The Cattle Business - Retained Ownership

Livestock Update, February 2002

Bill R. McKinnon, Extension Animal Scientist, Livestock Marketing, VA Tech

All segments of the beef cattle industry are learning more about custom feeding or retained ownership. Even Virginians, largely cow/calf and stocker cattle operators, are becoming more familiar with the concept and the jargon. Several changes with the industry are forcing the change in attitudes: increased variability in genetic and health backgrounds of feeder cattle, cattle being directed toward specific beef targets, the increase of fed cattle being marketed on a carcass value based grids, and the development of production/marketing alliances.

Typically, when buyers do the calculations of buying feeder cattle, shipping them to a feed yard, paying the feedbill and selling the fed cattle using the futures market as a price predictor, the calculated net return appears to be negative or offers only modest returns. The fluidity of the market tends to bid the profit out of the cattle. If, for example, current prices projected a $50 to $75 per head profit to custom feeding , the market for feeder cattle would quickly rise from increased competition to take advantage of a projected profit.

Given the above situation that there are very few times when the market appears to be offering substantial profits to feeding cattle, why do buyers continue to bid on cattle and send them to feed? There appears to be three philosophies at work that keep feedlots full.

Philosophy number 1 appears to be, "Well I will buy the cattle anyway and hope for the best." This philosophy seems to be based upon either ignorance or optimism. Some cattle buyers really do not have a good handle on their costs, could not calculate a break-even sale price and so buy the cattle out of ignorance. Others operating under philosophy number 1 may feel that their costs of gain are less than average and so they can buy feeder cattle at market price and still make money. An additional set of folks with philosophy number 1 operate on the "betting on the come" theory. These folks just feel the fed cattle market will have to be higher when they get ready to sell their cattle. This set of cattle feeders has also been known to play the lottery and constantly try to draw to an inside straight when playing poker.

Philosophy number 2 is based upon buying normally discounted feeder cattle, have them fed and then sell them on the average live price. It happens every week in the High Plains feedlot region that all the finished cattle sell for essentially the same price per pound on a liveweight basis. Many buyers make a living out of buying extremely light muscled cattle, heiferettes, and other feeder cattle that normally suffer a substantial discount, feed them, and then receive the average price paid for fed cattle. As the industry moves to more cattle being sold on a carcass value basis, it will be tougher to make this mode of operation work.

Philosophy number 3 entails sending superior cattle to the feedlot and permitting their above average on-feed performance and improved carcass merit to generate profits. Cattle with superior growth and feed conversion can be finished with a lower cost per pound of gain than industry standards. Additionally, cattle with true carcass merit will be worth more dollars when marketed on an appropriate carcass value grid than when sold "on the average." Increasingly, the industry is recognizing the benefit to marketing cattle for what they are worth hanging upside down in a cooler. The percentage of cattle being sold on some form of carcass value has grown from just a small number a few years ago up to now roughly 35-40% of fed cattle.

In the future, philosophy number 3 is the mode under which progressive cow/calf operators and cattle feeders will conduct business. As we talk about the development of a two-tiered market for feeder cattle, it is these superior cattle that will return those higher tier prices back to the cow/calf owner. More commercial cow/calf breeders are retaining ownership in these truly superior cattle. If the owners have gone to the effort to make value added feeder cattle through improved genetics and health background, it pays them to maintain some financial interest in them past weaning. Using data derived from Virginia's Retained Ownership Program, the table below illustrates the impact of cattle with superior performance upon profit. Profit was calculated using current feeder cattle prices at the time of shipment from Virginia, individual shipping and feeding costs, an interest charge against feeder cattle value and hauling, and the carcass value of each steer or heifer. The cattle were divided into a top third and bottom third based upon the profit they made for the owners.

The table above illustrates that on the average cattle feeding tends to be a break-even venture. The $4-5 per head average loss agrees with industry-wide calculations. The superior cattle in the upper profit third significantly returned more dollars to their owners. Assuming a 600 pound shipment weight, the high profit cattle were worth $14/cwt. more than the average feeder cattle prices being paid. Those cow/calf operators who do not feel comfortable retaining ownership in superior cattle as those shown above may want to consider use of the Virginia Quality Assured feeder cattle ear tag program. The VQA program identifies cattle with superior growth genetics and a value added health program before they enter the marketing arena.

The Virginia ROP program is a commingled steer feedout program that helps consignors learn more about the post-weaning and carcass performance of their cattle. The next shipment of ROP steers is scheduled for March 27. The cattle with be fed at Midwest Feeders near DeKalb, Illinois. For more information on the Virginia Retained Ownership Program, contact Bill McKinnon in the Virginia Tech Animal & Poultry Sciences Department, 540/231-9160 or bmckinno@vt.edu.

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