8 minute read
RETAINED OWNERSHIP RISKS & REWARDS
RETAINED OWNERSHIP
Risks & Rewards The IBBA is proud to bring you the CattleFax Trends Publication that is sponsored by Ritchie Industries. Look for this article each month in the Brangus Journal and Frontline. If you would like to learn more about CattleFax, please go to www.cattlefax.com.
Bargaining power has a significant influence on price levels in commodity markets, especially when transactions occur between multiple, independent segments within an industry that produces a single product for consumers. Bargaining power shifts between sectors of the beef industry depending on the different phases of the cattle cycle. After the drought that occurred early in the last decade, cow-calf producers clearly had the upper-hand over backgrounders/ stockers and feedyards. During the early stages of expansion, the supply was not large enough to meet the demand to fill yards or grazing programs. Over the last few years leverage has shifted back to calf buyers as supply grew. Even though producers liquidated 375,000 beef cows from 2019 to 2020, bargaining power will still favor buyers over sellers this year. Also, given the current price outlook, additional liquidation will likely occur in 2020 causing more heifer calves to be marketed. One strategy cow-calf producers have utilized in recent years to combat or avoid the poor leverage position altogether, is retaining ownership.
Another reason producers might consider retaining ownership are the events that have taken place this year, with the uncertainty from COVID-19. While the impact COVID-19 has had on beef demand is difficult to quantify due to the major supply chain disruptions, it is likely consumer demand was hurt but will improve as the country returns to a more normal environment and recovers economically. This should be supportive to cattle prices and
give them a reason to rebound in the future, assuming no more black swan events adversely affect the markets. The exact timing and magnitude of the recovery is still to be determined. However, retaining ownership will buy producers more time and potentially increase profitability.
There are a multitude of directions a producer can go with their calves if the decision is made to own them longer. While there will be some variation around the number of days and target weights, the accompanying diagram displays some of the different options for producers. Assuming calves are not sent straight to a feedyard, retaining ownership gives producers a lot of flexibility when it comes to marketing windows to improve the chance of profitability. For example, the plan is to background calves for 150 days with the intent of sending them to a feedyard after. However, when it’s time to ship to the feedyard the market plunges and a recovery is not expected for at least another several months. Then those calves could be turned out to grass to stretch the marketing period out. This could be done assuming there is available forage.
Retaining ownership is a challenge, and not for everyone. Delaying cash flow from this year’s calf crop may not be financially feasible. Also, just like everything else in the cattle business, there are risks associated with owning cattle longer. The example that was just discussed assumed Mother Nature provided ample precipitation for optimal grazing. Right (continued on page 18)
(continued from page 16) now, a large percentage of the western half of the country is experiencing drought conditions. Many stocker operators in these regions were planning to avoid the risks involved with cattle feeding and sell their inventory as feeders. However, even grazing programs with cheap cost of gain cannot avoid all risks. The dry conditions will likely cause cattle to be marketed sooner and lighter than originally expected.
The last couple months the cattle feeding segment has endured a situation that is not common, but is a risk that producers need to be aware of. A backlog of roughly one million head of fed cattle has developed due to the slowdown in processing capabilities. A carryover of this size is very extreme and rare, but even having to carry cattle an extra week or two if the packer is slow to pick up cattle can impact profitability. It could cause final closeouts to fall short of beginning projections. Another variable that can hurt performance and increase cost of gain is weather. The wet winter from 2018 to 2019 resulted in much higher breakevens than expected, especially in the northern plains.
While the feedyard should aid in marketing the cattle, it’s up to the producer to decide what form of marketing will be used. Negotiated cash on a live or dressed basis only rewards the seller for total tonnage. Also, marketing on a dressed basis puts all the yield risk on the seller. If cattle are expected to have the genetic makeup to excel from a carcass merit standpoint, selling on a grid might be the best option to take advantage of the superior genetics. Keep in mind the premiums for quality grade will vary throughout the year depending on the size of the Choice-Select spread. The spread is typically the narrowest in the first quarter of the year and peaks in the summer and fourth quarter. Targeting those windows should help maximize revenue. Yield and weight can’t be forgotten when selling on the grid. Taking discounts for yield grade 4 or 5’s and being too heavy can significantly hurt your bottom line. If you participate in valueadded programs such as Verified Natural or NHTC, having a pre-arranged marketing agreement with a packer is recommended to ensure the appropriate premiums are fully realized. Owning cattle all the way through the supply chain and marketing on a grid gives producers the opportunity to analyze how their genetics perform in other segments of the industry. Even if retained ownership is not done every year, past performance and harvest data can be used to leverage for higher prices when selling future calf crops.
If you are seriously considering retaining ownership this year, it is never too early to start taking action. Having a plan is necessary to be successful. Obviously if you are going to background or graze your calf crop, having the right feed resources and facilities is required. The first step to putting cattle on feed is finding a feedyard with available pens, which could become a challenge as the year progresses. Because fed cattle are being backed up and occupying space longer than anticipated, some yards have started a waiting list for future placements. As mentioned earlier, drought will likely cause some cattle to come off summer grazing sooner than expected and be on-feed longer. If major winter grazing regions do not receive moisture into the fall, fewer calves will be turned out. Instead, larger volumes of calves will be put on-feed. For these reasons it is recommended to begin the search for a feedyard sooner rather than later. When investigating different locations, be sure to ask questions. What is their relationship with packers and proximity to a plant? Does the yard offer financing and risk management services? Are the expected feed costs reasonable?
Because of the current market environment and where the industry is within the cattle cycle, retaining ownership has become popular for cow-calf producers. Owning calves through the supply chain can be rewarding, but also comes with risk. To help make the decision, answer the question: Do you want to keep owning the calves with the projected breakeven based on what they could sell for at weaning? If no, then market at weaning or forward contract. If the expected breakeven is low enough to potentially be more profitable in the future, then retain ownership. Some form of risk management for equity protection is recommended, if the latter option is chosen. This could also include locking in feed costs by taking a corn position or doing it through the feedyard to help keep cost of gain near projections.
where
meeTs
PHILLIPS RANCH is selling one flush out of any wholly owned donor at the sbba showcase sale September 26, 2020
don’T miss This unbelieveable opporTuniTy To add ToTal package MS dmr nuff said 541Y18 | R10207063 mc nuff said 889t50 x ms brinks gd fortune 541p103 geneTics To TTR A5051 U0286 X6200 | UB10288664 Three trees double design x ttr x6200 317r3 406m4 SC:0.91 hpreg:3.04 REA:0.45 imf:0.28 mw:-6.47 CED:4.17 BW: 2.0 WW:28.7 yw:65.88 M:12.45 tm:26.8 your herd! CED:9.57 BW: -2.9 WW:27.8 yw:60.66 M:13.6 tm:27.5 SC:0.78 hpreg:2.05 REA:0.51 imf:0.56 mw:-3.89 stay: 0.72 Fert-ind:2.175 term-ind:3.374 stay: 1.63 Fert-ind:1.992 term-ind:4.198
These ouTsTanding females are jusT a sample of The donors available aT phillips ranch.
Ms salacoa stonewall 209B | R10260348 stonewall of rrr 222w6 x ms brinks bright side 209l11 CED:3.18 BW: 1.67 WW:29.0 yw:54.79
MB MS Yellowstone 129a2 | R10324851 mb yellowstone 17Y2 x mb ms nimitz 129t9 CED:4.0 BW: 2.7 WW:37 yw:77 M:20 tm:39 SC:0.41 hpreg:2.64 REA:0.49 imf:0.31 mw:4.77 stay:0.86 Fert-ind:1.38 term-ind:4.10
Flushmate sister to the great hollywood! MS Salacoa New Vision 23a49 | R10251838 new vision of salacoa 209y2 x ms svf patton 23y66 CED:2.5 BW: 2.4 WW:32.63 yw:61.38 M:-1.64 tm:14.67 SC:0.38 hpreg:1.25 REA:0.49 imf:0.02 mw:-19.33 Stay: -0.82 Fert-ind:0.93 term-ind:2.57 Bunnell, Florida Tim & Todd Phillips, Owners Rob Singleton, Manager 770.862.0983 | singletons2002@yahoo.com www.phillipsranchllc.com
