Alternatives for feeding cattle in the North Dakota -
Cooperative feedyards and Feeding clubs
Carrington Research Extension Center
North Dakota State University
In the era of controlling risk, vertical integration, cost control, and leveraged management; cattle producers are evaluating cattle feeding as another enterprise beyond cow calf production. Combining talents of multiple producers, interim boards have been developed to form cooperatives with the purpose of adding value and monetary reward for feeding cattle. Other producers have explored partnerships for shared ownership of cattle. Sharing ownership allows producers to market a larger volume of cattle and take advantage of the economies of scale. Cooperatives and limited liability partnerships are business structures that some North Dakota beef producers are using to expand their beef production business.
Key words: Beef, Feedlot, Finishing, Cooperative, Partnership
Cattle producers appear to be at a crossroads in the beef business. Profit margins for beef production is small or negative and the business of producing meat is being aggressively addressed with poultry and pork production. The cattle cycle explains the booms and busts every decade for almost a century. However, the low of the cattle cycle combined with fewer farmers and ranchers provides for a wonderment of the direction of cattle industry.
One direction North Dakota cattle feeders are exploring is the textbook issue of vertical integration. Vertical integration refers to the addition of another level of business, or production, to your current business. This could be interpreted as the cow calf producer that traditionally sells calves at weaning now owns the calves though the feeding period and is selling finished beef cattle rather than weaned calves. Vertical integration could also mean the packer could own cattle through the feeding period or owning the supermarket that sells the beef cuts to the consumer.
Usually vertical integration refers to the addition of the next closest step up in the production system. For cow calf producers, this would mean feeding their calves to finish. Feeding calves to finish has been referred to as retained ownership. However, retained ownership usually refers to the cow calf producer feeding his or her calves in a feedlot owned by someone else. Since the feedlot operates by providing a service and charging for it, the feedlot strives to reduce risk by not owning the cattle.
The mutually beneficial arrangement provides an income source for the feedlot and a level of vertical integration for the cow calf producer. However, recent successes or lack of successes have made producers question the added value of retained ownership. If the cattle producer aspires to own cattle through the packing phase then retained ownership is a cost-effective option for feeding cattle to finish.
With the equity drive of cattle packing and merchandizing cooperatives, i.e. Northern Plains Premium Beef, beef producers are reviewing retained ownership. Rather than investing $100-300 per head for developing a quality feedyard on their own farm, cattle producers are investigating doing business with a custom feeder or looking at owning the feedyard. During the past three years, several independent groups of producers combined to form the North Dakota Cattle Feedlot Consortium. The consortium represented cattlemen from central, northern, and western North Dakota and investigated the development of a cooperatively owned feedyard. After seeking funding for a feasibility study and business plan, the consortium proceeded to develop a plan for a 5000 head and a 10,000-head one time capacity feedlot.
The consortium concluded that owning the feedyard was profitable if the feedyard was filled to capacity. Consequently, the members owning shares in the feedlot have the right and responsibility to deliver cattle to the feedyard. Each share required the member to deliver one calf for feeding and the minimum number of shared purchased were 25 shares. Investment cost is $60 per share for October through March delivery and $55 per shares for April though September delivery.
For vertically integrating the cow calf herd, ownership into a feedlot through a cooperative venture appears to have a low entry cost. However, the shareowner is required to deliver cattle every year. Although the feedyard doesn't indicate that the shareowner has to own the cattle, the shareholder must ensure delivery of cattle. This creates an opportunity for a nonshare holder to place cattle on feed in the cooperative feedyard.
There are alternatives in the structuring of a cooperative feedyard. Organizers of a cooperative feedyard can develop different rules for delivery and ownership of cattle. These changes should be based on the desires and needs of the producers involved.
Another business structure for owning cattle in North Dakota is the limited liability partnership. A limited liability partnership was recently created to own cattle for feeding to finish in North Dakota. The purpose of this group is to own cattle that are fed in a custom feedyard in North Dakota. With marketing in mind, the group aspires to purchase feeder cattle monthly and, after a ramp up period, sell cattle monthly. This group has several advantages. It is large enough to procure cattle on a monthly basis whereas a cow calf producer would need to raise 1200-1400 cows to be able to purchase 100 head of calves monthly. Consequently, cow calf owners have invested in this partnership as a method for selling calves to the partnership and then indirectly owning the cattle during the feeding phase. This is an example of another variation of vertical integration.
Another advantage of this type of partnership, is that it is located in North Dakota where feed cost are lower than in traditional feeding areas. Also, the partnership allows for the cumulative knowledge of all partners to manage the business. This would conceivably allow for better, more informed decisions by the feeding group.
Since North Dakota cattle producers are traditionally cow calf producers, their
experience needed for entering into the business of cattle feeding is limited. Also,
equity positions maybe limiting the growth into other vertical integration structures.
Consequently, cattle feedlot cooperatives and cattle feeding limited liability
partnerships provide an alternative opportunity to enter into the business of cattle
feeding with limited investment capital and possibly reduced risk.
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