august 1986 - north dakota state librarylibrary.nd.gov/statedocs/ndsu/aer21320101206.pdfcow-calf...

Agricultural Economics Report No. 213

SB205. S7N64no.213

Ii·I se I II · · · ~_ILII

Retained Ownership -Production and

Marketing Alternativesfor Cow-Calf Producers

Randall D. Little, David L. Watt, and Timothy A. Petry

Department of Agricultural EconomicsAgricultural Experiment StationNorth Dakota State University

Fargo, North Dakota 58105

August 1986

I

Preface

Research for this report was conducted under North Dakota AgriculturalExperiment Station Research Project No. 1376. This report, which contains anextensive look at the profitability of retaining ownership, is an extension of"Comparing the Profitability of Beef Production Enterprises in North Dakota,"Agricultural Economics Report 210.

The authors would like to thank Brenda Ekstrom and Roger Johnson of theDepartment of Agricultural Economics; Harlan Hughes, livestock economist,Cooperative Extension Service, NDSU; LaDon Johnson and Russell Danielson ofthe Department of Animal and Range Sciences; and Olin Cox of Juhl's Nutritionand Management Services for their helpful suggestions, ideas, and commentsthroughout the development and review of this study. The authors would alsolike to thank the following for their cooperation and the information theyprovided:

Brookover Cattle Company, Inc.Hendricksbn Land and Cattle CompanyHertz-de Baca Cattle Management CompanyJuhl's Nutrition and Management Services, Inc.Onida Feeders, Inc.

Special thanks are due to Jody Peper for her diligence in typing themanuscript and to Carol VavRosky for the quality figures she provided.

Table of Contents

Page

List of Tables .. . . . . . .

List of Figures .. . . ...

Highlights . . . . . . . . . .

Description of the Situation .

Risk .. . . . . . .. .. . .

Costs of Production. ....The Cow-Calf Operation . . .Backgrounding and WinteringWintering and Pasturing . .Custom Feeding . . .....

Livestock Prices .. . . . ..

Methodology . .. . .....

Results . . . . . . . . . . .

The Decision to Custom FeedSelecting a Custom Feedlot .Systems of Payment .. . . .The Contract Arrangement . .

Summary and Conclusions . . .

Appendix A . . . . . . . . . .

Appendix B .. . . . . . . . .

Appendix C .. . . . . . ...

Appendix D . .. . . . . . .

References ..........

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34445

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13131718

19

21

33

39

43

51

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Table

1 TOTAL ESTIMATED ADJUSTED PRODUCTION COSTS PER COW OF THE COW-CALFOPERATION AND COW-CALF OPERATION WITH THE RETAINED OWNERSHIPALTERNATIVES IN NORTH DAKOTA, BY CALF CROP, 1958-1983 .... . .

2 ESTIMATED PROFIT PER COW OF THE COW-CALF OPERATION AND COW-CALFOPERATION WITH THE RETAINED OWNERSHIP ALTERNATIVES IN NORTH DAKOTA,BY CALF CROP, 1958-1983 .. . . . . . . . . . ..........

3 SUMMARY OF RESULTS FOR THE COW-CALF AND COW-CALF WITH THE RETAINEDOWNERSHIP ALTERNATIVES ..........

List of Figures

Figure

1 Estimated Profitability per Cow on the Cow-Calf and Cow-Calf andand Backgrounding Operations in North Dakota, 1958 to 1984 . . .

2 Estimated Profitability per Cow on the Cow-calf and Cow-Calf,Wintering, and Pasturing Operations in North Dakota, 1958 to 1984

3 Estimated Profitability per Cow on the Cow-Calf and Cow-Calf andCustom Feeding Weaned Calves Operations in North Dakota, 1958 to1984 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4 Estimated Profitability per Cow on the Cow-Calf and Cow-Calf, andBackgrounding, and Custom Feeding Operations in North Dakota, 1958to 1984 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

List of Tables

Page

8

10

12

Page

14

. 14

15

15

5 Estimated Profitability per Cow on the Cow-Calf and Cow-Calf, andWintering, Pasturing, and Custom Feeding Operations in NorthDakota, 1958 to 1984 . ............... . .. .. .. . 16

iiio o

*

Highlights

Cow-calf producers, because of their position in the beef productionprocess, are especially vulnerable to the price extremes that characterize thecattle cycle. They receive a culmination of losses that occur as lowerslaughter and feeder cattle prices and feeding losses are passed through thesystem. In light of this, cow-calf producers need to evaluate marketingalternatives to selling weaned calves.

The objective of this study is to estimate the profitability of severaloptions of retained ownership, including custom feeding. Cost of productionbudgets were constructed at 1984 price levels for a typical cow-calf operationin North Dakota and for the retained ownership alternatives considered. Thecost components of these budgets were adjusted back over time using indices ofprices paid by farmers. Total production costs were divided by expectedoutput to estimate break-even prices. Estimated profitability per cow wasderived by subtracting the break-even price from the market price andmultiplying by expected output.

Producers can usually increase profit per cow by retaining ownership ofcalves. There were several years, however, when selling weaned calves was themost profitable alternative. While retaining ownership reduced price riskrelative to the cow-calf operation, the alternatives considered were stillexposed to significant price risk. Availability of sufficient additionalcapital and the increased managerial requirements are important factors toconsider when deciding to custom feed.

v

RETAINED OWNERSHIP - PRODUCTION AND MARKETINGALTERNATIVES FOR COW-CALF PRODUCERS

Randall D. Little, David L. Watt, and Timothy A. Petry*

The cattle cycle, with its fluctuations in inventory and prices,imposes a unique set of risks on beef production. Cow-calf producers, becauseof their position in the beef production process, are especially vulnerable tothe price extremes that characterize the cattle cycle. Slaughter plant andfeedlot operations are capable, to some extent, of passing some of theirlosses along in the system. Their decisions to buy and at what price arebased on anticipated market conditions at the expected time of sale. Forexample, if a feedlot operator expects a difficult period in the future, hisbid price for feeder cattle will be adjusted accordingly. He also has theoption to operate at less than full capacity or to discontinue feeding. Thecumulative effect of feedlot managers' decisions heavily influences demand forweaned calves. Cow-calf operators often have little choice but to acceptlower prices. Thus, cow-calf operators receive a culmination of losses thatoccur as lower slaughter and feeder cattle prices and feeding losses arepassed through the system (Hasbargen et al. 1983).

Cow-calf operators need to evaluate marketing alternatives to sellingweaned calves. The objective of this study is to estimate the potentialbenefits of vertical integration by cow-calf producers. A historical approachis used involving annual calf crops from 1958 to 1983. Vertical integration,defined as the combination and coordination of successive production and/ormarketing stages within one firm (Cramer and Jenson 1979), providesalternatives to the traditional marketing plan of selling weaned calves in thefall. The vertical integration alternatives examined in this study involveretaining ownership of calves beyond weaning for sale as light or heavyyearlings or slaughter cattle. Retaining ownership enables producers to delaymarketing during periods of depressed feeder cattle prices. Tax implicationsof retaining ownership are not considered in this study.

Retaining ownership should reduce the total cost of gain for thecow-calf producer. Studies have shown that cow-calf operations selling weanedcalves are less profitable than operations that retain ownership (Ford et al.1985; Lambert and Sands 1984; and Whitley and O'Connor 1981). Lambert andSands (1984) concluded that retained ownership through slaughter wasprofitable in six of the nine years studied, while selling the same calves atweaning would have been profitable in only three years. They also concludedthat because seasonal price tendencies for calves and fed cattle generallyfavor retained ownership, the cattle feeder can improve his odds of bothavoiding seasonally low calf prices and achieving seasonally high fed cattleprices. Ford et al. (1985) concluded that live weight marketed andprofitability were increased when ownership of the animal was maintained andthat retained ownership through the feedlot finishing phase produced thehighest profitability of the strategies studied.

*Little is a research assistant, Watt is assistant professor, and Petry isassociate professor, Department of Agricultural Economics, North Dakota StateUniversity, Fargo.

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Custom feeding is defined in this study as maintaining ownership ofcattle and the right to major management decisions concerning those cattlewhich have been physically relocated to another's lot for growing and/orfinishing where daily supervision is the responsibility of a second party.Producers who custom feed are paying for the feeding services and expertise ofthe feedlot operator.

The profitability of the following production alternatives will beestimated and evaluated:

1. Cow-calf;2. Cow-calf and backgrounding;3. Cow-calf and wintering;4. Cow-calf, wintering, and pasturing;5. Cow-calf and custom backgrounding;6. Cow-calf and custom feeding a weaned calf;7. Cow-calf, backgrounding, and custom feeding;8. Cow-calf, wintering, and custom feeding; and9. Cow-calf, wintering, pasturing, and custom feeding.

Description of the Situation

Beef production is a vital part of the agricultural industry in NorthDakota. The sale of cattle and calves is a major source of cash farmreceipts, ranking second to wheat in 1983. Receipts for the sale of cattle andcalves accounted for 17 percent of total cash receipts for all crop andlivestock products and 69 percent of total cash receipts for all livestockproducts in 1983 (North Dakota Agricultural Statistics 1985).

The cow-calf enterprise is the major beef enterprise in North Dakota.Beef cows constituted about 91 percent of the total cow herd in North Dakotaat the beginning of 1985 (North Dakota Agricultural Statistics 1985).According to the Census of Agriculture, the average-sized beef cow herd inNorth Dakota had 77 cows. About 44 percent of the farms and ranches with beefcows had between 50 and 200 head.

Virtually all calves produced in the state are either sold at weaning;backgrounded and sold in the spring; or wintered, pastured, and sold the nextfall. The number of calves sold at weaning or held for further feeding iscontingent primarily upon feed availability. A greater proportion of the calfcrop is fed beyond weaning in years of ample moisture when feed supplies areadequate. But in years when feed is inadequate, more calves are sold in thefall at weaning. Feeder calves sold in North Dakota are generally shipped outof state for finishing. Very few calves are fed to slaughter weight in NorthDakota.

Risk

Risk and uncertainty are interchangeable terms used to describe anaction selected by a decisionmaker that has alternative outcomes (Boehlje andEidman 1984). The risks farmers face can be divided into two broad types,business and financial.

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Business risk is defined as the inherent uncertainty in the firmindependent of the way it is financed. The major sources of business risk areprice and production risk. Price or market risk, which is the source of riskconsidered in this study, is the result of factors that lead to unpredictableshifts in supply and demand of inputs and products. Seasonal, cyclical, andtrend natures of prices are predictable to some extent, but the inability toaccurately predict prices and price movements is the source of priceuncertainty. Many government actions concerning trade agreements, embargoes,and fiscal and monetary policy contribute to price variation. Productionrisk, the second source of business risk, is the result of factors affectingthe production level that are beyond the manager's control, such as weather,disease, insect damage, and changes in governmental regulations. Productionis reflected in variability in yields per acre, weaning weights, rate of gain,and other variables used to measure the amount of physical production (Boehljeand Eidman 1984).

Financial risk is defined as the added variability of net returns toowner's equity that results from the financial obligation associated with debtfinancing (Boehlje and Eidman 1984). Financial risk also includes uncertainloan availability and fluctuating interest rates, which reflect the price ofdebt capital. It deals primarily with the firm's ability to meet long-runclaims and increases as leverage increases (Barry, Hopkins, and Baker 1979).Leverage, which is measured by the ratio of debt to equity, multiplies thepotential financial return or loss that will be generated with differentproduction and price levels.

Costs of Production

Budgets reflecting the costs of production of several beef cattleenterprises typical to North Dakota and the custom feeding options wereconstructed at 1984 price levels (Appendix A). The budgets included acow-calf operation; backgrounding, wintering, and pasturing steers andheifers; custom backgrounding steers and heifers; and custom feeding weaned,backgrounded, wintered, and wintered and pastured steers and heifers.

The approach used to construct these budgets is based on the"opportunity cost" (returns foregone in the best alternative use) of resourcesemployed. When using the opportunity cost method, inputs are valued usingcurrent market prices, rather than what may have actually been paid for theinputs. Examples of resources that are valued differently using theopportunity cost method include feed, which may be cheaper when produced onthe farm than if purchased; operator and family labor, which generally remainsunpaid; pasture rent, which is unpaid for owned land; and interest expenses,which would not be paid when inputs were paid for at the time of purchase(Johnson et al. 1986).

There is much variation in production costs among producers.Differences occur due to production practices, managerial ability, and sizeand type of machinery employed. This variability means that the costsindividual producers incur (and consequently their profitability) may varyconsiderably from the estimate of average costs presented. Conclusionsreached, therefore, do not apply to producers with costs significantly

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different from the average. However, the trends indicated should provide ageneral idea of the profitability of the cattle enterprises considered overtime.

The Cow-Calf Operation

The cow-calf production costs were based on an average-sized springcalving operation.1 The operation weaned calves from 90 percent of the cowsand heifers assumed bred. It was assumed that cow-calf operators replaced 16percent of brood cows annually. To allow for this they retained 18 percent oftheir calves, all heifers, from which replacements were chosen. Cull cows andcull replacement heifers weighed 1,000 and 750 Ibs., respectively. Weanedsteers and heifers weighed 425 and 400 Ibs., respectively. There were 45percent of a steer (half of the 90 percent calf crop) and 27 percent of aheifer (half of the 90 percent calf crop minus the 18 percent retention rate)sold per cow each year.

Backgrounding and Wintering

Backgrounding and wintering are winter feeding programs common in NorthDakota. Backgrounding emphasizes a higher rate of gain that requires feedinga high protein and energy ration. Calves enter the backgrounding programafter weaning in the fall and are sold or custom fed in the spring. Programlength was assumed to be 150 days. Steers entered the backgrounding programat 425 Ibs. and were fed to a market weight of 675 Ibs. Heifers entered theprogram at 400 Ibs. and were marketed at 625 Ibs. The average daily gains forsteers and heifers were 1.7 and 1.5 Ibs., respectively.

The wintering program involves low weight gains and an inexpensive,high roughage diet. Calves enter the wintering program in the fall and aretypically either sold or pastured in the spring. Program length was assumedto be 150 days. Steers weighed 425 Ibs. and heifers weighed 400 Ibs. whenentering the program and 675 Ibs. and 535 Ibs., respectively, at the end.Average daily gains for wintered steers and heifers were 1.0 and 0.9 Ibs.,respectively.

Wintering and Pasturing

Many producers follow a wintering program with a pasturing program whensufficient forage is available. Compensatory gain is higher for winteredcalves than for backgrounded calves, so their capacity for growth on pastureis greater. The pasturing program was assumed to be 120 days. Steers andheifers entered the pasturing program weighing 575 and 535 Ibs., respectively.

1The methodology used in this report to estimate production costs percow is basically the same as that used in an earlier report, ComparingProfitability of Beef Production Enterprises in North Dakota. However, onechange has been implemented. The change in tTiR value of the cow, which waspreviously included, is no longer taken into account.

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Steers weighed 800 Ibs. and heifers 740 Ibs. at the end of the program.Average daily gains for pastured steers and heifers were 1.9 and 1.7 Ibs.,respectively.

Custom Feeding

Several custom feeding options are considered in this paper. Thefollowing basic assumptions apply to each alternative. Truckloads of animalsweighing 50,000 lbs. each were shipped 450 miles to a feedlot. A one-waytransportation charge of $1.81 per mile was used. A 4 percent transit shrinkwas assumed for all animals shipped to the feedlot. All animals were sold atthe feedlot with a 3 percent pencil shrinkage subtracted in lieu of additionalmarketing charges.

Steers and heifers in the custom backgrounding program weighed 408 and384 Ibs., respectively, upon arrival at the feedlot and 700 and 650 Ibs. atthe time of sale. Average daily gains were 1.85 Ibs. for steers and 1.67 Ibs.for heifers. The feeding period was 158 days for steers and 150 days forheifers.

Weaned calves going directly to custom feedlots in the fall weighed thesame as those entering the custom backgrounding lots. However, these calveswere fed to slaughter weight. Steers weighed 1,100 Ibs. and heifers 970 Ibs.when sold. Steers were fed to gain 2.0 Ibs. per day up to 700 Ibs. and 3.0Ibs. per day from 700 to 1,100 Ibs. Heifers were fed to gain 1.8 Ibs. per dayto 650 Ibs. and 2.7 Ibs. per day from 650 to 970 Ibs. Custom feeding weanedsteers and heifers to slaughter weight took 280 and 267 days, respectively.

Backgrounded steers and heifers weighed 648 and 600 Ibs., respectively,when entering the custom feedlot. Average daily gains for steers and heiferswere 3.0 and 2.7 Ibs. It was assumed to take 151 days for a backgroundedsteer and 138 days for a backgrounded heifer to reach slaughter weight.

Wintered steers and heifers weigh 552 Ibs. and 514 Ibs., respectively,when entering the custom feedlot. Average daily gains were 3.0 and 2.7 Ibs.It took 183 days for a wintered steer and 170 days for a wintered heifer toreach slaughter weight.

Wintered and pastured steers and heifers weighed 768 and 710 Ibs.,respectively, when entering the feedlot for custom feeding. Average dailygains for steers and heifers was 3.0 and 2.7 Ibs. It took 111 days to feed awintered and pastured steer and 97 days to feed a wintered and pastured heiferto slaughter weight.

Livestock Prices

The market prices used in this study were compiled from 1958 to 1984(Appendix B). The prices from 1963 to 1984 for steers and heifers marketed inNorth Dakota were based on USDA Market News Service prices received at WestFargo for No. 1 muscle thickness, medium-frame feeder cattle. USDA priceswere unavailable prior to 1963, so prices received at Kansas City wereadjusted using simple linear regression and used as proxies from 1958 to 1962.

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Regressions were computed between 10 years of prices from the two sources,with West Fargo prices as the dependent variable and Kansas City prices as theindependent variable. The regressions examined the relationship between theprices at the two locations for 400-500 lb. steers and heifers, 500-600 lb.steers and heifers, 600-700 lb. steers and heifers, and 700-800 lb. steers andheifers. The equations generated in the regressions as well as thecoefficients of determination (R2 ) values and T-values are included inAppendix B. It should be noted that the regression results yielded fairlyhigh R2 and T-values, which demonstrate a strong relationship between thecattle prices from the two sources.

Prices used in the custom backgrounding and feeding options were basedon 600-700 lb. choice steer and heifer yearlings at Kansas City and 900-1,100lb. choice slaughter steers and heifers at Omaha. Cull cow prices were basedon the annual average prices received by farmers for beef cows in NorthDakota.

Market prices used were three month averages of prices received aroundthe expected sale date. Weaned calf prices were based on September, October,and November prices. Backgrounded, wintered, and custom backgrounded calfprices were based on March, April, and May prices. Pastured calf andcustom-fed, weaned calf prices were averages of August, September, and Octoberprices. Prices for custom-fed, backgrounded calves were averages ofSeptember, October, and November prices; custom-fed, wintered calves, October,November, and December prices; and custom-fed, wintered, and pastured calves,the averages of December, January, and February prices.

Methodology

The production cost components were adjusted for price changes overtime back to 1958 using indices of prices paid by farmers (Appendix C). Percow production costs are divided by the hundredweights (cwt) of expectedoutput to derive an estimate of a breakeven price that would cover all costsusing this equation:

BE = (CCt + WPt + PPt+1 + CFt+i)/EO

whereBE = Breakeven price per cwt produce

CCt = Cow-Calf production costs in year t

WPt = Winter feeding program production costs in year tWPt = (.45 X steer winter program costs + .27 X heifer

winter program costs)

PPt+I = Pasturing program production costs in year t+1PPt+l = (.45 X steer pasturing costs + .27 X heifer

pasturing costs)

CFt+l = Custom feeding program production costs in year t+1,CFt+1 = (.45 X steer custom feeding costs + .27 X heifer

custom feeding costs)

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EO = Expected output per cowEO = (.45 X expected steer selling weight + .27

X expected heifer selling weight)

The percentages used to adjust the steer and heifer production costs andexpected selling weights reflect the percentage of steers and heifers sold percow in the herd. It was assumed that 45 percent of a steer (half of the 90percent calf crop) and 27 percent of a heifer (half of the 90 percent calfcrop minus the 18 percent retention rate) were sold per cow. Production costsof feeding programs were included only when applicable, otherwise they equalzero in the equation. For example, if a calf was sold at weaning, then allproduction cost terms would equal zero except the cow-calf production costs,while if the calf was wintered, pastured, custom fed, and then sold, eachproduction cost term would be included to reflect the costs of each productionsegment.

The break-even price was subtracted from an adjusted market price toderive an estimate of profit per cwt. The adjusted market price was equal to63 percent (.45/(.45 + .27)) of the steer price plus 37 percent (.27/(.45 +.27)) of the heifer price, which reflects the combination of steers andheifers that are sold per cow. Profit per cwt was multiplied by the cwt ofexpected output per cow to yield an estimate of the profit per cow.

Results

Perhaps the best method of evaluating retained ownership is comparingproduction costs and profitability involved with calves from a given calfcrop. The increased capital requirements of retained ownership are evident(Table 1). For example, it cost $246.53 to produce a weaned calf for sale inthe fall of 1983. However, it cost an additional $268.36 to winter, pasture,and custom feed that calf for sale at the end of 1984. The availability offunds to finance extended feeding programs should be of primary importancewhen considering retaining ownership.

The profitability in dollars per cow of the cow-calf operation and theretained ownership alternatives is presented in Table 2. The cow-calfoperation was profitable in 16 of the 26 years studied. Returns averaged-$1.32 per cow over the study period (Table 3). The most profitable retainedownership alternative was custom feeding weaned calves, which was profitablein 20 years and averaged $30.85 per cow. Factors contributing to the higherprofitability of this option include lower interest costs due to the shorterlength of the feeding period, the high energy ration and rapid rate of gain,less transportation shrink, and sale before the seasonally low fall prices.

The cow-calf wintering, pasturing, and custom feeding program was nextwith an average profit per cow of $16.33. This option was profitable in 17years. The cow-calf, backgrounding, and custom feeding option was profitablein 17 years, and it averaged $15.84 per cow. The cow-calf, wintering, andpasturing and the cow-calf and backgrounding options averaged $14.31 and$11.63 per cow, respectively. Both were profitable in 17 of the yearsstudied.

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TABLE 1. TOTAL ESTIMATED ADJUSTED PRODUCTION COSTS PER COW OF THE COW-CALFOPERATION AND COW-CALF OPERATION WITH THE RETAINED OWNERSHIP ALTERNATIVESIN NORTH DAKOTA, BY CALF CROP, 1958-1983

Cow-Calf Cow-Calf Cow-Calf, Wintering Cow-Calf CustomYear Cow-Calf Backgrounding Wintering and Pasturing Backgrounding

1958 60.78

1959

1960

1961

1962

1963

1964

1965

1966

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

19831984

64.57

65.70

65.70

66.27

69.44

71.64

72.72

73.65

74.23

74.80

79.41

81.71

82.74

82.47

116.53

156.59

162.20

161.55

166.31

173.67

208.83

244.75

277.23

257.01

246.53

91.22

95.41

95.65

96.05

97.11

101.05

102.61

104.54

107.51

108.11

108.01

114.69

118.86

120.90

122.21

173.32

219.86

225.36

226.52

232.36

246.30

296.81

340.49

377.95

351.12

340.69

81.75

85.88

86.36

86.66

87.63

91.13

92.79

94.61

97.14

97.88

98.39

104.85

108.45

110.15

111.37

156.81

199.81

206.10

206.88

213.19

227.42

275.53

316.42

351.74

327.39

314.88

103.76

107.41

107.72

108.16

109.21

112.27

114.43

117.78

120.47

122.26

124.89

132.29

136.41

140.36

150.32

201.52

244.62

253.74

256.35

270.16

300.33

352.17

397.25

429.32

402.30

390.63

94.49

98.59

98.52

98.95

100.03

104.25

105.67

107.52

110.56

110.72

109.64

115.95

120.31

122.19

122.96

177.97

225.74

229.32

229.91

234.44

247.09

298.37

343.22

381.31

351.47

342.19

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TABLE 1. TOTAL ESTIMATED ADJUSTED PRODUCTION COSTS PER COW OF THE COW-CALF OPERATION ANDCOW-CALF OPERATION WITH THE RETAINED OWNERSHIP ALTERNATIVES IN NORTH DAKOTA, BY CALFCROP, 1958-1983 (CONTINUED)

Year

1958

1959

1960

1961

1962

1963

1964

1965

1966

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

19831984

Cow-Calf, Cow-Calf, Cow-Calf, Wintering,Cow-Calf Backgrounding, Wintering, Pasturing, &

Custom Feeding & Custom Feeding & Custom Feeding Custom FeedingCow-Calf

60.78

64.57

65.70

65.70

66.27

69.44

71.64

72.72

73.65

74.23

74.80

79.41

81.71

82.74

82.47

116.53

156.59

162.20

161.55

166.31

173.67

208.83

244.75

277.23

257.01

246.53

141.52

142.69

144.76

145.85

149.31

150.97

154.85

160.76

160.58

157.05

161.31

170.68

175.05

178.01

228.23

285.17

319.29

327.39

325.18

339.11

381.73

440.13

492.05

500.78

485.57

481.79

147.81

150.17

150.64

151.62

154.67

157.60

160.05

165.55

167.65

165.78

168.24

178.48

183.50

186.82

222.40

291.48

330.96

339.90

338.88

349.95

391.56

455.92

512.89

534.15

511.65

504.38

149.04

151.05

151.87

152.86

156.33

158.73

161.42

167.33

168.84

166.45

169.84

180.49

185.24

188.66

231.02

298.79

332.97

343.31

341.46

353.34

399.38

464.90

521.36

536.68

518.51

509.78

146.39

148.46

149.17

150.25

152.58

154.68

157.98

163.60

165.80

165.74

170.64

180.12

185.49

190.63

226.15

287.51

328.33

338.65

340.80

360.56

409.41

473.69

527.51

548.89

522.16

514.89

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TABLE 2. ESTIMATED PROFIT PEROPERATION WITH THE RETAINEDCROP, 1958-1983

COW OF THE COW-CALF OPERATION AND COW-CALFOWNERSHIP ALTERNATIVES IN NORTH DAKOTA, BY CALF

Cow-Calf Cow-Calf Cow-Calf, Wintering Cow-Calf CustomYear Cow-Calf Backgrounding Wintering and Pasturing Backgrounding

1958 36.18

1959

1960

1961

1962

1963

1964

1965

1966

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

19831984

22.69

9.22

14.52

20.48

8.89

-8.90

-1.93

10.27

10.87

9.73

16.14

23.09

34.44

59.55

59.23

-71.76

-64.70

-52.49

-36.23

37.57

64.12

-9.02

-88.39

-67.74

-70.18

54.29

34.88

25.93

26.09

18.67

-2.24

-3.75

19.40

12.30

17.08

30.09

41.60

33.92

56.37

116.72

19.55

-80.70

-35.99

-48.98

20.31

147.96

28.02

-39.91

-85.94

-50.39

-52.89

42.10

24.46

16.35

16.57

11.17

-6.82

-8.43

10.65

5.10

8.95

19.45

29.01

21.92

50.56

104.07

20.23

-82.06

-38.98

-49.23

13.14

128.16

20.09

-48.52

-97.19

-61.58

-61.70

57.69

30.74

31.76

40.87

27.55

-1.21

16.92

22.66

19.55

18.93

39.06

31.70

47.56

76.34

141.67

-30.17

-51.73

-57.96

-40.16

63.42

122.59

39.48

-53.64

-77.12

-93.26

-51.27

56.38

37.60

27.71

26.98

24.90

2.99

7.83

29.50

16.15

24.35

46.08

51.99

43.47

64.39

131.46

26.84

-73.54

-25.43

-35.80

31.19

174.18

45.35

-20.34

-64.60

-25.95

-23.91··-~-~·--I-~--· -·-··~-; -·---·-- -~--··----··--·- -~----·-- ;--~-- ----·~--~- ----~-~ - - -- -~- - -~~.-

- 11 -

TABLE 2. ESTIMATED PROFIT PER COW OF THE COW-CALF OPERATION AND COW-CALF OPERATION WITHTHE RETAINED OWNERSHIP ALTERNATIVES IN NORTH DAKOTA, BY CALF CROP, 1958-1983(CONTINUED)

Year

1958

1959

1960

1961

1962

1963

1964

1965

1966

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

19831984

Cow-Calf, Cow-Calf, Cow-Calf, Wintering,Cow-Calf Backgrounding, Wintering, Pasturing, &

Custom Feeding & Custom Feeding & Custom Feeding Custom FeedingCow-Calf

36.18

22.69

9.22

14.52

20.48

8.89

-8.90

-1.93

10.27

10.87

9.73

16.14

23.09

34.44

59.55

59.23

-71.76

-64.70

-52.49

-36.23

37.57

64.12

-9.02

-88.39

-67.74

-70.18

56.75

35.31

30.38

61.44

27.20

26.81

35.55

25.24

33.21

43.29

49.90

44.12

64.55

79.72

114.36

27.22

32.18

-53.60

-24.76

56.36

98.92

71.80

-19.24

-47.60

-44.94

-21.95

46.08

30.26

26.85

59.86

18.21

18.27

27.06

15.95

23.12

34.17

36.61

29.30

56.59

65.76

88.86

-0.88

16.67

-60.90

-34.25

49.00

99.51

38.24

-56.13

-96.21

-75.58

-44.71

40.41

34.44

29.97

56.88

10.82

12.35

23.70

10.20

19.12

35.14

32.73

21.44

59.01

69.20

66.15

-18.42

5.11

-56.98

-30.03

48.74

93.84

16.06

-79.61

-104.45

-73.48

-43,65 -43.84

45.17

44.93

39.82

43.29

6.99

12.48

34.02

15.51

23.97

37.83

38.39

35.49

74.50

105.60

99.06

-22.50

-22.43

-53.97

-18.31

81.86

86.14

-11.45

-78.34

-109.70

-40.03

TABLE 3. SUMMARY OF RESULTS FOR THE COW-CALF AND COW-CALF WITH THE RETAINED OWNERSHIP ALTERNATIVES

Cow-Calf,Cow-Calf, Cow-Calf Cow-Calf Cow-Calf, Cow-Calf, Wintering,

Cow-Calf Cow-Calf Wintering, Custom Custom Backgrounding, Wintering, & Pasturing, &Cow-Calf Backgrounding Wintering Pasturing Backgrounding Feeding & Custom Feeding Custom Feeding Custom Feeding

----- -- - - - - - - --/-- - cwt - ----. -----..------------- --.--.--.CW

AverageMaximumMinimumStandard

Deviation

-0.4421.43

-29.54

14.41

Average -1.32Maximum 64.12Mi nimum -88.39Standard

Deviation 43.12Coefficient

Of Variation -32.65Average Profit

Per Dollar ofProduction Costs - 0.06

2.4631.32

-18.19

11.12

11.63147.96-85.94

52.54

4.52

0.8331.79

-24.10

12.46

3.36128.16-97.19

50.25

14.94

2.5625.31-16.66

10.15

14.31141.67-93.26

56.82

3.97

4.8536.60

-15.45

10.91

23.07174.18-73.54

51.91

2.25

4.2615.58-7.30

5.71

S/cow - - - -

30.85114.36-53.60

42.65

1.38

2.1613.55

-13.10

6.59

15.8499.51

-96.21

48.37

3.05

1.4612.78

-14.23

6.61

10.7293.84

-104.45

48.51

4.52

2.2214.38-14.94

7.25SI

16.33 r105.60

-109.70

53.22

3.26

0.15 0.10 0.16 0.21 0.18 0.12 0.10 0.130.15 0.10 0,16 0.21 0.180.12 0.10 0.13

- 13 -

Variability in profit, which is measured by the standard deviation, isvery high for each production alternative considered. Retaining ownershipincreased variability over the cow-calf operation, with the exception of thecow-calf and custom feeding option. However, the increases in the standarddeviation were not significant.

The coefficient of variation (CV), which is the standard deviationdivided by the mean, provides a measure of variation relative to earnings.The CV provides a means of comparing the riskiness and, in this case, pricerisk of production alternatives. The large negative CV of the cow-calfoperation is the result of its negative profit margins and high variability.Retaining ownership reduced risk considerably, relative to the cow-calfoperation. However, all production alternatives were still exposed tosignificant price risk. The probability of generating negative profits in anygiven year is high. The cow-calf and custom feeding weaned calves andcow-calf and custom backgrounding options had the lowest CV values, indicatingthey had the lowest associated price risk of the options considered. The CVvalues for the remaining retained ownership alternatives, with the exceptionof the cow-calf and wintering option, were quite similar.

The potential benefits of retained ownership are illustrated in Figures1 through 5. Profit per cow in the cow-calf operation in one year should becompared with profit per cow in the cow-calf and retained ownershipalternative in the following year to determine any impact on profitability ofretaining ownership of a given calf crop. Cow-calf producers could haveimproved profitability per cow by retaining ownership rather than selling atweaning in most of the years studied. Sale of calves at weaning was the mostprofitable of all production alternatives in 1973 and 1980.

The Decision to Custom Feed

Custom feeding enables cow-calf producers with sound, progressivebreeding programs to capitalize on more breeding improvements than justincreased weaning weights. It also provides a way in which producers cancapture any profits backgrounders and cattle feeders would have realized.However, feeding to slaughter weight will delay earnings four to ten months.Capital requirements will increase substantially because of the longer periodof ownership. A producer that custom feeds is bound by contract with thefeedlot, establishing a security interest in the cattle until all charges havebeen paid.

Selecting a Custom Feedlot

Custom feedlots sell feeding management and expertise, which is thebasis upon which they compete. Producers should investigate carefully beforeselecting a feedlot because of the variety of services offered and methods ofhandling financial details (Doane's Agricultural Report 1982).

Location of the feedlot with respect to weather, shipping distance andtransportation costs, and proximity to feed supplies and packing houses isimportant. Low-humidity climates are preferred because performance typicallydrops when humidity is high. When low-cost, locally grown feed is available,it can provide a feedlot with an attractive competitive edge. The proximity

- 14 -

Figure 1. Estimated Profitability Per Cow on the Cow-Calf andCow-Calf and Backgrounding Operations in North Dakota,1958 to 1984

Figure 2. Estimated Profitability Per Cow on theCow-Calf, Wintering and Pasturing Operations in1958 to 1984

Cow-Calf andNorth Dakota,

- 15 -

Figure 3. Estimated Profitability Per Cow on the Cow-Calf andCow-Calf and Custom Feeding Weaned Calves Operations inNorth Dakota, 1958 to 1984

$ Per Cow

Figure 4. Estimated Profitability Per Cow on the Cow-Calf andCow Calf, Backgrounding and Custom Feeding Operations inNorth Dakota, 1958 to 1984

- 16 -

$ Per Cow

Figure 5. Estimated Profitability Per Cow on the Cow-Calf andCow-Calf, Wintering, Pasturing, and Custom Feeding Operationsin North Dakota, 1958 to 1984

of several packing plants is important because this increases the potentialnumber of competitive price bids for finished cattle.

A good place to start in the search for a custom feedlot is by talkingwith other producers who have custom fed cattle. They can provide importantinformation about feedlots with whom they have dealt or recommendations ofothers to try. Extension specialists in the area where the cattle are to befed are another good source of information.

After selecting several feedlots for further consideration, it isimportant for the producer to take the time to visit each. It is during thesevisits that he will meet the people he will be dealing with. During thesevisits the producer should learn as much as possible about the feedlot'soperation and management. He should evaluate the general appearance of thefeedlot; a clean, well-maintained operation should be a reflection of itsmanagement. Other items to note include availability of clean water inproperly located water tanks, adequate shelter, usable handling and loadingfacilities, location of the mounds, width of the concrete apron along feedbunks, and the space per head in the lot and at the feed bunk. Mounds shouldbe six to eight feet high and six feet wide at the top (Minish and Fox 1982)and should be built near the concrete feeder apron to keep the cattle nearerthe feed bunk. Cattle require 150 square feet per head in the lot and 25square feet per head on the mound in a sloping well-drained dirt lot with

- 17 -

mounds, and 400 square feet per head in the lot and 25 square feet per head onthe mound in a nearly level dirt lot with mounds. Feeder cattle over 600 Ibs.require about 22 to 26 inches of feeder per head (Minish and Fox 1982).

Rather than contracting directly with a custom feeder, a cow-calfproducer may consider contracting with a livestock management company.Livestock management companies serve as agents managing cattle for owners whowant their cattle custom fed. They take care of the details involved withcustom feeding that a cow-calf producer with little experience in customfeeding may miss. They evaluate and select the feedlots and typically havesomeone who visits the feedlots periodically, preferably unscheduled, to checkprogress and performance. This is an important service to an owner living farfrom the feedlot.

Livestock management companies also help develop marketing plans thatmeet the owner's goals. Because this often involves hedging, the cattlemanagement company should be equipped and prepared to provide that service.Many are also capable of providing financing to qualified cattle owners whowant to custom feed but choose not to finance with their local banks.

Systems of Payment

Two types of costs, direct feedlot service charges and ownership costs,are incurred when custom feeding. The direct feedlot charges include feedcosts; yardage charges which feedlots use to cover operating and fixed costs;veterinary treatment charges to cover a routine vaccination, dipping, and aworming program for incoming cattle; and hazard insurance to cover losses fromwindstorms, lightning, etc. and death loss over 10 percent. The ownershipcosts include interest on the cattle investment, interest on feedlot charges,and transportation expenses.

Guyer (1975) lists the following methods of calculating payment fromowner to feeder currently being used:

1. Feed costs plus yardage2. Feed mark-up (to cover yardage)3. Price per pound of gain4. Price per head per day

Feed cost plus yardage is the approach used most often when feedershave the capability to weigh feed. When using this type of contract, thecattle owner should be concerned about record accuracy, the quality of healthmanagement, competitive feed prices, lot design and management, and specifiedgoals the cattle are fed to meet.

The feed mark-up method is used by some feedlots to cover milling costsand yardage charges. A dry matter or 90 percent dry matter basis is preferredfor the mark-up in order to compare yardage costs more accurately. The sameconcerns to the cattle owner apply to the feed mark-up method as the feed costplus yardage.

The price per pound of gain method is typically used by feedlots thatdo not have facilities available to weigh feed. This type of arrangement

- 18 -

provides motivation for the feeder to use the best management practices toobtain high rates of gain at least cost, which, in turn, should beadvantageous to the owner because health problems and death loss may beminimized.

Contracts based on a flat price per head may be best when the owner iswilling to accept rather low rates of gain. This type of contract is usefulwhen calves utilize unharvested crop residues, winter range, or other feedswhen daily feed intake and cost of gain are difficult to measure. However,certain stipulations should be added to the contract such as bonuses for a lowdeath loss or for meeting a minimum average daily gain and to provideincentives for the feeder to provide good management.

The Contract Arrangement

Satisfied parties to a contract arrangement can exist only if bothparties are fully informed and all important points are covered by thecontract. Guyer (1975) lists the following factors that should be included indetail in custom feeding contracts.

Weighing conditions, including fill procedures to be used prior toweighing, when and where calves are to be weighed, and allowable pencil shrinkshould be agreed upon when the contract price is set. Care should be taken sofeeders will not be penalized when cattle enter the feedlot with too much fillnor should the owner pay for excessive fill at the time of sale.

Assigning responsibility for death loss is very important. Excessivedeath loss as a result of poor cattle health should not be charged to thefeeder. Neither should the owner be expected to absorb excessive death lossresulting from negligent health management practices by the feeder. Manycontracts specify that the owner stand all death losses for a specified periodof time after arrival at the feedlot, typically one month. After that thefeeder and owner may share the death loss.

Veterinary, medicine, and immunization costs should be paid by theowner. Feeders should insist that vaccinations, dehorning, castration, etc.be done prior to arrival at the feedlot. If the feeder must perform theseoperations after arrival, cost of gain should be adjusted to give the feederadequate compensation for the lost gain due to the stress of treatment andother costs involved.

A minimum and maximum length of the feeding period should be specified.Cost of gain is usually high for short growing periods because time is neededfor adjustment and recovery from shipment. Cost of gain is also higher inlong growing periods as cattle reach heavier weights. Weight of cattle shouldalso be specified because lightweight cattle gain at less cost than heavierfeeders.

Both owners and feeders may benefit from including guidelines regardingrate of gain in the agreement. Faster rates of gain are usually lower costgains when a given final weight is the terminal point in the feeding program.However, faster gaining cattle that are fed for a given period of time finish

- 19 -

at a heavier average weight. Fast gains during the growing phase are offsetto some extent by the slower and more expensive rate of gain in the finishingphase.

The method and timing of payments or financing arrangements are veryimportant. Partial payments made during the feeding period, usually atbi-weekly or monthly intervals, reduce the interest payments for feed andyardage charges the owner would have to pay. If financed, cash outlay duringthe feeding period is usually not required.

The terms of the contract should give the feeder a security interest inthe cattle until all charges have been paid. Feeders should familiarizethemselves with laws governing liens and mortgages to ensure payment for feedand services rendered. Owners should also be aware of their rights if theyare mortgaging their cattle. The feeder must notify the holder of themortgage of his intent to assert his lien for feeds and services within 10days of receipt of the cattle if he wants his lien to be considered first.

An example of a contract arrangement between a custom feeder and acattle owner is presented in Appendix D. This sample contract simply providesan outline to follow. It should not be used until appropriate ammendmentstailoring it to individual situations are added and it has been checked forcompliance with the laws of the appropriate state.

Summary and Conclusions

The objective of this study was to discuss the potential benefits ofretaining ownership in cow-calf operations. Eight alternatives of retainedownership were examined, 1) cow-calf and backgrounding; 2) cow-calf andwintering; 3) cow-calf, wintering, and pasturing; 4) cow-calf and custombackgrounding; 5) cow-calf and custom feeding a weaned calf; 6) cow-calf,backgrounding, and custom feeding; 7) cow-calf, wintering, and custom feeding;and 8) cow-calf, wintering, pasturing, and custom feeding. Profitability percwt produced and per cow and average return on production cost were estimatedfrom 1958 to 1984. The budgets used to estimate costs of production werebased on the opportunity cost of the resources used.

Results indicated that beef production, especially the cow-calfoperation, is exposed to significant price risk. The use of three-monthaverage market prices to calculate profitability probably reduced the pricerisk that individual producers actually face when selling cattle on oneparticular day. This riskiness reflects the need for informed managerialinvolvement in production and marketing decisions. As the risks in beefproduction increase, the level of management should increase as well,especially with respect to financing. Exposure to financial risk should beminimized.

Retained ownership was shown to be a viable production and marketingalternative that can reduce the price risk inherent to the cow-calf operationthat markets weaned calves. However, all production alternatives consideredin this paper were exposed to considerable price risk. Retaining ownershipincreases the cost of ownership in terms of the additional operating capitalrequired. An operation's cash flow must be carefully analyzed prior to

- 20 -

considering retaining ownership due to the increased operating expense burden,especially in the first year.

Producers must also consider the additional production risk of customfeeding because the animals are outside their personal management control.According to the results of this study, cow-calf producers could improveprofit per cow considerably by retaining ownership. There were several years,however, when selling calves at weaning was the best alternative formaximizing profit.

It should be noted that the estimates of profitability discussed inthis study are returns to management. Because retaining ownership requires ahigher level of management, the increased returns may not offset the costsinherent to the additional management.

Appendix A

- 23 -

COW-CALF BUDGET (1984)

Feed Expense

Pasture Rent 7 AUM @ $8/AUM

Labor 8 hrs @ $4.20/hr

Other Operating Expenses

Marketing Expenses

Interest on Operating Expenses 1

Livestock Interest 2

Ownership Costs 3

Total Production Costs

AdjustmentsCull Cow Return4

Cull Heifer Return5

Adjusted Production Costs

Break-Even Price: 4.25 cwt x .45 = 1.91254.00 cwt x .27 = 1.0800

2.9925

(Per Cow)$106.66

56.00

33.60

29.50

15.00

11.57

43.58

21.35

$317.26

$-54.30- 8.47

$254.49

$254.492.9925 cwt

$ 85.04/cwt

1 Interest on operating expenses = (feed expense + pasture rent + otheroperating expenses) x interest rate x .5

2 Livestock interest = (cow value x interest rate)

3 Excluding livestock interest

4 Cull cow return = (replacement rate - cow death loss) x cow value

5 Cull heifer return = (retention rate - replacement rate) x heifer value

- 24 -

COW-CALF PRODUCTION COEFFICIENTS

a. Weaned steers weigh 425 lbs

Weaned heifers weigh 400 Ibs

Cull heifers weigh 750 Ibs

Cull cows weigh 1,000 Ibs

b. 16% cow replacement rate

1% cow death loss

18% heifer retention rate

c. 90% calf crop (45% steers + 45% heifers)

d. 63% calves sold steers (45 steers/72 hd sold)

100% calves sold heifers (27 heifers/72 hd sold)

e. 299.25 Ibs calf wt sold per cow per year

425 Ibs steer x .45 = 191.25400 Ibs heifer x .27 = 108.00

299.25

- 25 -

BACKGROUNDING (1984)

Steers Heifers(Per Head) (Per Head)

Feeder Cost $280.63 $228.32

Feed Expense 76.94 72.64

Other Operating Expenses 20.72 20.72

Labor 16.80 16.80

Marketing Expenses 10.00 10.00

Interest on Operating Expenses' 2.83 2.73

Interest on Calves2 13.89 11.30

Death Loss 3 2.81 2.28

Overhead 10.00 10.00

Total Production Costs $434.62 $374.79

Breakeven Price: Steers $434.62 = $64.39/cwt Heifers $374.79 = $59.97/cwt6.75 cwt 6.25 cwt

1 (Feed expense + operating expense + labor) x (interest rate x .5) x percentof year on feed.

2 Feeder cost x interest rate x percent of year on feed.

3 Feeder cost x .01.

Production Coefficients

a. Purchase weight in IbsSelling weight in Ibs

b. Average daily gain in Ibs

c. Feeding period in days

d. Death loss in percent

Steers

425675

1.7

150

Heifers

400625

1.5

150

1 1

- 26 -

WINTERING (1984)


Feeder Cost $280.63 $228.32



Labor 16.80 16.80


Interest on Operating Expenses1 1.93 1.88

Interest on Calves 1 13.89 11.30


Overhead 10.00 10.00



1Refer to backgrounding budget.






Steers

425575

1.0

150

Heifers

400535

.9

150

1 1

- 27 -

PASTURING (1984)


Feeder Cost $380.48 $305.16

Pasture Rent 40.00 40.00



Labor 10.50 10.50


Interest on Operating Expenses1 1.60 1.60

Interest on Calves 2 15.06 12.08


Overhead 5.00 5.00



1 (Pasture rent + feeder expense + other operating expenses + labor) x .5 xinterest rate x percent of year on feed.

2Refer to backgrounding budget.



b. Average daily gain in lbs



Steers

575800

1.9

120

Heifers

535740

1.7

120

1 1

- 28 -

CUSTOM BACKGROUNDING (1984)

Steers(Per Head)

Heifers(Per Head)

Feeder CostFeed ExpenseTransportation ExpenseVeterinary & Medical ExpensesYardage ChargeInterest on Operating Expenses1Interest on Calves 2Death Loss2


Breakeven Price:

$442.46 $368.58.,-- - •,,

Steers $442.46 = $65.( 07,0 -. .19 71)

Heifers $368.58 = $58.50 97)

1[Transportation expenses + (feedyardage charge) X .5] x interestRefer to backgrounding budget.

16/cwt

expense + veterinary and medical expense +rate x percent of year on feed.





d. Shrinkage in percentIn transitAt marketing

e. Death loss in percent

Steers

425700

1.85

158

Heifers

400650

1.67

150

43

43

1 1

$280.63112.42

6.927.00

14.213.8414.632.81

$228.3296.446.527.00

13.503.22

11.302.28

- 29 -

CUSTOM FEEDING WEANED CALVES (1984)

Steers(Per Head)

Heifers(Per Head)

Feeder CostFeed ExpenseTransportation ExpenseVeterinary & Medical ExpensesYardage ChargeInterest on Operating Expenses1Interest on Calves2

Death Loss 2


Breakeven Price: Steers $643.98(11.00 X .97)

Heifers $537.44(9.70 X .97)

= $60.35/cwt

= $57.12/cwt

1Refer to custom backgrounding budget.2 Refer to backgrounding budget.


a. Purchase weight in IbsSelling weight in lbs

b. Average daily gain in Ibs 2.0(to 700 Ibs)

3.0(700 to 1,100 Ibs)

1.8(to 650 Ibs)

2.7(650 to 970 Ibs)




$280.63280.42

6.927.00

25.2015.0825.922.81

$643.98

$228.32236.81

6.527.00

24.0312.3720.112.28

$537.44

Steers

4251,100

Heifers

400970

280 267

43

1

43

1

- 30 -

CUSTOM FEEDING BACKGROUNDED CALVES (1984)


Feeder Cost $431.84 $341.81Feed Expense 189.84 155.40Transportation Expense 11.13 10.18Veterinary & Medical Expenses 7.00 7.00Yardage Charge 13.59 12.42Interest on Operating Expenses 1 5.80 4.86Interest on Calves 2 21.51 17.03Death Loss 2 4,32 3.42


Breakeven Price: Steers $658.03 = $61.67cwt(11.00 X .97)

Heifers $522.12 = $55.49/cwt(9.70 97)

1 Refer to custom backgrounding budget.2 Refer to backgrounding budget.

Production Coefficients Steers Heifers

a. Purchase weight in Ibs 675 625Selling weight in Ibs 1,100 970

b. Average daily gain in Ibs 3.0 2.7

c. Feeding period in days 151 138

d. Shrinkage in percentIn transit 4 4At marketing 3 3

e. Death loss in percent 1 1

- 31 -

CUSTOM FEEDING WINTERED CALVES (1984)

Steers(Per Head)

Heifers(Per Head)

Feeder CostFeed ExpenseTransportation ExpenseVeterinary & Medical ExpensesYardage ChargeInterest on Operating Expenses1Interest on Calves 2

Death Loss 2


Breakeven Price: Steers $678.60(11.00 X .97)

Heifers $556.18(9.70 X .97)

= $63.60/cwt

$59.11/cwt

1Refer to custom backgrounding budget.2 Refer to backgrounding budget.







$380.50230.16

9.477.00

16.478.2322.973.80

$678.60

$305.15191.528.767.0015.306.9818.423.05

$556.18

Steers Heifers

5751,100

3.0

535970

2.7

170183

43

1

43

1

- 32 -

CUSTOM FEEDING WINTERED AND PASTURED CALVES (1984)


Feeder Cost $501.39 $422.74Feed Expense 139.44 109.20Transportation Expense 13.28 12.16Veterinary & Medical Expenses 7.00 7.00Yardage Charge 9.99 8.73Interest on Operating Expenses 1 3.35 2.73Interest on Calves 2 18.36 15.48Death Loss 2 5.01 4.23


Breakeven Price: Steers $697.82 = $65.40/cwt(11.00 X .97)

Heifers $528.27 = $56.15/cwt(9.70 X .97)

1 Refer to custom backgrounding budget.2 Refer to backgrounding budget.

Production Coefficients Steers Heifers

a. Purchase weight in Ibs 800 740Selling weight in Ibs 1,100 970

b. Average daily gain in Ibs 3.0 2.7

c. Feeding period in days 111 97

d. Shrinkage in percentIn transit 4 4At marketing 3 3

e. Death loss in percent 1 1

Appendix B

- 35 -

APPENDIX TABLE Bl. CATTLE PRICES

West FargoSteers Heifers Steers Heifers Steers Heifers Steers Heifers

400-500# 500-600# 600-700# 700-800#

Sept., Oct., Nov. - - - - March, April, May - - - - - Sept., Oct., Nov.

1957195819591960

1963196419651966196719681969197019711972197319741975197619771978197919801981198219831984

25.4533.7330.3826.37

86

26.9321.6525.8429.1329.8629.5933.1236.5440.6949.4661.3229.6634.8438.9645.8973.1095.4182.3865.8565.9262.2266.03

21.1030.1327.0722.775

24.8919.8019.9326.2026.0225.9629.9032.4436.5644.0454.3226.1028.7432.1639.3466.3284.0672.6358.4358.7053.3357.08

22.3029.7531.7028.

25.3721.3922.0027.2426.2327.5030.3634.2533.3641.3055.3145.7431.2944.0341.4058.2490.8876.6869.0466.4768.6466.17

26.9629.04

23.0320.0919.1024.1823.8724.7927.3031.4130.5937.4150.2340.7925.6437.0635.1852.5583.6167.6062.0357.4561.3157.04

22.3029.7531.70

625

25.3721.3922.0027.2426.2327.5030.3634.2533.3639.2152.2942.1031.1842.2539.5255.1386.1071.8465.6464.4365.8863.98

27.3629.2625 804

23.0320.0919.1024.5223.8724.7927.3031.0730.5934.6447.6438.6426.5136.3834.2650.6578.9163.4760.1657.3359.8455.69

23.3429.5829.0624

9225.5620.5524.5625.3125.2125.42,29.9829.2232.9340.8254.1931.8336.3936.7240.2362.3579.7472.3763.5165.3357.0562.67

26.7728.47

24.4022.5018.6321.6024.7024.6724.8728.1029.4232.7535.1248.7128.5331.1631.9935.8754.8968.4265.8657.7658.8152.0657.13

- ---

- 36 -

APPENDIX TABLE Bl. CATTLE PRICES (CONTINUED)

Kansas City OmahaSteers Heifers Steers Heifers Steers Heifers

Year 600-700# 900-1,100#

March, April, May Aug., Sept., Oct. Sept., Oct., Nov.

195819591960196119621963196419651966196719681969197019711972197319741975197619771978197919801981198219831984

29.7531.7028.6226.5226.4626.2522.5323.8528.7926.6228.3832.7235.2934.4139.2053.4643.0331.9842.8440.7955.8188.5272.2267.8466.5568.4066.88

29.7531.7028.6226.5226.4626.2522.5323.8528.7926.6228.3832.7235.2934.4139.2053.4643.0331.9842.8440.7955.8188.5272.2267.8466.5568.4066.88

25.9327.0024.2423.8528.2324.0424.2125.9325.3326.3927.2928.7729.2632.6335.1046.6642.5547.8737.2940.9253.8665.4669.7264.4061.7260.0162.63

25.9327.0024.2423.8528.2324.0424.2125.9325.3326.3927.2928.7729.2632.6335.1046.6642.5547.8737.2940.9253.8665.4669.7264.4061.7260.0162.63

26.1126.4124.5724.1728.8023.5523.9525.4824.7225.9827.2327.9028.3032.7034.4042.3939.5847.3538.0041.4954.3466.8867.3062.2159.6559.3962.61

26.1126.4124.5724.1728.8023.5523.9525.4824.7225.9827.2327.9028.3032.7034.4042.3939.5847.3538.0041.4954.3466.8867.3062.2159.6559.3962.61

- 37 -

APPENDIX TABLE Bl. CATTLE PRICES (CONTINUED)

Omaha West FargoSteers Heifers Steers Heifers Heifers North Dakota

Year 900-1,100# 700-800# Cows

Oct., Nov., Dec. Dec., Jan., Feb., - - Annual Average - -

195819591960196119621963196419651966196719681969197019711972197319741975197619771978197919801981198219831984

26.2625.8025.2624.7728.5722.7723.3025.2124.1825.6027.4627.5927.5033.2735.1240.4738.1946.0539.0042.4254.7667.1865.5160.1758.8760.6163.49

26.2625.8025.2624.7728.5722.7723.3025.2124.1825.6027.4627.5927.5033.2735.1240.4738.1946.0539.0042.4254.7667.1865.5160.1758.8760.6163.49

27.6126.0926.3425.7426.3621.7322.7726.1524.3925.8527.7328.4729.3735.4140.3544.2936.0941.6638.7743.9260.2667.4962.9661.1859.8265.6764.16

27.6126.0926.3425.7426.3621.7322.7726.1524.3925.8527.7328.4729.3735.4140.3544.2936.0941.6638.7743.9260.2667.4962.9661.1859.8265.6764.16

26.1826.8423.5023.3724.3222.9219.2220.3324.0824.1024.7627.5530.1831.6334.7344.7332.4128.7232.8934.1550.7569.7764.1553.2656.7455.7356.46

16.6015.7013.9014.4014.4013.6011.7012.5016.0016.0016.6019.0019.5019.6023.4030.7024.6019.6024.1024.4034.8047.4044.6041.8037.7036.8036.20

SOURCES: USDA Market News Service, West Fargo; Livestock and MeatStatistics; and North Dakota Agricultural Statistics.

- 38 -

APPENDIX TABLE B2. EQUATIONS USED TO ADJUST KANSAS CITY PRICES TOWEST FARGO PRICES

Regression Equations

400-500# SteersWest Fargo Price

400-500# HeifersWest Fargo Price


500-600# HeifersWest Fargo Price


= -1.8201946 + (1.0343523 x Kansas City Price)R2 = .978T-Value = 35.155





600-700# HiefersWest Fargo

700-800# SteersWest Fargo

Price = 1.9244081 + (.94,R2 = .773T-Value = 11.68

Price = -. 5434368 + (.98ER2 = .987T-Value = 45.332

36183 x Kansas City Price)

31594 x Kansas City Price)

700-800# HeifersWest Fargo Price = 4.1015440 + (.8410749 x Kansas City Price)

R2 = .766T-Value = 11.31

700-800# Heifers (Annual Average)West Fargo Price = .5080279 + (.9720322 x Kansas City Price)

R2 = .994T-Value = 35.844

Appendix C

- 41 -

APPENDIX C. INDEX OF PRICES PAID BY FARMERS (1984 = 100)

ProductionFeed Labor Item Land Transportation Marketing Interest

Year Index Index Index Index Index Index Rate

1957195819591960196119621963196419651966196719681969197019711972197319741975197619771978197919801981198219831984

37.2936.7336.9235.9936.3636.7338.4038.0338.4040.0739.5237.1137.8540.0741.5641.9363.4576.8174.0375.7073.8472.3680.8991.0998.7089.8098.70

100.00

19.5020.1021.2821.8722.4623.0523.6424.2325.3827.3729.5332.0435.2537.7639.7142.0245.8252.5156.7362.1066.7771.5878.1784.4191.6096.2398.88

100.00

28.9329.8729.8529.8729.8530.2130.5330.2130.9232.2532.3732.3733.7134.9336.6139.1747.3253.6858.9362.3964.6270.0980.3689.0695.4296.5498.55100.00

30.0430.2030.8230.8230.6730.5930.5130.4330.6731.2531.7633.7335.8435.9238.5141.5746.5957.4965.4968.3172.7878.5186.2092.9497.3398.35100.47100.00

26.7227.5928.7528.7529.0729.6829.8430.2530.7731.1832.0833.1134.3936.1638.0538.4739.7244.1848.3253.1056.8559.5168.0180.1189.8393.5295.73100.00

25.4026.0226.3726.5526.7327.1727.6127.7028.4129.5630.2731.0932.6033.8135.6237.7343.4749.3954.2757.9360.9865.8575.0084.1591.4695.7397.56

100.00

4.503.834.754.504.504.504.504.505.005.755.716.387.677.305.675.328.239.998.276.817.139.78

13.7815.9218.5016.0810.8312.04

SOURCES: Agricultural Prices, EiFederal Reserve Bulletin 1985.

ncyclopedia of Banking and Finance, and

Appendix C

- 45 -

FEEDING CONTRACT1

This agreement, made and entered into as of this day of, 19 , by and between of

hereinafter called the "Grower," and ofhereinafter called the "Feeder."

Witnesseth

Whereas, the Grower has about head of , hereinreferred to as "stock," which he desired fed and finished for market; and

Whereas, the Feeder having ample resources to do so, desires to feedand finish said stock for market so that he may share in the sales proceedsthereof; and

Whereas, in order to provide for the proper care, feeding, andmarketing of the stock, the Grower and the Feeder desire to appoint asupervising agent and to authorize him to supervise such care, feeding, andmarketing, and to perform other related duties, all in accordance with theterms and conditions hereinafter set forth;

Now, therefore, in consideration of the premises and the mutualpromises herein contained, to be kept and performed by the respective partieshereto, it is agreed by said parties as follows:

A. The Grower agrees:

1. If the stock covered hereby are mortgaged, to obtain the writtenconsent of the mortgagee or mortgagees (which includes any assignee of anysuch mortgage) to this contract before the same shall become effective.

2. After giving days' advance notice to the supervising agentand the Feeder, to ship to the Feeder about head of feeder stock,between the day of 19 , and the day of19 , the exact date of shipment to be at the Grower's option but within theabove-described limits and to bill stock to market with stop-over enroute at

transit feeding yards.

3. That upon the arrival of said stock at the transit feeding yards,the supervising agent is hereby authorized and directed:

(a) To advise the Feeder when the stock will be delivered to himso that he can be prepared to receive said stock promptly.

1This contract form is presented solely as a suggested basic outline.It should no be used as a legal instrument until it has been checked forcompliance with the laws of the appropriate state. Amendments should beconsidered to fit individual situations.

- 46 -

(b) To take charge of said stock at transit feeding yards andfeed, water, and rest the same for forty-eight (48) hoursprior to weighing.

(c) To sort off all the stock deemed undesirable by him forfeeding purposes, and dispose of such off sorts according towritten instructions which may be given by the Grower.

(d) To grade the animals deemed by him to be satisfactory forfeeding purposes into reasonably uniform lots of similar type,size, quality, and weight according to written specificationsgiven by the Feeder, with the minimum weight of each animalnot less than pounds and the maximum weight of eachanimal not more than pounds, and the average weightof the stock not to exceed _ pounds, and to weigh thestock, in case of lambs, with fleeces dry, which weigh less

percent, shall be and is hereinafter referred to asthe "contract weight."

(e) To count the stock when he makes delivery thereof to theFeeder at the transit feeding yards and obtainthe Feeder's acknowledgement of receiving stock on the formattached to this contract.

(f) To inspect said stock carefully from time to time, to makecertain that the stock while in the Feeder's possession are atall times properly fed, watered, sheltered, and cared for inan efficient manner, and to make written reports promptly ofeach such inspection to the Grower, sending one copy to theFeeder, and retaining a copy in his files for inspection byeither party hereto.

(g) To "cut-out" or "mark-out" stock that are deemed by him to befinished for market, direct the marketing of same, and todistribute the net proceeds arising from the sale of the stockin accordance with the terms of this contract, particularlysubsection 9 of section C hereof.

B. The Feeder agrees:

1. If the feed or pasture is mortgaged, to obtain the written consentof the mortgagee or mortgagees (which includes any assignee of any suchmortgage) to this contract before the same shall become effective.

2. To promptly accept delivery of the stock from the supervising agentat the transit feeding yards.

3. To set aside sufficient feed to finish the stock for market and topasture, feed, water, shelter, and care for said stock in a proper manner athis farm located ________; all in accordance with the provisions ofthis agreement.

- 47 -

4. To pay all expenses for feed, water, shelter, veterinary service,and any necessary expenses from the time of delivery of the stock for feedinguntil they are reloaded for shipment to market or sold locally, and in theevent of his failure to pay the same, the supervising agent is herebyauthorized and directed to advance such amounts and to deduct the same withinterest at the rate of percent per annum, from any amounts dueFeeder hereunder.

5. To permit inspection by the supervising agent and the Grower at anyand all times and to follow strictly all reasonable instructions of thesupervising agent with respect to the feeding, care, handling, and marketingof the stock.

C. The Grower and Feeder agree:

1. The supervising agent is hereby appointed the agent andattorney-in-fact of the Grower and the Feeder for the purpose of receiving,handling, supervising the care and feeding of, and selling the stock, andreceiving and distributing the proceeds, as specified in this contract,provided, however, that the foregoing appointment and authorization, and allother undertakings and agreements in this contract contained relative to thesupervising agent, shall not become effective until a supervising agentsatisfactory to both Grower and Feeder has agreed in writing to act in saidcapacity in accordance with the terms and conditions herein set forth.

2. The title to all of said stock shall at all times during the termof this contract be and remain in the Grower free and clear of any claims,charges, costs, or expenses of the Feeder, other than as provided herein, andwith no right in the Feeder to encumber or sell the stock. The Feeder shallnot remove the animals from the farm or ranch without the consent of thesupervising agent or the Grower.

3. Freight charges and feed expense from Grower's loading point to thefeed-in-transit yards at which Feeder accepts delivery shall be advanced bythe supervising agent, and the amounts so advanced, with interest at the rateof percent per annum, may be deducted by the supervising agent fromthe proceeds of sale of the stock. Freight and feed expense so advanced shallbe and remain a first lien and charge upon said stock and the proceeds of salethereof.

4. Stock shall be fed for grain feed and(list grains)

for roughage and for(list roughage) (list supplemental feeds)

supplemental feeds, in such rations as shall be prescribed by the supervisingagent.

- 48 -

5. Any loss of stock or any damage from the crippling of stock due tothe carelessness or negligence of the Feeder shall be borne by the Feeder.The amount of pounds involved in any such loss shall be computed bymultiplying the average contract weight of the stock by number of stock lost,and the sum of this poundage shall be subtracted from the total number ofpounds of gain obtained by the Feeder. Any loss of or damage to stock not dueto the carelessness or negligence of the Feeder shall be shared--the Growerlosing the average per head contract weight and the Feeder losing the feed andlabor represented by his gain. The Feeder shall remove the pelts or hidesshowing brands, if any, of animals that have died and the same shall becomethe property of the Grower. Responsibility for losses and the amount thereofshall be determined in the first instance by the supervising agent providedthat if either the grower or the Feeder refuses to accept such determination,the matter shall be settled by arbitration as provided in paragraph C-11hereof.

6. The supervising agent is hereby fully authorized and empowered bythe Grower and the Feeder to designate the time or times of marketing, themarketing place or places, the price or prices at which said stock shall besold, and to sell and market said stock in his name through a bonded salesagency or to a financially responsible packing company, and to receive thesales proceeds of said stock in trust to be distributed to said parties astheir interests may appear under this contract.

7. If, at any time, in the opinion of the supervising agent or theGrower, the stock is not properly cared for, either of them may serve noticeon the Feeder to surrender said stock to the supervising agent or Grower; uponservice of such notice, the Feeder hereby agrees to deliver said stock, in themanner provided in said notice. In any such case, either the supervisingagent or the Grower is authorized:

(a) To market said stock and make settlement for same as providedin this agreement, or

(b) To select another party to finish the stock, in which eventsaid stock shall be weighed on nearest scale and afterdeducting four percent (4%) shrink from the resulting weight,the Feeder shall be compensated for gain in weight at the rateof cents per pound.

8. On any partial shipment of stock to market, the supervising agentshall withhold twenty-five percent (25%) of the net sales proceeds so as toprotect all parties in the fulfillment of this contract distributing theremainder in accordance with the terms of paragraph C-9 hereof.

9. After payment of freight, marketing expenses, and supervisingcompensation amounting to cents per head of all animals delivered toFeeder under this contract, percent of the remaining proceeds shallbe paid the supervising agent as full compensation for his serviceshereunder. The remainder of the proceeds from the sale of the stock shall beapportioned between the Grower and the Feeder on the following basis:

- 49 -

(a) The Feeder shall receive the market price for the gain inweight of the stock, which weight shall be the differencebetween the contract and the market weight on the sale of thestock.

(b) The Grower shall receive for the contract weightcents per pound, which shall be considered to be the goingmarket price of the feeder stock at the time this contract isexecuted.

(c) Any money remaining over and above the deductions for (a) and(b) shall be divided between the Grower and Feeder on thefollowing basis:

Seventy percent (70%) to the Grower and thirty percent (30%) to theFeeder, providing eighty-five percent (85%) or more of the stock sell at the"shipper or packer top" classification. In case the percent of stock in the"shipper or packer top" grades falls between seventy-five percent (75%) andeighty-five percent (85%), the division of the remaining proceeds shall beeighty percent (80%) to the Grower and twenty percent (20%) to the Feeder. Incase less than seventy-five percent (75%) of the stock sell at the "shipper orpacker top" classification, all of the remaining proceeds shall go to theGrower.

(d) If sales proceeds are insufficient to permit a full settlementunder items (a) and (b), then the difference between theamount available for distribution and the amount that would berequired for making a distribution as provided in items (a)and (b) shall be considered a deficit which shall be borne bythe parties on the following basis:

All of the deficit shall be borne by Grower if ninety percent(90%) of the stock sell at the "shipper or packer top"classification. If less than ninety percent (90%) of the stockand more than seventy-five percent (75%) sell at the "shipper orpacker top" classification, the Grower shall stand seventy percent(70%) of the deficit and the Feeder thirty percent (30%). If lessthan seventy-five percent (75%) of the stock sell at the "shipperor packer top" classification, then the deficit shall be dividedequally between the Grower and Feeder.

10. The terms of this contract shall be binding upon the heirs,executors, or administrators of both Grower and Feeder in like manner as uponthe original parties.

11. Any disagreement arising under this contract, which thesupervising agent is unable to settle in a manner acceptable to both theGrower and the Feeder shall be arbitrated by a committee of three, one memberto be selected by the Grower, one by the Feeder, and the third member by thetwo representatives selected. The decision of any two of the arbiters shallbe final and binding on all parties hereto. This shall include the naming ofa new supervisor if necessary.

- 50 -

In witness whereof, the parties hereto have hereunto affixed theirsignatures the day and year first above written.

(SEAL)(Grower)

Witnesses (for Grower):

(SEAL)(Feeder)

Witnesses (for Feeder):

SOURCE: Federal Extension Service, USDA.

- 51 -

References

Board of Governors of the FederalBulletin. Vol. 71, No. 5.

Reserve System. 1985. Federal ReserveWashington, D.C.

Bureau of the Census. 1982 Census of Agriculture - North Dakota.Washington, D.C.T U.S. Department of Commerce, March 1984.

Cramer, Gail L. and Clarence W. Jenson.Agribusiness. Second Edition.1982.

Agricultural Economics andNew York: John Wiley and Sons, Inc.,

Doane's Agricultural Report. "Feeding Cattle in Commercial Feedlots."45, No. 37-6. St. Louis: Doane-Western, Inc., 1982.

Vol.

Ford, M.J., D.C. Clanton, and M.E. England. "Computer Simulation-RetainedOwnership Profitable." 1986 Beef Cattle Report. Agr. Exp. Sta.,University of Nebraska, Lincoln, 1985.

Guyer, Paul Q. "Contract Feeding of Growing Calves." Great Plains BeefCattle Handbook. GPE 4004. Cooperative Ext. Service, Great PlainsStates, 1975.

Hasbargen, Paul R., Tommy Beale, John E.David C. Petritz. Cattle Cycles:Publication No. 1430. Washington,1983.

Ikerd, Douglas E. Murfield, andHow to Profit from Them. Misc.D.C.: Extension Service, USDA,

Johnson, Roger G., Mir B. Ali, David M. Saxowsky, and Randall D. Little.Cost of Producing Farm Commodities in North Dakota. Agr. Econ. Misc.Rpt. TNo. 90, Dept. of Agr. Econ., North Dakota State Univ., Fargo,January 1986.

Lambert, Chuck and Micheal B. Sands. Kansas Steer Futurities-Summary of NineYears of Retained Ownership. Bulletin MF-712. Cooperative Ext.Service, Kansas State University, Manhattan, 1984.

Little, Randall D. and David L. Watt. Comparing the Profitability of BeefProduction Enterprises in North Dakota. Agr. Econ. Rpt. No. 210, Dept.of Agr. Econ., North Dakota State Univ., Fargo, April 1986.

Mann, Glenn G. (Editor). 1983. Encyclopedia of Banking and Finance. 8th ed.Bankers Publishing Co. Boston.

Minish, Gary L. and Danny G. Fox. Beef Production and Management. SecondEdition. Reston, Virginia: Reston Publishing Co., 1982.

-52 -

Toman, Norman and Wallace Eide. 1983. "Break-Even Prices for BackgroundingCalves." Bulletin EC-783, Cooperative Extension Service, NDSU, Fargo.

Toman, Norm, Tim Petry, and Billy Rice. 1985. Enterprise Analysis: The CowHerd. Bulletin EC-872. Cooperative Extension Service, NDSU, Fargo.

U.S. Department of Agriculture, Agricultural Marketing Service, LivestockDivision, Market News Service. West Fargo.

U.S. Department of Agriculture, Crop Reporting Board. Agricultural Prices.Selected issues, Washington, D.C.

U.S. Department of Agriculture, Economic Research Service. Livestock andMeat Statistics. Selected bulletins, Washington, D.C.

U.S. Department of Agriculture, Statistical Reporting Service. North DakotaAgricultural Statistics. Selected issues, Fargo.

Whitley, Carol and Carl O'Connor. Production and Marketing Strategies forOregon High Desert Rangeland Cattle Producers, 1968-1978. Circular ofInformation 688. Agr. Exp. Sta. Oregon State University, Corvallis,1981.

jlp:bi

august 1986 - north dakota state librarylibrary.nd.gov/statedocs/ndsu/aer21320101206.pdfcow-calf...

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