Feeding an Investment

August 30, 2009 07:00 PM
 
As more cattle feeders bleed red ink in the current market, the idea of investing in cattle feeding may seem a bit too risky. However, that's just what a cattle investment group in Iowa has decided to do, with the idea there are still opportunities to make a return on investment (ROI) in cattle feeding.

The idea started back in 2006 when a group of farmers looked at ways to invest in cattle and help increase the number of cattle feeding operations in central Iowa. CattLink, LLC, was formed by 28 investors in March 2008 and currently has 1,200 head on feed in different feedlots around Iowa.

"Growth will be determined by our investors, but I think we have the interest to grow to 10,000 head,” says Jeff Pastoor, CattLink manager and senior cattle consultant with Land O'Lakes Beef.

"The goal of the investors is to 1) get a competitive return on their investment; 2) facilitate feedlot expansions in our area of Iowa; and 3) improve cost of gain by bringing a more disciplined approach to cattle management and marketing.

"So far, things have been going as well as they can given the current market situation,” Pastoor says. "Due to our risk management policies, we have been able to exceed our ROI goals for 2008 and through the end of May this year.”

Keith Van Waardhuizen has been a cattle feeder in Iowa for years. Sometimes he owns all the cattle in his 1,000-head feedlot in Oskaloosa, Iowa, and sometimes he partners with others. In the past few years, many farmers in his area have stopped feeding livestock.

"Like anything with livestock, not as many farmers are feeding cattle nowadays,” he says.

Environmental regulations have forced many farmers to just grow crops and avoid livestock confinement facilities. But Van Waardhuizen, like others, felt there were opportunities to make money feeding cattle in central Iowa.

Brad Rietveld, a farmer and small feedlot operator near Otley, Iowa, also found the opportunity appealing. He had already considered expanding his cattle enterprise. "[CattLink] had a good plan to start with, and I'm always interested in learning something new and different,” he says.

Wade Van Dyke, a row-crop farmer and CattLink investor near Sully, Iowa, says he looked at other opportunities to make money in agriculture but wasn't sure about the financial risk.

Van Dyke says having a manager whom you know and trust is key. "There are some examples out there of cattle investment groups that turned into frauds,” he says. By knowing the people you are doing business with up front, you can protect your investment. "There are still risks, but with this larger group, it helps limit that,” he adds. "If this opportunity hadn't presented itself, I wouldn't have invested in cattle on my own.”

Each investor was initially required to buy 10 shares at $1,000 each. "We want to control the growth of the number of shares investors can purchase so we have slow and steady growth,” Pastoor says.

As the manager, Pastoor is in charge of purchasing cattle and coordinating risk management of cattle and feed. There is a strict protocol using hedges and options to put a floor price on the cattle so the members don't lose a lot of money. Also, corn and other feeds are purchased or hedged in advance so members know the cost of feed before cattle are purchased.

Cattle go into feedyards at different times of the year, which also spreads the operation's risk. While one group of cattle may make money due to market timing, another may lose money, balancing market changes throughout the year. So far, CattLink's risk management plans have paid off and investors are growing their profit potential. BT



Solid Cattle Investments

1. Build a complete business plan.

Take time to look at the market, evaluate strategies to purchase cattle and establish risk management protocols. It took CattLink two years to investigate and determine the best strategy for the investment group.

2. Create a core group of initial investors.

Don't just look for people willing to put money into the group. Make sure they understand cattle management and marketing philosophies. A majority of CattLink investors are farmers and understand livestock production.

3. Enlist the help of outside consultants.

Nutritionists, consulting veterinarians, risk management specialists and attorneys are good resources.

4. Set goals.

Specific benchmarks will help determine if the investment is a success and improve potential for growth.

5. Structure based on abilities and strengths.

Identify a group manager to handle day-to-day decisions. This person should be someone the group trusts.

6. Communicate.

Hold regular meetings so everyone is aware of market and production changes, and send updates as needed.

7. Assess Returns and make adjustments.

8. Have a contingency plan.


To contact Kim Watson-Potts, e-mail kwatson@farmjournal.com
.

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