Retained Ownership: Now is a Good Time to Gain more Value

August 30, 2010 05:30 AM
 

Bonus Content:
Is retained Ownership for You?

Click here to access an online worksheet from the University of Mirrouri that evaluates the cost of retained ownership vs. selling calves at weaning.

Selecting a Place to Feed Cattle There are other considerations that you need to keep in mind when choosing a place to feed cattle.

1. Animal health program
2. Feeding performance
3. Marketing program
4. Climate
5. Geographic location
6. Finance options

Communication with the feedyard is critical throughout the process. Make sure the feedyard you select is participating in the health and breed programs that you want. You can find a list of participating feeders from the appropriate breed association or source verified programs.

Also the Texas Cattle Feeders offers a guide to retained ownership on their Website. You can access it here.

Match the smallest cowherd on record with an upswing in beef demand, and the stage is set for higher cattle prices across the board.

“Beef cow numbers have been declining since 2006 due to the high price of feed and terrible losses in cattle feeding in 2008 and 2009,” says Purdue economist Chris Hurt. “Beef cow producers are retaining 2% fewer heifers for replacements and that means the cowherd will be dropping even more. The earliest we could see an increase in cow numbers is mid-2011, but that won’t give us more beef in the marketplace until near 2013. That means at least three to five years of small beef supplies.”

That is helping to boost projected prices for all segments of the cattle industry in the coming years.

According to CattleFax, a member-owned information organization serving producers in all segments of the cattle business, cattle prices are projected to reach record levels by 2012 for calf, feeder and fed cattle.

That means there are opportunities for cattle producers who continue to control costs, implement risk management strategies and evaluate marketing opportunities. One of those marketing opportunities is retaining ownership, which means you wean calves, place them on feed and market at slaughter. The intended advantage is to feed calves at a lower cost and reap a higher profit margin.

“At our feedyard, we typically have 25% that are retained by owners,” says Bo Kizziar, feedlot manager of Hansford County Feeders in Spearman, Texas. “I’ve been managing feedyards for 25 years, and the number of cattle placed through retained ownership ebbs and flows depending on what calves and feeders are worth. As that margin gets tighter, the squeeze goes up.”

 

Is now the time? Retaining ownership on cattle is not for the faint of heart. Volatility in feed grains as well as cattle prices can send you on a roller coaster. But the coming years make it look like it might be worth it.

“Retained ownership makes sense with cost of gain well below the price of fed cattle. Every pound a producer puts on should be profitable since you are extending ownership into a potentially higher market,” says Randy Blach of CattleFax. Risk management will still be an important factor.

In addition to market outlook, you need to take into consideration your financing, availability of feed and whether you qualify for value-added programs.

Financing options. If you cannot afford to hold onto calves and need the cash flow to pay off loans or other expenses, retained ownership may not be an option. In that case, you may need to sell at weaning.

Interest rates are low, however, which favors retained ownership—although interest rates may not be low for everyone, Hurt says. “Some cow–calf operators have money sitting in CDs, so their lost interest if they retain ownership may be only about 1% per year [for a six-month to one-year CD rate].

“Others that have to borrow from their lender may have rates that are more like 6% a year. Just that 5% difference in interest rates can be a $3 per live hundredweight or more difference on the final cost of finished cattle,” Hurt says. If you do have to borrow money, expect lenders to take a very cautious approach to feeding cattle, he adds.

“Cattle feeding returns have a very volatile track record, and lenders are not interested in increasing their risk of loss on loans unless equity [often land] can be pledged,” Hurt says.

Feedyards also offer financing options. Sometimes agreements can be made for full financing or partial financing. Feedyards may also be willing to offer a percentage ownership to help you with cash flow while cattle are on feed. This is something to check into when shopping for a feedyard to place cattle.

Feed availability. Feed is always a consideration. “Generally, the wet summer in the Midwest and Plains has made for an abundance of forage, and some of that is low-quality due to too much rain in June and July,” Hurt says. But that quality should not be as big of a factor for beef cattle compared with dairy cattle.

“The U.S. should have reasonable corn supplies, fully adequate soybean meal and abundant wheat supplies,” he adds. “However, the feed markets are very nervous in early August, with the drought in Russia and parts of eastern Europe and the potential for reduced yields in western Europe.

“The concern is that the U.S. will see stronger exports of grains and oilseeds that will leave less for domestic uses,” Hurt says. “Feed buyers are very nervous, including those retaining cattle ownership. Generally, the strategy would be to have feed supplies in place, or at least established in the cash or futures market.”

If you are placing cattle in a feedyard, ask about its strategies for purchasing feed to keep cost as low as possible.

Value-added programs. The more genetics and health considerations you put into your calves, the more value there is in retained ownership. If you specifically raise cattle for an age-verified, certified natural, organic or breed-specific program, it may benefit you to hold onto the ownership as well.

“If you know you have cattle that fit a particular market, you’re more likely to retain ownership,” Kizziar says. “With the naturals, non-hormone and age-verified programs, that is adding value at each level. There’s more opportunity to gain that value by holding onto ownership of it.” BT

FJ BT7 B10041

 

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