A Cow-Calf Producer's Guide to Custom Feeding
AS-1162, February 1999
Greg Lardy, NDSU Beef Extension Specialist
Introduction
What Services Do Commercial Feedyards Offer?
Financial Considerations
How Does a Commercial Feedyard Make Money?
Risks Involved in Retaining Ownership
Selecting Cattle For Feeding
How Do I Find a Feedlot Which Will Work For
Me?
When You Have Cattle on Feed
Summary
This circular will discuss items that a cow-calf operator
should consider before choosing a feedlot to custom feed cattle.
Custom feeding refers to the practice of sending calves,
stockers, or yearlings to a commercial feedyard for feeding to
slaughter weights. Custom feeding is not without risks. It should
be viewed as a potential means to add value to your calf crop
and/or to evaluate the genetic potential of your cow herd.
Every custom feedlot has specific advantages and disadvantages
which should be considered before selecting a lot which will feed
your cattle. Feedlot location, facilities, services, and
management are a few of the factors which need to be evaluated.
What Services Do Commercial Feedyards Offer?
Feeding cattle to slaughter weights
Commercial feedyards are specialists in feeding cattle high
concentrate finishing rations. Rations vary from region to region
but all feed a diet high in grains or grain byproducts. However,
no matter what the ration, the manager should have experience
feeding high concentrate diets to slaughter cattle. Many feedlots
will use the services of private or feed industry nutritionists
to formulate rations and provide technical advice on feeding
management.
Financing
Many feedyards will offer their clients financing for cattle,
feed, and other charges. This is usually accomplished through
local banks or finance companies associated with the feedlot.
Your local bank may also assist in arranging financing to place
your cattle on feed. Feed is usually billed biweekly or monthly.
Almost all feedlots will require you to keep 25 to 30% equity in
the cattle. When the cattle are sold, the feedlot will
immediately deduct charges for feed, financing, yardage, and
other items. You will then be forwarded a check for the proceeds,
provided the cattle made enough money to cover all the costs.
Depending on how the cattle were financed, and the degree of loss
associated with feeding, the lot may be forced to send a bill to
cover the losses.
These services can ease cash flow problems since you can wait
until the cattle are sold before settling the feed charges. You
will be charged interest on feed and other charges which you
choose to finance. The interest rate is usually the prime rate
plus 1 to 2 percentage points at banks familiar with cattle
feeding. Interest should not accrue until you have been billed
for the feed, unless you choose to purchase all your feed up
front as a risk protection measure.
A good rule of thumb to use when figuring interest charges on
feed is to calculate the interest on the projected feed bill and
divide by two. For example, if we project that the feed bill will
be $200 for a calf on feed for 6 months, and the interest rate is
10%, our interest bill on the feed would be $10 ($200 x 10% x �
year � 2). The reason we divide the interest bill by two is that
in most cases you will only be billed for feed every two weeks.
Consequently, over the course of the feeding period, interest
will only accrue on a portion of the feed bill, not the entire
feed bill.
Marketing
Marketing your finished cattle is one of the most important
services a commercial feedyard provides. The feedyard manager
should have experience in feeding and marketing the kind and type
of cattle you are sending to the feedyard. Questions to ask
include: How many packers bid on the cattle weekly? Do you sell
"live" or "in the beef"? Do you have access
to grids, formula pricing arrangements, contracts, or alliances
for selling particular groups of cattle?
Carcass data collection and data management services
Individual carcass data collection may or may not be part of
the package which a commercial feedyard offers its customers. Be
sure to ask about getting carcass data and about any fees
associated with this service. The National Cattleman's Beef
Association (NCBA) will collect carcass data, in major cattle
feeding areas, for a $6/head fee (minimum charge is $300). The
program is managed by West Texas State University; contact them
at (806) 656-2275 or (806) 656-2278 for more information. Carcass
data can also be collected through individual alliance programs.
Contact the specific alliance program that you are participating
in for more information.
Risk sharing
Many commercial feedyards that specialize in retained
ownership cattle will offer risk sharing plans to customers. In
these situations, 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.
Other services
Larger commercial yards may also offer back-grounding,
growing, and pasturing services for their clients in addition to
strictly feeding cattle. Most commercial feedlots also work with
professional nutritional consultants and veterinarians to ensure
the best nutrition, management, and health programs for your
cattle.
The use of futures markets, hedging, options, and other risk
management programs are available through many custom feedlots.
In most cases, the feedlot will work with you to put a risk
management program in place if you would like one.
Although retaining ownership and having your cattle custom fed
offers the opportunity for increased profits over simply selling
at weaning, the practice is not for everyone. Cattle producers
should work closely with their lender to evaluate their financial
position before placing cattle on feed. When cattle are fed to
slaughter weights, marketing dates are delayed since calves are
not sold directly following weaning or after back-grounding. It
is prudent to discuss plans you have for retained ownership with
your lender well in advance of sending the cattle to the feedlot
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.
Discuss your equity position with your banker to determine if
you have the equity necessary to finish cattle, you should also
evaluate how much you can stand to lose in a bad market. Several
opportunities exist for reducing risk, but none will guarantee a
profit. Many commercial feedyards will offer or have an
arrangement with a brokerage firm to provide hedging
opportunities for customers who desire them.
Cattle producers who are uneasy about placing their entire
calf crop on feed or have limited financial resources should
consider participating in local steer feed-outs or fill pens
together 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 learn how the cattle
will perform in the feedlot.
Cow-calf producers should be aware of the tax implications of
retaining ownership. In many cases, income (and taxes) is
deferred for four to seven months by retaining ownership over
selling weaned calves, backgrounded calves, or yearlings. This
situation is more difficult, however, when a producer has
retained ownership previously and now wishes to sell weaned
calves, backgrounded calves or yearlings since two calf crops
will be sold in one year. The new tax laws regarding income
averaging may help producers through this situation. Producers
should contact their tax professional to determine tax
implications of retained ownership.
How Does a Commercial Feedyard Make Money?
Just as in any other business, a commercial feedyard must make
a profit in order to stay in business. Commercial feedyards which
custom feed cattle make money by selling feed and services. If a
commercial feedyard owns the cattle it is feeding, it makes money
by adding value to the cattle by feeding them to slaughter
weight. If the feedyard is feeding cattle for someone else, it
makes money by charging fees for the feed, services, and
facilities it provides.
What type of fees can I expect?
Three of the most common ways of charging for services are 1)
yardage, 2) yardage plus feed markup, or 3) feed markup only.
Yardage is usually charged on a $/head/day basis. When only
yardage is charged (no feed markup) yardage generally ranges from
$0.25 to $0.35/head/day. Feed is then sold at cost with this
arrangement. In feedyards which charge yardage plus feed markup,
yardage charges generally run about $0.05/head/day. Feed is sold
to the customer with a markup ($/ton) included. In yards which
only charge feed markup, the markup typically runs $25 to $30 per
ton of feed.
Be sure that you understand how a particular feedyard
charges for these services before placing cattle on feed. In
most cases, there is little difference in total feed plus yardage
costs, no matter which fee structure a yard utilizes. It is to
your benefit, however, to be sure to push the pencil to make sure
you are getting the best deal.
Example of costs in feedlots
which charge yardage vs. yardage plus feed markup
Assumptions
- Initial weight = 600 pounds
- Slaughter weight = 1200 pounds
- ADG = 3.33 pounds per day
- Feed conversion = 6.0 pounds of feed per pound of
gain
- Feedlot A
– Yardage charges = $0.30/head/day
– No feed markup (ration cost = $100/ton or
$0.05/pound)
– Yardage charges = $0.05/head/day
– Feed markup = $25/ton (ration cost = $125/ton or
$0.0625/pound)
– No yardage charges
– Feed markup = $30/ton (ration cost = $130/ton or
$0.065/pound)
Our steer in this example will consume 3600 pounds of
feed (600 pounds of gain x 6.0 pounds of feed/pound of gain)
and will be on feed for 180 days in all three feedlots.
Costs for Feedlot A–
- Yardage charges = $54 (180 days x $0.30/head/day)
- Feed charges = $180 (3600 pounds x $0.05/pound)
- Total feed and yardage cost = $234 ($54 + $180)
Costs for Feedlot B–
- Yardage charges = $9 ($0.05/head/day x 180 days)
- Feed charges = $225 (3600 pounds x $0.0625/pound)
- Total feed and yardage charge = $234 ($9 + $225)
Costs for Feedlot C–
- Yardage charges = $0 (no yardage charge)
- Feed charges = $234 (3600 pounds x $0.065/pound)
- Total feed and yardage charge = $234 ($0 + $234)
There is no right or wrong way for feedlots to charge
for feed and yardage. It is up to the feedlot manager or
owner to decide what type of fee structure to use.
In this example, there is no difference between the
three feedlots on total feed and yardage charges. This is not
always the case. Take the time to do the calculations
yourself when comparing different feedlots.
Other fees and charges
Others fees include medicine, vaccine, implants, processing
and chute usage charges, and other miscellaneous fees. In some
cases vaccines, medicine, and implants are marked up, as well as
feed. It pays to ask before placing cattle so there are no
surprises. Generally there are charges for processing the cattle
on arrival and chute usage charges (on a per head basis) when the
cattle are worked through the chute. Some lots also charge
special fees for use of hospital pens when cattle are sick.
Risks Involved in Retaining Ownership
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. 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. If your equity position warrants the use of
these tools, you should strongly consider using them.
Unforeseen risks such as inclement weather, storms, and other
problems can reduce performance and drive up cost of gain. Even
feeding areas which are known for relatively mild weather can
have weather-related feeding problems.
Selecting Cattle For Feeding
Sorting cattle
One of the keys to successful feeding is to start with a pen
of cattle which are uniform in weight, body type, age, breeding,
and previous nutritional management. When a pen of cattle is as
similar as possible, the feedlot has an easier time feeding the
cattle to an optimum endpoint. Sorting should result in fewer
discounts based on quality and yield grades, and carcass weight
specifications, if animals are sold on a carcass basis. Either
steers or heifers can be fed, but they are usually fed
separately.
Most ranches will have light, medium, and heavy calves at
weaning simply due to the nature of calving distribution and herd
genetics. In larger herds, the heavy end of the calves can be
sorted off and sent to a feedyard for finishing following
weaning. The medium weight group can be backgrounded and sent at
a later date and the light weight group can be wintered and run
as yearlings or the two lighter weight groups can be sold at
weaning to provide needed income.
Effect of calf health on feedlot performance
It is no secret that healthy calves are worth more than sick
calves. An analysis of the Texas A&M Ranch to Rail Retained
Ownership Program provides an estimate of the value of a healthy
calf in the feedlot. Healthy calves had lower death loss, lower
cost of gain, and higher net returns. In fact, healthy calves
returned over $90 more per head than sick calves. Sixty dollars
of this return was attributed to increased efficiency and $30 to
decreased medicine cost.
Minimum pen size
Cow-calf operations with less than 100 head of cows may find
it difficult to fill a pen at most commercial feedyards. Ask the
manager the minimum pen size required for feeding at a particular
lot. Large feed-yards prefer to work with `pot-load' pen sizes or
larger. A `pot-load' lot for 500 pound calves would be
approximately 80 to 85 head. However, there are a number of
smaller feeders which will feed 25 to 30 head pens.
How Do I Find a Feedlot Which Will Work For
Me?
Identifying potential feedlots
Ask friends or neighbors who have retained ownership to refer
you to a feedlot where they are comfortable feeding. Ask the
feedlot manager for names of customers who have fed with him
recently. Be sure to call those references and ask them questions
about the service they received. Your local veterinarian or
extension personnel may also be able to refer you to a reputable
feeder. State or local cattleman's or cattle feeder's
organizations may also be able to provide you with lists of
custom cattle feeders in a particular area.
Selecting a feedlot
Once you have narrowed your selection down to a couple of
feedyards, call the manager and visit with him, or better yet,
visit the feedlot. Observe the condition of the pens, facilities,
and cattle on feed. Neat, clean facilities indicate pride in the
feedlot on the part of the owner, manager, and employees. Observe
the daily operations at the lot. Is there stale feed in the
bunks? Do the employees appear to take pride in feeding and
caring for the cattle? Are muddy conditions prevalent? Does the
feedlot use mounds, concrete aprons, or underground drainage to
control mud problems?
Invest time up front "interviewing" the manager and
asking questions. Be sure you understand the fees and charges as
well as the services you will receive. Ask yourself if you will
feel comfortable with the manager and his crew caring for your
cattle for three to seven months. If you don't feel comfortable
with the manager, the lot is probably not the place for you. How
accessible is the manager or assistant manager? If you need to
reach a person with authority at the feedlot, can you do it?
If you have concerns about the financial condition of a
particular feedlot, have your banker call the feedlot's banker.
Your banker may gain insight into possible financial problems at
that feedlot and help you avoid problems with a lot which is in
poor financial condition.
When You Have Cattle on Feed
Maintain periodic contact with the manager and discuss any
problems openly. If time permits, visit the lot once or twice to
see your cattle while on feed. Remember to inform your lender
about the feeding conditions, performance, market outlook, and
projected marketing date of the cattle. Don't call or visit the
lot daily. Allow the manager to do his or her job.
A successful custom feeding program involves an investment of
time from you before cattle are placed on feed. Do your homework
and take the time to thoroughly check out potential feedlots. A
high degree of trust between the cattle owner and feedlot manager
in necessary to ensure successful long term feeding arrangements.
Worksheet for Projecting Cost of Gain and Breakeven Price
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Example Your
Projection Projection
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1. Beginning cattle weight(shrunk weight) 600 lbs ____________
2. Estimated cattle value at feedlot entry $480 ____________
(line 1xestimated feeder calf price)
3. Finished cattle weight 1250 lbs ____________
4. Total gain 650 lbs ____________
(line 2–line 1)
5. Estimated daily gain 3.25 lbs/day ____________
6. Estimated days on feed 200 Days ____________
(line 4 � line 5)
7. Projected feed efficiency 6.25 ____________
(feed: gain)
8. Total feed intake 4063 lbs ____________
(line 4 x line 7)
9. Feed cost $203.15 ____________
($0.05/lb)
10. Daily yardage charge $0.25/hd/day ____________
11. Total yardage charges $50.00 ____________
(line 6xline 10)
12. Vet/chute/misc charges $20.00 ____________
13. Death loss $4.80 ____________
(1%)
14. Trucking $12.00 ____________
(include charges for feeder
calves and slaughter cattle)
15. Interest on feedlot charges $6.73 ____________
(line 9 + line 11 + line 12)
� 2 x (200/365 days) x 9% APR
16. Interest on feeder calf $23.67 ____________
line 2 x (200/365 days) x 9% APR
17. Total feedlot cost $320.35 ____________
(add lines 9, 11, 12, 13, 14, 15, 16)
18. Cost of gain (line 17 � line 4) $49.28/cwt ____________
19. Estimated breakeven $64.03/cwt ____________
(line 2 + line 17) � line 3
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Marketing your finished cattle is one of the most
important services a commercial feedyard provides. The feedyard
manager should have experience in feeding and marketing the kind
and type of cattle you are sending to the feedyard.
Questions to ask include:
- How many packers bid on the cattle weekly?
- Do you sell "live" or "in the beef"?
- Do you have access to grids, formula pricing
arrangements, contracts, or alliances for selling
particular groups of cattle?
AS-1162, February 1999
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