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Custom Cattle Feeding; a Retained Ownership Option

By Stephen Boyles
 
Custom feeding is paying someone else to feed your calves because you, the cattle owner, do not have the facilities, time, or expertise to feed cattle. Custom feeding allows the feedlot operator to use feed, facilities, and labor without large investments in cattle. Cattle owners can take advantage of favorable market situations or improved genetics they have developed in their cow-calf operation.
 
Custom feeding is not currently practiced in Ohio to the degree it is practiced in the high plains. Much of today’s cattle feeding is located on the high plains.  Custom feeding may allow existing feeders to expand without encountering as much financial risk. Financial institutions, livestock marketing associations, packing plants and feed companies may need to offer shared financial opportunities to increase the profits of their cow-calf operators and cattle feeders.
 
Increased opportunities for marketing or at least processing/fabrication of finished cattle are needed. However, we also need to provide the business atmosphere to supply any increased demand for finished cattle. Custom feeding may allow spreading the financial risk among more individuals. This will also increase the knowledge base of all individuals involved with Ohio beef production.
 
In general, there are two situations where custom feeding or retained ownership may be considered:
1. Background or stocker calves to heavier weight (650-800 lbs).
2. Feed calves or yearlings to market weights (1000-1300 lbs).
 
The custom feeder takes the cattle and feeds them and bills the cattle owner for the cost of feeding the cattle. Each custom feeder will handle the charges for feeding a little differently. Some programs are based on a “cost per pound of gain.” Cost of gain programs are better suited to grass feeding where weighing feed is impossible. It is probably safer in the long run for feedlots (drylot feeding) and cattle owners for costs to be based on actual feed costs and yardage fees. This requires a set of scales to weigh feed going into the pens.
 
Considerations for Custom Feeding
 
Cost of feed: Feed may be marked up a few dollars a ton to cover cost. The cost of the ration the cattle feeder quotes to the cattle owner will include this markup.  There are some differences in how feedlots charge for their services. Some markup the feed a little more and do not charge “yardage.” Others may charge a little more for yardage and not markup the feed as much.
 
Yardage fee: The yardage fee will vary from lot to lot. Some have a yardage fee and some don’t. The important thing is to ask. Yardage fees may include free-choice mineral, medication, etc. The yardage fee may vary from no fee to $.30 per head per day, depending on what is included in the yardage fees.
 
Ration composition: The ration composition should include not only the list and amounts of feedstuffs but also a report on energy, protein and major vitamins and minerals. A list of feed additives should also be included. It might also be helpful to know who are the feed suppliers.
 
Cost of receiving procedures: Cost of arrival treatments usually includes cost of vaccination, dewormer, implant, etc. plus a labor cost for working the cattle. This will vary but the total cost will run from $5 to $15 per head.
 
Receiving management practices: Actual receiving management practices may include a vaccination with 7-way, IBR, and Lepto. Other practices will be implants, deworming, pour-ons or tagging the cattle. (A separate charge may be needed if the cattle are reimplanted during the feeding period.)
 
Cost of treating sick cattle: Cattle moved to a sick pen will have additional costs of medication while the cattle are in the sick pen. In some lots, the yardage fee may cover these costs.
 
Typical death losses: Death losses will usually be borne by the owner of the cattle.
 
Selling method: Ask the feedlot operator how the cattle are to be sold and if there will be any marketing costs. The cattle owner and cattle feeder work together to determine when the cattle are ready for marketing. Transportation costs should be considered.
 
Method of billing costs: Billing is usually done every two weeks or monthly. The feedlot operator should send a complete record of the delivered feed and its cost. Billings should reflect changes in ration ingredient costs if feed is continually purchased from another source during the feeding period.
 
You want to see as much detail on the bill as possible. It, at least, ought to tell you how much feed the cattle ate, at what cost and then an itemization of any other costs billed to the cattle owner.
 
The first bill should tell how much it will cost to process the cattle on arrival. The cost of the feed will be on an as-fed basis.
 
If the feed is financed through the feedlot, look for a statement of interest on the bill. It is a good idea to ask when interest charges go on the feed.
 
Written contract: It is a good idea to have some form of written agreement even with very reputable feeders. It allows each party to know their respective responsibilities.
 
Partnerships or Joint Venture: Another option to custom feeding is a partnership or a joint venture. This offers opportunities for cow-calf producers, stockers and feeders to take advantage of favorable market situations, and yet, spread risk among more individuals. Some feed companies also have shared ownership programs. It is a possible opportunity for other ag businesses to increase their customer base. It is also a viable alternative where lending institutions are not familiar with cattle feeding or are hesitant about being the sole institution involved. A joint venture is an association of two or more persons to carry out a business enterprise. A joint venture may occur when the producer wants to retain part ownership in the cattle and obtains the management and marketing expertise of the feedlot operator as the other partner. A successful joint venture would include:
  1. Terms of ownership
  2. Management control
  3. Guidelines for responding to market changes
  4. Adequate capital
  5. An analysis of tax consequences for all parties
Evaluating a Custom Feeder or Potential Partner: It is important to know exactly when, what and how the feeder is billing you. It is also important to work with a reputable feeder. Visit with neighbors, feed suppliers and the local sale barn about the cattle feeder. Check out the financial condition of the feeder. You can’t afford to have them go broke with ·your cattle on the operation. Liens against the feeding operation may tie the cattle owner up in court. You might have your banker talk to the cattle feeder’s banker. Ask what kind of cattle they handle best. Some feedlots handle mostly yearlings, others specialize in weaned calves and still others are set up to care for long-hauled, weaned cattle. It is also a good idea to visit several operations instead of just one.
 
Visiting a Feedlot: It is a good idea to visit a lot while cattle are being fed. It is also not a bad idea to visit during or after bad weather to see how they handle the situation. The lots should be fairly clean and well drained. Ask how often the pens are cleaned. The water and feed should be clean, fresh and available at all times. There should be adequate shelter and bunk space for all cattle in the pen. It is a good idea to at least put locks on gates and loading chutes when you are feeding cattle for other people. A large flock of birds or spilled grain can increase feed costs. Cattle from different owners should be kept separate for accurate billing sheets. The sick pen should be kept dry and well ventilated.
 
How to Choose a Feedlot: Cattle producers are by and large a reputable group with well managed operations. The question may be, “How do I choose among them?” Since you are concerned about how much it will cost, a good place to start is to compare expected costs of gain.
 
When you talk about cost of gain, it is important to know how it is calculated. To start with, you need to know if it is figured on payweights or in-weights. The payweight is how much the cattle weighed when they got on the truck for the trip to the feeder. An in­weight is what the animals weigh when they arrive at the feedlot. Since cattle shrink due to transport, in-weight is less than the payweight. By the end of the feeding period, cost of gain based on in-weights usually looks more favorable than those based on the payweight. In-weights are often used because a feedlot won’t usually know what the payweights are.
 
Feed efficiency is another factor that affects the cost of gain. Feed efficiency is the amount of feed it takes to get a pound of gain. Knowing the cost per ton of the complete ration is only a starting point. A higher priced per ton ration may provide better gain and cheaper costs of gain. Therefore, cost of gain is a more important question to ask than just cost of a ton of feed. Comparing ration costs can be done three ways:
  1. Expected cost of gain (including all costs)
  2. On a dry matter basis
  3. On a net energy basis
For evaluating just the diets of different feeders, comparing diets on a dry matter basis or on a cost-per pound of net-energy basis are probably the best. In either method, you have to have the ration ingredients and the percent moisture of the ration. Ration costs and cost of gain may vary with feed price changes during the feeding period.
 
Selling the Cattle: At the start of the feeding period, an estimated market date should be projected. It is important for the cattle owner to be involved in marketing decisions. Allowing the feeder to make all the decisions regarding marketing may classify you as a passive investor for tax reasons.
 
Cattle may remain in the yard for approximately seven days after they are sold. The buyer of your cattle can pick them up any time during those seven days. The cattle remain your responsibility and not the buyer’s until they leave the yard. Therefore, you will pay for the feed and incur any losses due to weight loss or death until that time. Pencil shrink on delivery date will be approximately 4 percent.
 
Payment: Payment can come in different ways. If you financed everything through a bank, the packer’s check can go there, and the bank pays you the balance after the loan is repaid.
 
The packer may write two checks, one to the feedlot for their feed and service and the second check to the cattle owner. If the cattle owner has been paying a feedlot bill, the check comes directly to the cattle owner.
 
At the end of the feeding period when the cattle are sold, you get a final “close-out” from the feedlot. It serves as a bill plus a summary of itemized costs and performance.
 
Loan Requirements for Retained Ownership: The search for loan money is not the sole responsibility of the cattle owner. The custom feeder should be able to direct the cattle owner to financial institutions that are familiar with cattle feeding. Loan policies can vary.
 
Some financial institutions will loan up to 70 percent of the appraised value for the cattle and 75 percent of the feed bill. Cattle may be appraised when they arrive at the feedlot. A large line of credit will call for a current financial statement. The financial institution may require some sort of price protection such as hedging or an option contract. If this is the first time you have custom fed cattle, the financial institution may want to send someone to visit the operation during the feeding period. The feedlot may send all bills directly to the financial institution for payment. The owner will receive a copy of the bill payment. A computer generated economic and animal performance predictor model can be used to illustrate how the cattle should perform during the feeding period.
 
Summary                                                     
 
There are many hurdles (opportunities) for increasing beef production in Ohio. We need to continue to improve our production and management practices. However, we need to investigate alternative business programs for owning and financing cattle operations. Custom feeding and joint venture projects are viable tools that should be considered.
 
Source : osu.edu