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Should you retain ownership of
your calves? While that is a question that hinges on many
factors for each individual operation, Barry Dunn and his
colleagues at the King Ranch Institute for Ranch Management have
some interesting thoughts on the subject.
Dunn tells that Dave DeLaney, Vice
President and General Manager of Ranching Operations for King
Ranch, has said that the question he is most frequently asked
relates to why King Ranch does not retain ownership of all of
the calves they raise through the stocker and feedlot phase?
For many years, King Ranch’s
production and marketing plan has consisted of selling their
raised calves after they have been backgrounded, stockering
purchased cattle as pasture conditions permit, and using their
feedlot to finish cattle primarily of Brahman influence.
DeLaney explaines that this plan
allows him two distinct advantages over retained ownership:
arbitrage and an increase in asset turnover ratio.
Here, Dunn explains more about
these two principles:
What is arbitrage?
Webster’s dictionary defines arbitrage as: “The simultaneous
buying and selling of the same commodity in different markets in
order to profit from price discrepancies.”
Dunn says, “While this – arbitrage – may seem like a big fancy
word that only academics use, many ranchers use this business
principle like an artist paints on canvas.”
He explains: When a rancher finds value in the market place,
buys those calves, harvests cheap gains, and creates additional
value – he is using arbitrage. Ranchers often quickly reinvest
that money and run the cycle again, and again, and again.”
How do you define asset turnover ration?
Dunn says, “Think of it this way: The implement dealer in your
community has an inventory of expensive tractors and equipment.
Because they are very expensive and require large investments,
the dealer probably only has one or two tractors of each model
on their lot, and only sell a few each year. As a result, they
turn their investment over very slowly, perhaps only once each
year. Compare that to your livestock feed dealer, who is buying
and selling feed all of the time, perhaps every day. A feed
dealer turns their investment in feed over very rapidly, many
times each year. Of course each business has a different
operating profit margin, but in terms of total profit, a
business that captures their profit margin multiple times each
year has an inherent advantage. They are frequently in the
market place, capturing created value.”
How do you tie that to calf marketing?
Dunn concludes, “The widely touted and promoted cattle
management and marketing practice of retained ownership of a
rancher’s calf crop has advantages. Many ranches have made
substantial investments in genetics and herd health, and one way
of capturing that investment is to retain ownership of the
cattle as far as possible into the cattle production system.
This has been used very successfully by many ranchers.”
However, he adds, “There is always a price tag.” He goes on to
say, “In this case, one of these is the opportunity to use the
business principles of asset turnover ratio. Using it is not
dependent on size or scale. If you have a successful business
model, one way to take advantage of it is to turn it more
often.”
How might these business principles apply to a ranch?
Dunn suggests considering the drought management strategy of
running a portion of your carrying capacity as stockers instead
of cows. This builds flexibility into your operation, and as
precipitation and pasture conditions permit, one choice you will
have is to stocker your raised calves.
However, Dunn says that an
alternative, which uses the principles of arbitrage and
increasing your asset turnover ratio, is to sell your calves,
and buy back lighter, greener calves of less value, stocker
those, and sell them at a heavier weight, harvesting the cheap
gain from your grass and most likely, compensatory gain in the
cattle.
He acknowledges that there are
additional risks. One might be biosecurity. Another is the
volatility of the cattle market. But he adds, “Taking advantage
of these opportunities might entail honing your marketing
skills. But all marketing plans entail risk and require
learning, even retained ownership.”
What has the King Ranch’s record been?
Dunn reports that a King Ranch Institute graduate student
recently analyzed whether or not over the last eight years, King
Ranch would have been more profitable if they had retained
ownership of their calves. The findings? “King Ranch’s financial
and production records revealed a tremendous advantage for
arbitrage and increasing asset turnover ratio over retained
ownership,” Dunn concludes.
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