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Retain ownership: Gold?

04/05/2011 @ 9:56am

For years, you've been preached at about retaining ownership of your calf crop through the feedlot-finishing phase because it will garner more profit as you cut out the middleman. It also lets you take additional advantage of your genetics and herd health. But will it?

Maybe not, says Barry Dunn, dean at the college of agriculture at South Dakota State University and former director of the King Ranch Institute for Ranch Management in Texas. One of the final things he did while at the 25,000-cow ranch last year was study the effects of retained ownership.

Why it doesn't work

Rather than sell feeder calves in the fall or winter, experts often tell producers to own them through the feedlot phase, either at home or in a custom lot.

“We've promoted it as sort of the gold standard for how to improve profitability,” Dunn says. “But in fact, less than 20% of cow-calf producers actually retain ownership that way, and the number appears to be falling every year.”

Dunn compiled six reasons retained ownership doesn't work as well in practice as it might appear in theory:

1. Debt usually increases because cattle are owned longer and fed more.

2. Cash flow problems mount while calves are in the feedlot.

3. Other opportunities might be lost since money is tied up in ownership, feed, and yardage.

4. Calf sales are not spread out over several weeks or even months as markets and feed supplies dictate, which means a loss in flexibility.

5. Control over cattle shifts to someone else, typically the feedlot manager, who is responsible if cattle don't perform or get sold at the wrong time. So there is loss of control over cattle.

6. Risk is increased because cattle are owned longer and more money is on the line over more time.

Dunn and some of his colleagues decided to analyze long-term records (2001 to 2008) from that operation to see if it would have paid off to retain ownership. Their standard approach is to sell calves from the cowherd after weaning and backgrounding. But what if they had retained ownership through their own feedlot?

To get the answer, they had to make some assumptions about average costs for finishing the calves. They have good estimates on those numbers because they actually run a feedlot on the ranch. The results of their comparison are shown in the table below.

The bottom line is in this eight-year period for this ranch, the status quo program (selling weaned calves) far outperformed the retained ownership estimates ($300 per head vs. $8 per head). Selling weaned calves was never a money loser, while retaining ownership did lose money in three of the eight years.

“In this study, retained ownership removed the opportunity for arbitrage (buying and selling the same commodity in the same market) and asset turnover ratio (how many times a business markets within a year),” says Dunn. “We offer this not as a recipe to follow but as an example to study and consider.”

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