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EVALUATE ALL FACTORS BEFORE RETAINING OWNERSHIP OF CALVES

by: Stephen B. Blezinger
Ph.D, PAS

Cattle producers have a wide variety of management tools at their disposal. Some of these are as simple as whether or not to castrate or vaccinate at a given time. Perhaps it's the use of a certain type of feed additive or fly control method. An area that has become increasingly critical in the management of today's cow herds is marketing of the calf crop. Cattle producers often follow the same marketing and/or pricing pattern year after year. For instance every year, come rain or shine they load up their calves and take them to the local livestock auction. The dynamics of the U.S. cattle industry, however, make it necessary for cattle producers to evaluate different, relevant marketing alternatives. Even then, changes often are not made unless something unexpected and, in some cases, surprising occurs. These factors can take many forms, not the least of which is lower cattle prices. Then, there is a danger that producer reaction to the unexpected factor may result in inappropriate action which results in less profit, not more.

A buzz word that emerged in the industry a few years back is “retained ownership.” Retained ownership (holding cattle longer than would “normally” be the case or to the next one or two stages of production) is one action some producers take in response to low prices at the time they would normally sell their cattle (calves). Retained ownership practices include everything from the use of pastures and crop residues to dry lot feeding and many combinations of those alternatives. This will depend on a multitude of factors, not the least of which include your region of the country and forage and feed availability. While positive returns to retained ownership are possible; so are losses. A quick look at Table 1 will prove that point.

When deciding whether or not to retain ownership of calves, there are some major factors to consider. The focus of this article is on some of those factors. These are not necessarily presented in order of importance since what may be important to one producer may not be important to another.

Economic Considerations

For the most part, decisions to retain ownership of cattle will depend on economics as well as flexibility on the part of the producer. The extent to which producers maintain flexibility often depends upon personal resource constraints and attitudes toward change. Thus, even though in some years it may be economical to hold calves, some producers may pass on that opportunity simply because of personal preferences, tax reasons, or the perceived risks involved. Numerous factors account for making retained ownership decisions.

Producers may hold calves because of unutilized labor and facilities, available feed and pasture, tax purposes, etc. As long as profit incentives are important, probably the most important factor would be comparing estimated extra costs with extra returns (marginal analysis). Other factors constant, producers will market calves under the above alternatives if projected extra returns exceed projected extra costs; i.e., net returns would be expected to increase from some type of yearling/finishing program.

Because of market dynamics, such a decision process should account for risk and uncertainty. Risk occurs because realized values of production and marketing tend to deviate from their average or expected values; variables of concern usually include weight gain, health and death loss, feed costs, cattle prices, and final grade. Consequently, a retained ownership analysis using average (or expected) prices and costs might favor backgrounding calves, but accounting for risk, the optimum decision might be to sell at weaning.

Regional Effects on Costs/Returns

Retained ownership factors such as weaning weights, rates of gain, feed costs, and calf and yearling prices will vary across regions of the United States. This variation may be attributed to different cattle breeds and quality, calving seasons, climatic and range conditions, feed sources, and local demand and-supply conditions in livestock markets. Thus, retained ownership decisions cannot be a universal recommendation made across the board. Each region and each ranch setting is unique and therefore requires its own recommendations.

Partial budgets have been developed in many areas by Extension personnel for specific retained ownership alternatives. Producers should check with their local county agent's office for the availability of appropriate budgets.

Timing

Changing the sale date of any product will affect cash flow. If calves are not sold in November (which might be the case before retained ownership was used) but now are sold in the following year, the ability to repay loans (lenders also have an interest here and will let you know about it!), the ability to meet production and personal living expenses, and the amount and payment of taxes all can be affected. Each of these areas should be evaluated to determine both short term and long term consequences. For example, moving the sale of calves from the Fall to after January 1 could affect not only income tax and social security taxes for the current year but also for a year or two later.

Price Risk

Regardless of the industry the longer any product is held, the more price risk there is. That price risk for cattle may be related to a change in the general price level, to changes in animal quality (such as more fat), and changes related to weight. Cattle usually gain weight as they mature. Generally, heavier cattle, especially feeder cattle, receive a lower price per pound or per hundredweight (cwt) than do lighter cattle. If that price risk creates an unacceptable burden or if there is a lack of ability or unwillingness to transfer that risk to someone else by using forward prices, then retaining ownership may not be a suitable alternative. Each producer's situation is different.

Animal Performance

If a producer does not have knowledge of how his or her cattle will perform as they get older, i.e. away from the farm or ranch, retained ownership can be a disappointment. All cattle are not created equal. Some gain faster than others. Some are more efficient than others. And, some yield a more desirable end product than others. That means some cattle will be more profitable (or yield greater losses) than others. For example, returns from placing calves directly into a feedlot vary greatly depending upon the performance of the calves. Information provided in Table 2 is an example. Unless you know the performance of your cattle, retained ownership is risky.

Retaining ownership of calves can affect other enterprises. Capital and labor requirements for retained calves may be more than some producers can spare. Added inputs such as feed, medicine or equipment may be required (purchased). Or, the returns to labor may be greater elsewhere. Even leisure or vacation time may not be possible if you “have to take care of the cattle.”

In some cases, inputs which cannot be sold (or at least not for very much) can be used in a retained ownership project. However, if some inputs can be sold or if other inputs must be purchased, then those considerations must be included in the decision-making process. Keeping cattle to use surplus feed and labor could end up being very costly, especially if other inputs are purchased. Cattle should be kept to earn profits, not for other reasons. Or, if they are kept for other reasons, know that those reasons are not always “dollars and cents” in nature (or maybe dollars and sense in nature).

In some cases, producers are equipped (financially, mentally and facilities) to carry out retained ownership programs on their own farm or ranch. If retained ownership is to be “farmed out” to someone else, it is absolutely critical that all aspects are covered before activities take place. A written contract covering “all things which could go right or wrong” should be used. Research and consultation with others who have used retained ownership, both at home and away, might provide some guidelines regarding factors to consider and questions to ask.

Conclusions

There are many factors which should be considered before retaining ownership of calves. Each factor should be evaluated by each producer for each situation. Calculation of breakeven costs under different retained ownership alternatives will help the producer estimate profit potential. What worked last year for last year's cattle on the neighbor's farm or ranch may not work for you this year for this year's cattle on your farm or ranch. And, next year the process must be re-evaluated again.

Dr. Steve Blezinger is a nutritional and management consultant with an office in Sulphur Springs, TX. He can be reached at 667 CR 4711 Sulphur Springs, TX 75482, by phone at (903) 885-7992 or by e-mail at sblez@peoplescom.net.

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