of pasture to rent.
Baize was managing a feedyard in the Panhandle at the time and had become friends with one of the ranchers who fed cattle there. The rancher called him looking for leads on grass, and Baize remembered a former feedyard employee who had told him he was seeking cattle to care for on the gain on a place he’d just leased. Baize figured it was a good match, and passed the contact information along.
“So, we get the deal made and get the cattle up there,” Baize says. “The guy wasn’t there when we arrived, but he had told me where to turn them out, so we did. He calls later to tell us everything was fine, and we believed it was.”
But it all took a turn for the worse.
About 2 weeks later, Baize got a call from a neighboring ranch, encouraging him to go check on the cattle soon. He said the caller told him the guy had just up and left the country, and the cattle were roaming up and down the river.
“I took a crew of cowboys, and we spent a week on the Salt Fork of the Brazos River, in the scrub brush and the deer flies, gathering up these cattle and getting them out of there,” Baize says, adding that it all could have been prevented.
“That’s just one of those deals. We should have gone down there and looked at the country to begin with. We should have done a background check on the guy, even though I knew of him.”
He says it was the result of desperation, which he warns his customers about time and time again.
“Hasty decisions will end up costing you money,” Baize says. “I always tell people to have their pasture lease arrangement prior to buying any cattle. Human nature is to make really bad decisions when we think, ‘I have got to get these cattle on pasture somewhere right now.’” ❚
5 Ways the Bank Protects Itself
- Verify, verify, verify.
Baize says the bank must establish as best they can that a borrower owns the cattle he says he does.
“It’s happened twice in my career of 30-plus years,” Baize says. “You go out to look at a potential new customer’s cattle, and the ear tags and brands don’t match what the owner represented. They tell you a story like, ‘This place belongs to a friend of mine. He has it leased, and if the owner found out that somebody else had cattle on there, he’d lose his lease, so I put his brand on them.’
“When cattle are on pasture, we get signed statements from the debtor and his cowboys to verify numbers. When cattle are in a feedyard, we obtain verification from the feedyard office that the cattle are owned by the borrower.” - Make distributions directly to the seller of the cattle, as noted on invoices, weight tickets or other documents.
In one of TSCRA Special Ranger John Bradshaw’s recent cases, Baize says, a Perrin man rerouted funds for steers he sold through a fictitious person. This person pled guilty to federal wire fraud charges in November.
“If you’re buying cattle, or if we’re funding the purchase of cattle, it needs to be to a reputable or a recognized cattle trading company or to a livestock auction barn,” Baize says. - Inspect cattle often.
“I sent a gentleman who does inspections for me out to a potential new customer’s operation one time, and he called and said, ‘Van, you need to come see this. You’re not going to believe it.’ We go out to look, and fences are down. Equipment is in poor repair. Cattle are emaciated. Just a bad, bad situation. Yeah, he did own those 100 head of cattle he said he did, but that scene told us a whole lot about his management. We were able to avoid a possible loss.” - Require brands.
“In pasture operations, we require strict use of brands and require the debtor to register the brand,” Baize says. “This is useful even though in many states, such as Texas and Oklahoma, brand laws do not necessarily tie brands to ownership.” - Suggest hedging.
“We highly recommend our borrowers minimize their risk,” Baize says.
“Protect Yourself” is excerpted from the April 2017 issue of The Cattleman magazine.