An Ag Lender’s Questions for Startup Stocker Operators
If running stocker cattle is an appealing business concept, prepare yourself with a lot of research into your ranch resources, the prices of cattle and your own tolerance for financial risk.
By Ellen H. Brisendine
If you’ve always been curious about adding stocker cattle to your ranch business, then leasing land to an experienced stocker operator may be the easiest way to observe this segment of beef production with the smallest amount of risk exposure, a.k.a. losing money.
However, if you take delight in daily analysis, beef breeds, trends in what types of cattle are selling for how much and to whom, average daily gains, land lease costs, production loan interest rates, purchase prices, selling options and risk management, average rainfall, range and pasture conditions and seasonal nutritional value of feed stuffs, then you may find a stocker component to be a profitable addition to your ranch business.
Ken Leiber, president of National Finance Credit Corporation and Texas Livestock Marketing Association, Fort Worth, and a Texas and Southwestern Cattle Raisers Association (TSCRA) director, makes production loans to some of the leading ranchers in the country and deals with business people who buy and sell thousands of stocker cattle yearly.
He offers some thoughts to consider from his perspective as a lender.
First, do you have the resources — the feed, facilities, and the labor?
“With stocker cattle, you are trying to turn your grass or feed stuffs into cash by marketing it through conversion to beef,” he says. He suggests answering these questions as a starting point.
What forage or feed do you have that can be used to put weight on stocker calves? When during the year is that forage or feed available? When is that forage of the right nutritional quality to make the calves gain weight?
Are your facilities, pens and fences adequate for a stocker program? Do you have enough labor and expertise to properly manage stocker cattle? You may need help when receiving the calves, getting them to the right pastures, watching their health and administering medication if necessary. Your stockmanship style will determine how much, if any, additional help you’ll need to manage cattle during the backgrounding and grazing period. You may need help when the calves are sold, getting them gathered efficiently and loaded onto the trucks.
If the feed, facilities and labor resources are sufficient, Leiber says that the next step is to get the finances in line.
Let’s talk about budget
“You’ll need to sit down and go through a budgeting process,” he says, and then he recommends you stress test the budget assumptions.
Gather price information. Research how and where you are going to source the calves. Livestock auction markets post sale reports on their websites. Find out what calves are selling for by regularly checking several reports for several weeks or months.
Read futures market reports to learn the price at which feeder cattle are selling. TSCRA members who have downloaded The Cattleman NOW smartphone app receive this information every day in the CattleFax Market Outlook and Analysis, which includes a Futures Market Summary of live cattle and feeder cattle.
These sales reports will tell you what you can expect to pay for the kind of stocker calves you want and what you might expect to receive when you sell those cattle. The difference between the two numbers is the margin that supports the expenses incurred by the stocker cattle.
Within the margin
“The gross margin is the difference between the purchase price and the sale price in total dollars per head,” Leiber says. These dollars must pay for all the costs associated with a stocker operation — veterinary fees and medications, transportation fees, labor costs, interest payments, feed, grazing lease or crop payments and death loss are a few such possible costs.
“Sometimes a rancher might earn a better margin on a lower-quality calf,” Leiber says. “The lower-quality calf will cost you less, and you will also be paid less by the buyer, but it’s the margin you are looking for.”
“On the other hand, you may get a better margin on the better-quality calves. You would have to pay more, but you would expect to be paid more when you sell. The whole key is to start by looking at the cost differential for different weights and quality of animals, estimate their performance differential, and then start your budgeting process,” he says.
Consider the gender of the stocker calves. “On paper, a lightweight heifer will generally cost less than her lightweight steer mate. What you have to do is ask, ‘Is there going to be a difference in the animal health protocol that I use on heifers compared to steers? Will this protocol cost more, less or the same? Will I have a problem with neighbor’s bulls across the fence from the stocker heifers? What is the impact of the different rate of gain on the heifer versus the steer calf? How much total weight can I expect the heifer to gain compared to the steer while I have it? What differences will this decision make in my marketing options?’”
An important piece of information is the price of feeder heifers compared to steers. “If you have a heifer that weighs 700 pounds and the steer weigh 800, what price differential are they going to bring when you sell them?” he asks.
“Document your estimates as you’re looking at the types of cattle so you can make comparisons,” he says. “Write out your assumptions and see which cattle have the better gross margin,” he says.
The next step is to ask yourself the hard questions: Are your assumptions reasonable?
If you feel confident they are, then put your budget under various types of stress to prepare yourself for the inevitable changes to your plan.
Leiber says, “A budget doesn’t always work out the way you’ve projected it to on paper. It just never does.”
Budget stress test
“Stress test your budget by changing the variables and questioning your assumptions,” Leiber says. “To me, when you stress test the budget you are evaluating the areas of greatest risk. Ask yourself what are the areas that will make the most impact if you miss your assumptions?”
Evaluate your forage quality. Send a sample of the forage to a testing lab for an objective report on the nutritional value. This will help you develop a reasonable estimate of the weight the stocker calves may gain.
If you estimate that the stocker calves will gain 2 pounds per day on the forage you have available, what would happen to your budget if they gain only 1.5 pounds per day? Will you supply supplemental feed to put on the pounds?
What will happen if you have a drought year and the amount of forage is reduced? Will you move them to another pasture, feed them or sell the calves at a lighter weight?
“If I miss my animal health cost by $5 to $10 a head,” Leiber says, “that hurts the profit margin. It’s a cost overrun, but it may not be a deadly one to the budget.” Leiber reminds us that stocker cattle herd health management is different from cow-calf health management. The calves experience many different stressors than cow-calf pairs do, and could require more veterinary support.
“But if I miss my weight gain by 100 pounds and the market is at $1.50 per pound, that’s a $150 a head hit to my budget.”
Leiber says, “When you’re the stocker operator, you’re saying, ‘The money I spend, how do I get that back with weight gain? How does each expense enhance the weight gain of these animals?’ Stocker operators have made assumptions of what it will cost them to get those calves to a certain weight. They need to stay within those cost parameters and also meet their weight gain expectations for the program to work.”
How will you sell the cattle?
After you have estimated the margin you expect to make from the stocker calves, Leiber advises ranchers to develop “a marketing plan to protect that margin, because it can slip away. The market doesn’t stay static, price volatility is very real.”
There are a number of ways to sell your cattle and protect your potential profit. Hedging can be used as a risk management tool but you still must find a buyer for your cattle and manage the basis risk between the futures market and cash prices.
Forward contracting means you have an agreement with a buyer who will buy your cattle in the future for a certain price, at a certain weight, at a certain time. In this scenario, knowing your rate of weight gain is critical.
“You have to hit the target weight or you end up with some penalties if you go over,” Leiber says. “If your cattle gain too much, there are some significant weight sliding fees reducing your price or even weight stops in some of the contracts where the buyer quits paying you for pounds above a certain weight. That’s a trap that a stocker operator can fall into. A weight stop can be almost as painful as not making the weight gain of your assumptions, because you are paying to put on pounds that you are not being compensated for.
“The buyers don’t worry about you coming in with cattle that are too light, because that helps them. They will be worried about you coming with cattle that are too heavy, which hurts their potential for profit.”
Stockers can also be sold at a livestock auction market, via a video or internet auction, through private treaty or you can retain ownership of the stocker cattle through the feeding process.
Making the decision
Leiber says, “Do your analysis; and look at your potential for income versus the risks. If you are a landowner, your decision to use the land to run stocker cattle will be strongly influenced by your alternative production uses of the land. Spending time upfront analyzing and comparing your various options will help in the decision making process. It’s always enjoyable and fairly easy to evaluate the upside potential and rewards of an enterprise but it gets to be a really personal decision when you evaluate the downside risks as you determine the risk/reward balance you are comfortable with.” ❚
Definition of Stocker Cattle
Taken from “Guidance for Industry #191” published d by the Food and Drug Administration Center for Veterinary Medicine in May 2015
Weaned growing beef cattle (including dairy breeds) maintained on pasture and receiving the majority of their diet from grazing.
“Stocker” refers to weaned calves grazing pasture to enhance growth prior to finishing and slaughter; they are usually younger, weigh less, and are of lower condition (finish) than “feeder” cattle.
“Feeder” refers to weaned calves grazing pasture and of sufficient weight and maturity to be placed on high-energy rations for finishing; they are generally older, weigh more, and carry more condition (finish) than “stocker” cattle.
Ag Marketing Compared to Consumer Marketing
In many how-to programs about starting a stocker cattle operation, the word “marketing” is often used. For those new or returning to agriculture, marketing might conjure up images of an advertising program, and free pens and ball caps emblazoned with your ranch logo. To others, marketing may simply mean selling.
Here is a description of marketing by A. Lee Meyer, University of Kentucky extension professor, from his paper “Key Beef Cattle Marketing Concepts.”
TSCRA members will find a link to this paper on the TSCRA Resources Page, accessible via the TSCRA Member Center online. Navigate to the Resources Page and click on “Business” to find the link.
Marketing, for managers of beef cattle enterprises, means two things. First, it is using market information, such as prices and trends, to direct the farm and provide information for good management decisions. For example, if black-hided cattle top the market, the manager should decide if the market premium justifies a production system that will produce black calves for sale. The second purpose of marketing is to get the most out of the cattle that are sold and to pay the least for cattle and other purchased inputs. This must take into account both immediate and long-term needs. It must also recognize that price is only one part of the equation. Paying a low price for replacement heifers may be a bad decision if the quality does not match your needs. Of course, all of this depends on the effective working of the cattle and beef marketplace, so that is the starting point.
Marketing of products to consumers has a slightly different definition, according to www.businessdictionary.com.
The management process through which goods and services move from concept to the customer. It includes the coordination of four elements called the 4 P’s of marketing:
- identification, selection and development of a product,
- determination of its price,
- selection of a distribution channel to reach the customer’s place, and
- development and implementation of a promotional strategy.
Marketing is based on thinking about the business in terms of customer needs and their satisfaction. Marketing differs from selling because (in the words of Harvard Business School’s retired professor of marketing Theodore C. Levitt) “Selling concerns itself with the tricks and techniques of getting people to exchange their cash for your product. It is not concerned with the values that the exchange is all about. And it does not, as marketing invariably does, view the entire business process as consisting of a tightly integrated effort to discover, create, arouse and satisfy customer needs.” In other words, marketing has less to do with getting customers to pay for your product than it does developing a demand for that product and fulfilling the customer’s needs.
According to www.businessdictionary.com, selling is “The last step in the chain of commerce where a buyer exchanges cash for a seller’s good or service, or the activity of trying to bring this about.”
“Questions for Startup Stocker Operators” is excerpted from the September 2017 issue of The Cattleman magazine.