Kansas Farm Bureau®

  Creating Value for Small Beef Operations  Mark Nelson

What’s a Small Beef Operation?

According to Kansas Agricultural statistics, the average beef cowherd in the state is 57.7 cows, which is the number of beef cows divided by the number of beef cow farms.  For this discussion I define a small beef operation as one whose size limits it from utilizing many of the tools available to other ranches.  As an economist, we often throw out the term, “economies of scale” when producing a commodity like cattle.  If your operation is of a sufficient size to use these tools, you have an advantage over smaller farms and ranches, providing you higher prices, better terms or lower costs. 

In the cattle business, you might argue that 50,000 pounds is a key number.  If you want to move cattle more than 50 miles, likely the most cost effective mode of transportation on a per head basis is a semi-load or 45,000 to 50,000 pounds of cattle.  If you want to forward price your feeder cattle using the futures market, you need to do it in 50,000 pound increments. 

If you’re a good manager and have good cattle, which I assume you do, and you’re weaning 600 lb. calves; it would take 80 calves to reach 48,000 pounds, in order to fill a load or allow your calves to be forward priced on the futures market.  We know the cattle industry desires a good set of calves whose weaning weights all fall within a fairly narrow range; and I again assume you’re a good manager and have 75% of your calf crop within a tight, 45-day period, giving you weaning weights plus or minus 60 pounds on that percentage of your calves.  I also assume that half your calves will be bulls and half will be heifers.   

So how many mamma cows does it take?  Eighty calves divided by 75% (calves in a single weight group), equals 107.  One hundred seven cows divided by 50% (half bulls and half heifers), equals 214 mamma cows needed; assuming a pretty short calving season, pretty good weaning weights, and not retaining any replacement heifers. 

So what’s a Small Beef Operation?  For this discussion, I’d say anything under 200 cows. 

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Maintaining value from the Ranch                                  . . . . . .  to the Grow Yard
 

The Benefits of “Load-Sized” Lots

A load-sized, 80 head group of locally grown calves provides several potential benefits that can either save the rancher money or create greater value for the grow yard.

1)      Transportation Benefits: Let’s compare two sets of calves, Group “A” is loaded once, hauled and then received at a grow yard versus Group “B” which is loaded, hauled to an auction, separated into smaller groups by size, sex and color, ran around the ring, regrouped with numerous other cattle from unknown origins (in order to create a load-sized lot), then reloaded, hauled and received at a grow yard.  Clearly, there are benefits to handling cattle like Group “A” relative to Group “B.”

a.      Added value – by reducing calf stress, resulting in less sickness and death loss, lower veterinary/medicine costs and improved gains.  All of this benefits the grow yard and provides the rancher with the opportunity to negotiate a premium price.

b.      Added pounds – by reducing shrink.  Assuming that the Group “A” cattle realize at least one percent less shrink versus Group “B” cattle; on a six hundred pound calf , that’s 6 lbs., at $1.00 per pound this can add $6.00 to the rancher’s bottom line.

c.      Decreased transportation costs – by loading and hauling once, versus loading and hauling the cattle twice you clearly reduce miles, fuel and time.  Who benefits is a negotiable point between the individual rancher and the grow yard.

2)      Marketing Benefits:  As noted earlier, the 50,000 pound lot not only fills a semi-trailer but is also the number of pounds in a CME Feeder Cattle Futures contract (a cash-settled contract based on the CME Feeder Cattle Index[1]).

a.      Added flexibility – by allowing both the rancher/seller and grow yard/buyer to more easily use the futures or options market to hedge[2] the cattle.  This allows both buyer and seller to set the price of the cattle independently not only of each other but independently of actual delivery.  In addition, even if the rancher chooses not to utilize this marketing tool, it represents a potential negotiating point with the grow yard who may be more inclined to use futures or options than an individual rancher.

b.      Added information – by creating a more direct link between the ranchers and grow yard.  This allows information about calf genetics, health, age & source, and weaning to be more easily shared with the grow yard; while gain and other downstream information such as quality grade can more easily be shared with the rancher.  Better management decisions come with better information.  By gaining access to carcass information and feedlot performance data, ranchers can more easily see what practices are working at their operation and which cattle are performing regardless of the operation’s size.

Other Value Adding Opportunities

A Montana State University – Montana Beef Network study of cattle sold through Superior Livestock Auctions during the summer of 2007[3] quantified several opportunities for ranchers, reporting them as the dollars per head added to the value of a 600 pound calf.  In sum, the four opportunities below add $57.93 to the value of a 600 pound calf ($9.65/cwt.).

a)     Weaned – Calves weaned at least 30 to 45 days prior to delivery were shown to add $17.64 to the value of a 600 pound calf ($2.94/cwt.).

b)     Vaccinated – Calves that were part of a comprehensive and documentable vaccination and health program added $14.81 to the value of a 600 pound calf ($2.46/cwt.).

c)      Age and Source Verified – Calves that were enrolled in a USDA approved and audited age and source, Process Verified Program (PVP) or QSA (Quality Systems Assessment) program added $12.83 to the value of a 600 pound calf ($2.13/cwt.).  Note: Ag Solution’s Beef Verification Solution[4] program is part of the AgInfoLink PVP, providing age and source verification at an affordable price.

d)     Load-sized Lots – As previously mentioned, were shown in the Montana study to add $12.65 to the value of a 600 pound calf ($2.10/cwt.). 

Commingling, A Solution for the Small Beef Operation

We’ve defined what a small beef cattle operation is, discussed the benefits of “load-sized” lots and several opportunities available to add value to your calves.  But the challenge for many smaller beef operations is that it is difficult to take advantage of these opportunities.  Smaller operations often don’t have the space, time or feed resources available to add animals in order to create load-sized lots, let alone retain ownership, which by the way is the best way to realize the packer-based premiums available for age verification and carcass quality.  So how does the small operation achieve these benefits?

One solution is to take advantage of some economies of scale by creating your own commingled, load-sized lot of “like” cattle.   

How?  Work with a neighbor, or two, or several and put together your own 50,000 pound load of cattle that are uniform in age, size, sex, color and have been managed similarly.  For example, one producer with 100 mama cows might put in 37 calves and then work with two smaller, 60 head units who each put in 22 head, for a grand total of 81 calves; or ten producers could put in eight calves a piece–all born in March; or any number of combinations, each creating a 45,000 to 50,000 pound load of like cattle. 

Isn’t this what my local sale barn does? Yes, for decades local cattle auctions have served an important industry niche by splitting up calves from one ranch by size, sex and color and allowing feeders to buy these smaller groups, assembling them into larger groups of “like” cattle.  By working with your neighbors to create your own commingled, load-sized lot of like cattle, you’ve continued to fill that niche but have increased the value of the calves, reduced the overall costs and shifted many of the benefits and responsibilities from the feeder, to the rancher. 

What about quality?  We all know that our cattle are “better” than the neighbors.  First, individual animal identification is a must in this type of commingling program.  Individual weights should be recorded and payment prorated back to each participant based on the pounds and quality of animal produced.  Secondly, you may be surprised to find that often there is as much variation within your own calves as there is between your calves and your neighbors.  For example, through the Beef Verification Solution program, we’ve consistently seen $500 to $700 ranges in carcass value from animals coming from the same herd/genetics.

Commingling Tips and Suggestions

1)      Identify a Group Leader – First and foremost there needs to be someone at the local level that is organizing the load(s) and communicating with both their fellow ranchers and potential grow yards and buyers.  This may be the rancher with the most animals in the group, the grow yard or an individual willing to work with ten to twenty area producers putting together multiple loads. 

2)      Individually identify and weigh calves – As mentioned earlier, it is essential that Individual weights be recorded and payment prorated back to each participant based on the pounds and quality of animal produced.  An initial weaning weight can be used to calculate an adjusted 205-day weight (providing information on cow productivity) and also compared to later weights for calculating daily gains (providing insight into the genetic growth potential of your calves).  Suggestion: Confidentially provide individual calf information to each participant but also anonymously combine “group” information so that participants not only see how their animals did but also how they performed in relation to the group as a whole. 

3)      Set the rules early – It is important for all participants to get together early in the process and develop ground rules, responsibilities and expectations.  Asking yourselves, what kind of cattle do you each have and what kind of load-sized lot can you create together.

a.      How narrow will the deliverable range of ages and weights be?

b.      A single color or breed?

c.      Specifically when are the calves to be delivered or picked up?

d.      Will the calves need to be weaned and held on the ranch for a period of time prior to commingling or weaned “green?”

e.      Do you wish to sell the calves after a 45-day weaning period, after a 90 to 120-day grower phase, or would you consider retaining ownership?

f.        If the calves are held for a period of time as a commingled group, who will feed and care for them and how will the feed bill be shared and paid?

g.      How will income be shared?  Suggestion: While the buyer will likely want to pay a single per cwt. price for the entire load, with individual weights you can still prorate income to each participant on a per head basis (adjusted for shrink); possibly even utilizing a predetermined “price slide” to adjust for individual calf weights.

h.     How will sick calves and death loss be handled?  Suggestion: Like payment, the cost of treating sick calves, if possible, should be paid by or deducted from the income of the individual calf owner.  The group goal should be to provide a good set of healthy calves that will grow and perform at the feedlot.  You need to demonstrate to the grow yard that the calves in your group will do better than a hodgepodge group they put together through a sale barn.

i.        What will be the agreed upon health management program?  It is vital to have a uniform, documented and industry accepted health program applied to all animals, with a goal of providing a set of healthy calves that the grow yard doesn’t need to fully vaccinate at receiving, “they’ve had all their shots,” doesn’t cut it.  Suggestion: Select and work with a local veterinarian that can assist in outlining and implementing a health program and more importantly, will stand behind your cattle if additional information or documentation is needed by the grow yard. 

4)      Discuss and decide early what your price and premium expectations are – The final price received for the entire load and each calf individually, will be a strong determinant of each participant’s ultimate satisfaction with your commingling effort.  Agreeing to what an acceptable price is, who will have the responsibility for negotiating the price, and maintaining transparency throughout the process are essential to your success.   

Idea: Instead of setting a target, per hundred weight price that you wish to receive/negotiate, negotiate a premium/discount relative to the CME Feeder Cattle Index.  As noted in the footnotes, the index is a seven-day weighted average of prices from across the country of actual feeder cattle auctions, providing a fairly accurate barometer of the current market.  But because the index represents 650-849 lb. medium and large frame, #1-2 feeder steers, both a premium and basis component should be included to adjust this price.  The benefit of this is that the CME Feeder Cattle Index is used to “cash-settle” CME Feeder Cattle futures contracts, making it possibly the ideal cash price when hedging.  In addition, Livestock Risk Protection (LRP) revenue prices are percentages of the expected end value of the cattle at the end of the coverage period and is a forecast of what the CME Feeder Cattle Index will be on the date the LRP contract terminates, making the use of this price risk management tool even more effective if you would choose to use LRP.  

5)      Age and source verify your calves – Packers continue to pay premiums from $35 to $50 per head for fed cattle that are age verified through a USDA approved PVP or QSA program.  If potential buyers are aware, research has shown that a portion of these premiums will be passed back to the rancher.  But it is nearly impossible for smaller operations to receive this premium when they market through a sale barn[5].  Creating a load-sized lot of age verified calves represents an excellent opportunity to capture a portion of this premium and add value to your calf crop.  Note: Ag Solution’s Beef Verification Solution program is part of the AgInfoLink PVP, providing age and source verification at an affordable price. 

6)      Realize that it will be a long-term pay off – It is important to understand that done properly, the pay off to your commingling efforts will be greater in the years following the first year.  If you succeed in providing a good set of healthy calves that grow and perform at the feedlot, you’ve likely gained a loyal customer for many years to come; as your group’s reputation grows, it will be easier and easier to negotiate premium prices but in year one, your group and your commingled cattle are an unknown. 

Suggestion: Over time your group can continue to improve how you operate.  For example, more closely align your calving seasons in order to provide more cattle of like age and size.  And, consider cooperatively selecting sires, to better ensure similar genetics and performance.  A large enough set of small beef operations might even consider sharing bulls between spring and fall calving seasons, cutting your bull costs in half. 

7)      Realize that participating in a commingling effort will require you to take on some additional costs and responsibilities – You’re not just hauling calves to the sale barn anymore, you’re creating a value-added commodity that must be managed and marketed to properly pay off.  

8)      Look around for resources – There are many folks, including grow yards, cooperative extension personnel, Beef Verification Solution Verification Centers, or your local veterinarian that would be more than happy to work with you as you explore the concept of working with your neighbors to create your own commingled, load-sized lot of like cattle.  You can also contact me here.