Retaining Ownership of Calves Requires Caution

Retaining ownership of calves can have rewards but financial concerns and other risks must be considered.

"Retaining ownership is not without risk. Bad markets, poor performance, high feed grain prices and death loss can all contribute to negative returns when feeding cattle," says Greg Lardy, North Dakota State University Extension beef specialist. Unforeseen risks such as inclement weather, can reduce performance and drive up cost of gain. Using marketing tools such as hedging, options and forward contracting can be used to reduce risk, but they cannot cure bad markets or poor performance.

Many commercial feedyards that specialize in retained ownership cattle will offer risk sharing plans to customers. The feedlot will buy a portion of the calves when they are placed in the lot. This can ease cash flow problems in addition to being a sound risk management tool, Lardy said.

Financial standing should also be taken into consideration when possibly pursuing retained ownership. The practice is not for everyone, though it offers the opportunity for increased profits over simply selling at weaning. Cattle producers should work closely with their lender to evaluate their financial position, he advises.

Marketing dates are delayed since calves are not sold directly following weaning or after back-grounding, Lardy explained. Discuss plans with your lender well in advance of sending the cattle for finishing. Cash flows are changed when cattle are retained for feeding. If you traditionally market your calves at weaning, income will be delayed six to eight months until slaughter cattle are marketed.

Tax implications can also be a concern. Income and taxes that are deferred can create a difficult situation for a producer who is changing his marketing strategy because two calf crops will be sold in one year. "New tax laws regarding income averaging may help producers through this situation," Lardy noted. Contacting tax professionals to determine tax implications of retained ownership is also recommended before sending the calves to the lots.

Cattle producers uneasy about placing their entire calf crop on feed or who have limited financial resources should consider participating in local steer feed-outs or fill pens with neighboring farms and ranches. Producers can consign as few as five head to some feed-out programs. This reduces risk and still allows the producer to learn how the cattle perform in the feedlot.

Difficulties finding feedlots can be another hurdle for cattlemen. Ask friends or neighbors to refer you where they are comfortable feeding, Lardy suggested. Your local veterinarian or extension personnel may also be able to give a reference, as well as a state or local cattlemen’s or cattle feeder’s organization. Ask feedlot managers for names of customers who have fed with them recently. Call those references, and ask them questions about the service they received.

Once in a feedyard, the cattle are fed high concentrate finishing rations, high in grains or grain byproducts. "In a custom feeding situation, the farmer or rancher would retain at least partial ownership of the cattle and receive any profit or be responsible for any losses that occur when the cattle are sold to the packing plant," Lardy explained. Typically, most custom feedlots require their customers to maintain ownership on at least 25 percent of the value of the animals. For example, if the calf is valued at $500, he would need $125 equity in the calf.

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Source: Greg Lardy, 701 231-7660
Writer: Karen Heinzen, 701 231-7881
Editor: Tom Jirik, 701 231-9629