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THERE ARE MAJOR FACTORS TO CONSIDER BEFORE DECIDING TO RETAIN OWNERSHIP

by: Stephen B. Blezinger
Ph.D, PAS

In today's beef industry where grid pricing is rapidly becoming the norm and the value of cattle is directly related to carcass characteristics, many breeders are finding an important and valuable niche. Every breed is scrambling to determine how their cattle perform in finishing situations since this is where the lion's share of cattle are marketed annually. Subsequently, how cattle perform in the feedyard and at the packing house is now having a direct effect on the value and pricing of feeder cattle as well as on commercial breeding females. Similarly, this affects the value of bulls as sires for the calf crop. The trickle-down effect is alive and well although it may be developing into a gush and not a trickle. Use of feeding and carcass data is valuable to purebred breeders as they strive to be competitive in the beef industry marketplace. With dozens of breeds and combinations of breeds and countless seedstock operations from which the commercial cattleman can select bulls and replacement heifers a purebred producer HAS to have something that will differentiate him from the rest of the crowd. Generating performance and carcass data from his or her specific herd is one of the ways this can be accomplished and utilized some practices which have not been overly common to the purebred cattle producer.

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. For instance, if a producer normally sells a calf crop at weaning but elects to hold onto them through a grazing/growing period, this is referred to as retained ownership) is one action some producers (largely commercial) take in response to low prices at the time they would normally sell their cattle (calves). Other possibilities are if the producer sees an opportunity to improve his profitability by growing the cattle out to a larger weight or until finishing by feeding in a feedyard. 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.

Retained ownership in a purebred setting takes a somewhat different form. For commercial producers retaining ownership of these cattle into a grazing or feeding phase, helps them improve their opportunities for profitability and in general increases the net profit per head. Purebred breeders can use retained ownership as an outlet for those cattle in their herd which do not meet the standards they hold as replacement breeding animals and can help improve the profitability of these animals in the correct circumstances. It is fairly common for a breeder to cull a certain percentage of their calf crop which does not meet their needs in terms of breed type, body conformation, growth or gains, weaning weights, yearling weights, etc. This depends totally on the individual breeder's selection criteria. Most purebred breeders will have a selection process or set of criteria they use which, ultimately results in calves that must be marketed via another route. Commonly this has been through the local livestock sale facility.

When a breeder is 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 retain calves because of unutilized labor and facilities, available feed and pasture, tax purposes, etc. As long as profit incentives are important, 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 (another name for retaining ownership through the preconditioning and grazing phase) calves, but accounting for risk, the optimum decision might be to sell at weaning.

Other economic issues come into play with purebred breeders as they develop sets of heifers or bulls as replacement animals. Few breeders cull all animals from these groups at the same time, in many cases there may be two or more cull “dates” or points in the production of these cattle where the producer decides to remove the bottom “X” percent because they do not meet required criteria. If another group of retained animals is still on the farm/ranch, these newly culled cattle can go in with the retained animals for future marketing.

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 1 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.

More Performance

One of the biggest benefits retained ownership can bring to the breeder is that of feeding data – how the bloodlines in a particular herd perform on feed (gains, feed efficiency and carcass characteristics). By collecting and using this data the breeder can rethink selection and build a marketing program based on the performance he sees from his own cattle.

Research data is supportive of the performance that many breeders have observed. Ongoing work by the Roman L. Hruska U. S. Meat Animal Research Center (MARC) in the Germplasm Evaluation Program has been comparing breeds of cattle. Breed differences in performance characteristics are an important genetic resource for improving efficiency of beef production. Cundiff, et al, found that of all the breeds evaluated (25 total), certain breeds of cattle routinely performed on the upper end of the performance scale.

When carcass data was evaluated workers found the following (Table 2) as compared to other similar European breed types. This is only a portion of the breeds evaluated for carcass characteristics:

It should be noted that all breeds showed a fairly low percentage of cattle grading Choice. This can be correlated with the final weights of the cattle being lower than what we have found to be optimal in the feeding industry. Typical final weights now are regularly in the 1200 to 1300 range. When fed to somewhat higher final weights, the percentage of cattle grading choice increases dramatically.     

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.

Implementing practices such as retained ownership and evaluation of finished cattle performance both on the hoof and on the rail is an important step in the process of becoming more profitable and more competitive in today's beef industry.     

Dr. Steve Blezinger is a nutritional and management consultant with an office in Sulphur Springs, Texas. He can be reached at P. O. Box 653 Sulphur Springs, TX 75483, by phone at (903) 885-7992 or by e-mail at sblez@direcway.com.

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