The Cattle Business -- Custom Feeding as an Option
Livestock Update, November 1998
Bill R. McKinnon, Extension Animal Scientist, Marketing, Virginia Tech
Low feeder cattle prices, cheap grain and low cost of gain estimates have caused many folks to consider the option of retaining ownership in their cattle. Commercial cattle feeders have been willing to talk to new customers, since some of their 1998 customers have tired of current year losses.
There are some basic questions that need to be asked of any feedyard manager before shipping the cattle:
Once some of these basic questions are answered, the cattle owner must also evaluate the basic "gut" feeling he has about the feedlots under consideration. The cattle owner must have some sense of trust in the cattle feeder. You should also be able to ask the feedlot to prepare a cost projection for your cattle for you. It is up to the cattle owner to shop and compare.
The cattle owner may want to do his own projections before making the decision to retain ownership in the cattle. Below is an example printout of an Excel spreadsheet "ROBE -Retained Ownership Break-Even" that may serve as a guide. It is seldom that using current prices for feeder cattle and cost of gain and futures prices for fed cattle will the projection predict a substantial profit to custom feeding 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. If the cattle feeder does find the opportunity to feed cattle and make a potential profit of over $50 per head, steps should be taken through use of the futures or options markets to forward price the fed cattle. Historically, opportunities to lock in that kind of profit are few and fleeting.
Additionally, the cattle owner must consider the cash flow and tax situation he may be in by delaying income until the following year by feeding cattle. The feedlot may be able to offer financing on the cattle to alleviate cash flow problems. The feedyard may also partner on the cattle, paying the owner a percentage of the value of the feeders on arrival at the yard to help address both cash flow and tax problems.
BREAK-EVEN ANALYSIS WORKSHEET
|(enter your figures in the highlighted cells)|
|EXPECTED FINISHED SALE WEIGHT||a||1200|
|SHIPPING SHRINK %||c||7%|
|STARTING FEEDLOT WEIGHT||d||651|
|EXPECTED GAIN (a-d)||e||549|
|DAYS ON FEED (c/d)||g||161|
|EXPECTED SALE DATE||h||25-Apr-99|
|NEARBY FUTURES PRICE||i||$64.50|
|EXPECTED SALE PRICE||k||$64.50|
|GROSS SALE PRICE (i*a/100)||l||$774.00|
|CURRENT FEEDER VALUE, $/Cwt.(net)||m||$63.00|
|CURRENT FEEDER VALUE, $/hd.(b*m/100)||n||$441.00|
|FEEDER INTEREST RATE||p||9.00%|
|FEEDER INTEREST [(n*p)/365*g)]||q||$17.56|
|ESTIMATED OTHER COST/LB OF GAIN||r||$0.48|
|COST OF TOTAL GAIN (e*r)||s||$263.52|
|TOTAL EXPENSES (n+o+q+s)||t||$764.08|
|NET INCOME PER HEAD (l-t)||u||$9.92|
|BREAK-EVEN SALE PRICE/Cwt. (t/a*100)||v||$63.67|
|BREAK-EVEN VALUE OF FEEDER/Cwt. [(l-(t-n)]/b*100||w||$64.42|