RETAINED OWNERSHIP AN ALTERNATIVE FOR THE NEW MILLENNIUM

P.J. Rathwell, Extension Ag Economist

Retained ownership also allows producers to spread risk from one production activity to another and from one period of time to another. There are certain advantages associated with this production and marketing strategy. Retained ownership from the cow-calf level through the stocker and into the finishing phase eliminates some trading points, which can lower shrink, transportation and selling costs. History reveals that between birth and slaughter, someone will often profit from cattle before they reach slaughter weight. The major objective of retained ownership is to take advantage of this tendency.

During certain periods and under the proper conditions retained ownership is more profitable than selling calves at weaning. Producers must evaluate their selling decision at each level of the ownership process, because; by retaining ownership they are assuming more production and marketing risks. It the producer misjudges future market conditions or if the cattle are mismanaged retained ownership can cause an accumulation of losses rather than profits.

Retained ownership decisions must also consider other important factors. Management and decision making requirements will increase. Capital requirements will also increase as producers face additional production expenses. And, cash flows will change because incomes are delayed and production costs are added.

The starting point for any retained ownership decision is to know your production costs. Sometimes cattle producers miss opportunities because they don't know their production costs and, as a result fail to project profitability accurately in the next production phase. For example, if a cow-calf producer determines that there is not a profit in the cash market at weaning can he obtain his profit goals by retaining ownership through the stockering phase? To accurately assess profitability you need to know your costs from the cow-calf level and project accurately costs for the next production stage.

Another critical point in the decision process of retained ownership is "price roll backs" on heavier weight cattle. Generally as cattle gain weight their price per pound drops. This means that producers will frequently sell heavier weight feeder cattle at a price per pound that is lower than the price per pound they are accustomed to receiving for lighter weight calves.

But, even with price roll backs retained ownership programs can be profitable. The most important consideration in determining whether or not to retain calves is the relationship between calf prices and the cost of gain. Knowing these factors enables you to determine the required price relationship between the beginning and end or the production period. For example, if expected costs of gain exceed weaned calf prices, the sale price at the end of the production period will need to be above the weaned calf price at the program's start. If costs of gain are less than weaned calf prices some rollback in prices of feeder cattle can be endured without suffering a loss.

Table 1 illustrates the effects of cost of gain and total pounds of gain on cattle break-even prices. The table assumes that you are producing a 500-pound calf with a value at weaning of $90 per hundredweight. Costs of gain are given in units of $5 per hundredweight beginning at $30 and increasing to $50 per hundredweight. If, for example, the calf gained 200 pounds during this stockering period at a cost of $40 per hundredweight the break-even price at the end of the program would be $75.71 per hundredweight. As is frequently expected the price per hundredweight required to break-even is below the calf's per hundredweight price at the beginning of the stockering program. Also note that as the total pounds of gain during the feeding program increase, you can tolerate a larger price rollback.

Table 1: Break-even Prices for a 500-Pound Calf Grazed to Different Weights at Selected Costs of Gain
POUNDS	COST OF GAIN ($/CWT.)
GAINED	30	35	40	45	50
	Break-even prices $/cwt.
100	80.00	80.83	81.67	82.50	83.33
150	76.15	77.31	78.46	79.62	80.77
200	72.86	74.29	75.71	77.14	78.57
250	70.00	71.67	73.33	75.00	76.67
300	67.50	69.38	71.25	73.13	75.00
Assumptions: 500-pound calf at $90/cwt. and costs of gain include all production, management, marekting,
finance and transportation costs

The next decision point in the retained ownership process is placing the stocker calf into the feedlot. Table 2 provides break-even prices for a 750-pound calf entering a feedlot at a price of $72 per hundredweight. Once again, costs of gain and total weight gain are allowed to vary. Finishing a 750-pound animal to 1,150 pounds at $55 direct cost of gain would require a $66.09 break-even price when the animal is sold.

Table 2: Break-even Prices for a 750-Pound Feeder Calf Fed to Different Weights at Selected Costs of Gain
POUNDS	COST OF GAIN ($/CWT.)
GAINED	45	50	55	60	65
	Break-even prices $/cwt.
300	64.29	65.71	67.14	68.57	70.00
350	63.41	65.00	66.59	68.18	69.77
400	62.61	64.35	66.09	67.83	69.57
450	61.88	63.75	65.63	67.50	69.38
500	61.20	63.20	65.20	67.20	69.20
Assumptions:750-pound calf at $72 per cwt.: costs of gain include all production, management, marketing,
finance and transportation costs.
Average daily gain of 3 lbs. per day.

In addition to cost of production information today's informed cattle producer must keep informed on current market conditions and trends in the livestock, grain and meat sectors as they affect the retained ownership decision.

The trends in the comestic cattle markets should be considered before deciding whether or not to retain ownership. Are prices expected to rise or fall? Generally retained ownership strategies will work best when cattle prices are expected to rise. However even during declining prices retained ownership can often work, especially if the cost of gain is low.

Don't forget the financial changes that retained ownership causes. Capital requirements are increased and income receipts are delayed. Talk to your lender and show him your analysis. He may require complete financial statements and he may suggest that you hedge the cattle.

Finally, retained ownership can offer cattle producers some flexibility in managing their annual income tax liabilities. By retaining ownership a producer may transfer taxable income from one year into the next. This may be especially useful in years when sales have been high. It is possible that some sales can be carried over to the next year at reduced risk by using futures or options contracts. It is important to discuss these options with your tax or financial advisor.