Dr. Carla Sanford, Beef Cattle Extension Specialist
If Only We Had A Crystal Ball- Retained Ownership
It’s safe to say that we had no way of knowing that 2020 would be the year that has been presented to us. However, ranchers are experienced in being adaptable, be it to adverse weather, volatile markets, or animal health concerns. While fall shipping seems far away it is just around the corner, which means it is never too soon to plan calf weaning and consider marketing options. With so many unknowns between weather conditions and future markets, what options are there when the going gets tough? Producers have a multitude of options available and depending on the year it may be necessary to alter the tried and true marketing method and pricing pattern.
One option that ranchers can employ is retained ownership, essentially holding calves longer than we would in past years. The length of time to retain ownership depends on the producer, the cattle, the market, and the year. This ability to hold cattle during times of low prices and sell at more opportune times can drastically impact ranch profitability. Retained ownership allows the rancher to more fully capture the genetic potential of the cattle rather than allowing the next phase owner into the stocker or from stocker to feedlot phase of production to receive the value-added profits. In addition to receiving a return for value-added management, the producer also gains information on how those cattle perform in the next phase of production. While positive returns are possible through retained ownership, so are losses. Are you in a position to practice retained ownership? The important aspect to note is that retained ownership should be considered year-to-year, and what might work for the neighboring ranch may not work for you this year. Additionally, what is the current operation cash flow status and have the potential tax implications of retaining ownership been considered? While there is added flexibility of retained ownership by which a rancher can plan for future taxable income and tax liabilities, it is best to discuss these options with the ranch financial advisor. Retaining ownership results in shifting the year of sale, delayed income and will also require more capital. There is the old saying that “it takes money to make money”. Retained ownership also requires increased management and decision-making to properly capture the available capital. While many other states around the U.S. have smaller operations, Montana producers with larger herds, or the ability to market with other ranches through partnerships or cooperatives, and uniform calf crops can fill a pen at most commercial feedyards. In order to capture future profit it is imperative to know the ranch production costs at every phase to capture future profit and develop a strategic plan for the potential scenarios. For example, what is the typical weaning weight, calf prices, and cost, or value, of gain for your ranch? Cost of gain is the cost per head of cattle at the conclusion of sale less the cost of the cattle at the beginning of the phase divided by the weight gain (Equation 1). If the projected calf prices are below the likely cost of gain and increase in management for production, then retained ownership will not be viable in this year. Cost of gain is fluid from year-to-year and ranch-to-ranch based on market seasonality and the resources available.
A breakeven (Equation 2) analysis and knowing which and how many cattle will be retained should be included in the primary considerations of retaining ownership. While small pens at most feedlots are designed for 100 head capacity, there is the option to either work with a custom feedlot or combine with another producer. The costs associated with retained ownership can vary from feeding operation-to-feeding operation, but some factors to consider include: freight costs, feedlot costs, feed, yardage, animal health costs, death loss, and miscellaneous costs (processing, insurance, taxes, and the Beef Check-off). When searching for the right feedlot or custom feeding operation, word-of-mouth goes a long way and the proof is in the profits. Those ranchers that stand to benefit the most from retained ownership are those that are current managing for proper animal health, superior genetics, and have the ability to precondition and even background the cattle prior to delivery to the feeder.
If you are custom feeder and would like to be placed on the MSU Extension Beef Cattle Program online resource directory or a producer wanting to learn more about marketing options, please email me at firstname.lastname@example.org.
Equation 1. Calculating Cost of Gain =
Feed cost + Interest on feed + Yardage + Health + Processing + Death loss
Equation 2. Calculating Breakeven =
(Initial animal cost + Interest on cattle + Feed cost +
Interest on feed + Yardage + Health + Processing + Death loss)