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RETAINING OWNERSHIP THROUGH FEEDLOT IS A VIABLE OPTION

by: Stephen B. Blezinger
Ph.D, PAS

Part 1

Cattle feeding has been around a long time. Since the early 60's, cattlemen have discovered that intensive feeding to grow and finish steers and heifers was an economical means of producing beef. Even though this practice has been around for many years and millions of head are fed for slaughter each year, a great deal of mystique still seems to surround this portion of the cattle industry. Many cow/calf producer's eyes begin to glaze over when we start discussing feed efficiency, cost of gain, hospital pens, starch gelatinization, bunk management, hedging, puts, options, grids and all the other buzz words we commonly use in the cattle feeding industry.

Cattle feeding is, in fact, an intensive management system and when we consider the large commercial feedyards and the economies of scale of a yard feeding 50,000 head per year can be intimidating. Consider this: if a feedyard with a 50,000 head capacity operates year-round at an average occupancy of 80 percent and turns the cattle over at least twice per year, they will feed 80,000 head in a 365 day period. If over that period these cattle average 3.0 lbs of gain per head per day, that means that the total gain produced in that yard is 43,800,000 lbs of beef. If the average feed conversion for this production is 7.0 lbs of feed per lb. of gain, then this feedyard will manufacture 306,600,000 lbs of feed per year or an average of 840,000 lbs per day. If you change the cost of gain, either up or down for the entire year's production of beef by $.01 per lb. the cost or return will be $438,000.00 for this time period. As you can see we are talking substantial numbers and that small differences can mean huge changes in profits or losses.

Feedlots and cattle feeding programs are used by various producers in a number of different ways. These can include:

• Cow/calf producers that want another option for marketing their calf crop. They retain ownership through weaning, growing and the finishing phases.

• Cattle feeders who do not own cow herds but buy cattle after weaning and either ship these purchased cattle first to grass for growing (or possibly to a backgrounding/preconditioning facility) and then on to the feedyard.

• Cattle feeders who purchase cattle to go directly into the feedlot as part of their overall cattle production program.

• Investors who may no little or nothing about the actual production of cattle but who work with a feedyard to purchase and feed cattle. These folks may never even see the cattle they own. This used to be very popular when the tax incentives were greater.

• Packers who want to insure the ownership of at least part of their supply.

• Marketing alliances designed to produce a specific quality of beef and that negotiate particular pricing grids with packers for enhanced profitability.

• Any combination of the above or some not listed.

As you can see the utilization and application of the cattle feeding segment of the industry are widespread.

Feeding cattle does not have to be complicated but does require that you understand mechanics. Let's take a few minutes and discuss the basics of cattle feeding.

Why Should I Consider Feeding Cattle?

As we mentioned above, many producers utilize the cattle feeding industry as another marketing option. They can also use this as a tool to improve overall profitability of their overall operation. The thing that must be considered is that retaining ownership and feeding out your calf crop is not for everyone nor is it something you should always do.

Some questions a producer should ask include:

1) I know that by retaining ownership my cash flow on this particular group of calves will be delayed 6 months or more. Can my operation tolerate this delay? Will my banker work with me to extend my note repayment, what financing options exist at the feedyard?

2) I know there is some risk involved. How much risk can I afford? What can I do to reduce this risk?

3) What can I get for my cattle if I sell them at weaning and what will my profit be as compared to the profit I could potentially generate by feeding these cattle.

4) Unless I have a feedlot that I can work with just down the road I know I will have to ship my cattle to a yard by truck. For this to be the most cost effective I need a truckload of cattle (48,000 to 50,000 lbs or about 82 head of 600 lb. cattle). Do I have that many? If not can I afford to buy a few extra head to finish out the load.

5) What are the current markets for weaned (feeder cattle), finished or fat cattle at the approximate time they will come out, and corn and other ingredients?

The number one issue that drives a decision to feed cattle is typically finances and risk. If your cow/calf operation is operating to a large degree on borrowed money you will have note payments to make and this may be highly dependent on when your calf crop is marketed. You have some options here. Go talk to your banker and see if he will be willing to work with you on feeding your calf crop. He may extend your note to allow for a longer time to repayment or provide other options. If the cattle are not financed and you have adequate cash reserves to cover production costs until the cattle come out of the feedyard and you are paid then this is not an issue.

Another option that exists is that many feedyards offer financing options that you might utilize. These can include:

• Financing the cattle for you. The yard (or more accurately, their bank) may loan you a certain amount against the value of the cattle for which you would give them the first lien. Typically they my loan you 70 to 80% of the current value of the cattle with your retaining the other 20 to 30% of the equity. Some yards may loan you the value of the cattle minus a flat equity figure like $100.00 per head. In many cases the yards may be fairly liberal in the valuation on your cattle but you are better off by taking a value that is lower than the market as opposed to higher. This simply helps insure that you have enough value in the cattle at the end of the feeding period so the note can be paid once the cattle are sold to the packer. The last thing you want is to come to the end of the feeding period and you end up owing money on the cattle. By loaning you this money against your cattle you have immediate access to some money to cover immediate operating expenses at your operation or to pay of notes with your local lending institution. Obviously in this situation you are still incurring interest expense at whatever the lending rate will be.

• Partnering with you on the cattle. Many yards will purchase a percentage of your cattle (i.e. 50 percent). Once again, you retain a portion of the ownership (a higher portion in this case). This method does not incur additional expense on the cattle. It also provides you with some immediate cash flow based on the current value of the cattle and can be a relatively low risk method to get your feet wet in this process.

You also to have to consider how the feed and other expenses will be paid. Most yards will finance 100 percent of these expenses as they are incurred. You can pay these expenses as you go, the yard will generate a monthly statement detailing all the expenses incurred for the previous 30 days. These expenses will include feed cost, hay (normally this is only during the starting period or if cattle are in the sick pen), processing expenses such as tags, vaccines, implants, chute charges, etc. This is variable from yard to yard. Other expenses may include yardage fees, insurance, medications for the treatment of sick animals, vet expenses and so on. If you use some type of risk management such as futures or options, there may be a cost to cover there as well depending on which method you utilize. If you pay these expenses as you go, you will avoid the extra interest cost. Otherwise, the yard will keep these expenses on account for you, charging interest against these expenses and deduct the all the final expenses and interest at the end of the feeding period from the total amount paid by the packer for the cattle.

How Do I Go About Choosing a Yard?

There are literally hundreds if not thousands of feedyards, most of them located through the plains states including Texas, Oklahoma, New Mexico, Kansas, Nebraska, Colorado and Iowa. These can range from a very small yard of only a few hundred head to mega facilities of 100,000 or more. Things you should consider in choosing a feedyard:

1) First you need to determine what type of yard are you the most comfortable with – large, intermediate, small.

2) Next, visit with the manager. Talk to him about his feedyard and his thoughts on cattle feeding in general.

3) Ask him what his employee to occupancy ratio is. How many people are actually working out in the yard in cattle feeding and care.

4) Determine what type of ration they are feeding and what typical costs of gain may run.

5) Ask him about “close outs,” or total feeding costs for the last year or so.

6) Ask about morbidity and mortality (sickness and deathloss) rates in the yard both just after receiving and over all averages.

7) Ask about yard philosophy on risk management and if you are not well versed in this concept, will they help you understand and use this tool.

8) Ask what packers they sell to, what the typical shrink taken on fat cattle is, how far away the packers are and what the shipping cost will be.

9) Ask how cattle are marketed. Is it done live, on the grid, forward contracted, etc.

10) Ask if they have a preference on the type and weight of cattle they like to feed. What types of cattle have they had the best success with?     

11) Talk to several yards and compare your responses. If you call a yard and the manager is too busy to spend time with you then call someone else. You are looking at a sizeable investment and you want someone who is concerned about you and about your investment.

12) If you can, go out and visit some feedyards. If you've never been to one you will be impressed. Look at their house keeping, condition of equipment, pens, buildings, etc. This indicates how detail oriented they are. Details are everything in a feedyard. Look at the sick pens and hospital facilities. What kind of job are they doing in caring for sick cattle?

13) Ask who their consulting veterinarian and nutritionist are and why they use these particular individuals.

14) Finally, ask for references and be sure to follow up with these folks.

15) Call the state cattle feeding association (i.e. Texas Cattle Feeders Association, etc.) to determine if the yard has had any problems in the past.

These are just some of the questions you should ask. You will probably have plenty others but your best bet is to talk with a number of yards to get a good feel for their operation and management.

In part two of this series we'll talk about some of the mechanics of cattle feeding and some things a producer can do to effectively use this tool.

Dr. Steve Blezinger is and nutritional and management consultant with an office in Sulphur Springs Texas. He can be reached at Route 4 Box 89 Sulphur Springs, TX 75482, by phone at (903) 885-7992 or by e-mail at sblez@peoplescom.net.

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