Making the Business of Backgrounding Work For You

Readers have asked for more information about running stocker operations. So here’s Blake Allen with another in his series. Blake says that stockers aren’t for everyone, and that cow calf operations are very important. If that includes you, read on with an eye towards how you might implement some of what Blake explains here. Then check out the link to John Marble’s article and some thoughts to improve margins for cow calf operators too.

“Backgrounding” generally refers to buying feeder cattle, grouping them together and adding value through weaning, weight gain, improving health status, quality, or any other type of improvement. One of the things I like about this segment of the beef industry is that most of the people who are in it are in it to make money.

In contrast, if you’re running strictly cow calf, you have a lot of competitors who don’t care so much about making money. I can’t count the number of times I’ve had someone with 30 or 40 cows tell me that there isn’t any money to be made with cattle, so they don’t even try. They just do it because they like having cows, or they need them to keep agricultural use tax status on their land. Those people keep the price of land rent, feed, hay, equipment, and replacement cows and bulls inflated with other sources of income.

If you’re buying calves, straightening them out, and caring for them until time to sell, chances are you’re in it to make a profit. So are the people you’re competing with to buy the cattle. The cattle business can provide good returns if run like a business and not a hobby. If you’re interested in trying this business, here are some things to keep in mind.

It’s the Margins That Make It Work

To start out, one must realize that the stocker business is a margin business. The overall price of cattle isn’t nearly as important to a stocker operation as the margin between what the cattle cost and what you sell them for. You need to make sure to buy cattle that have a positive margin, and keep your expenses low. If the market falls between the time you buy them and the time you sell them, your weight gain and upgrading should protect you from some of the price drop. If the market totally falls out of bed, and shows little hope of improving anytime soon, you should still sell the big cattle and buy back a set of light calves even cheaper. This will leave you with some money left over, and an opportunity to profit again. You’ll survive as long as you aren’t extremely leveraged, and don’t decide to just sell out and quit forever when prices hit rock bottom.

Inventory Value and Cash Flow Are Two Different Things

This seems obvious, but it’s something that livestock producers often forget. Let’s start with Inventory Value.

Inventory value is what animals in your herd are potentially worth. For example, if you owned a three year-old bred cow in 2014-2015, she was worth somewhere between two and three thousand dollars. That same cow is now eight years old, and, if you decide to sell her, at best she is worth probably $800-$900. We can brag all we want about how much our livestock are worth, especially when prices increase, but if we don’t sell them, we don’t realize that increase in value.

Selling the animal gives you cash flow. Cash pays your bills, buys your dinner, and provides you something in return for your time and effort. To stay in business for the long run, it is important to liquidate inventory as it increases in value, reinvest in another undervalued animal, pay your expenses, then take some profit to pay yourself.

Turnover is Key

This brings us to turnover. Ralph Ketner, co-founder of the Food Lion grocery store chain, once said he’d rather make five fast pennies than a slow nickel. Why? The faster you can turn your money over, the more chances it has to grow.

Suppose you have a cow calf operation that sells one calf crop, every year in October. Your calves bring top dollar, $950 each. The total cost to bring each calf to market each year is $750. Essentially, this ranch made $200 per cow.

Down the road is a stocker operation. This outfit buys mismanaged cattle year round, adding weight and condition and selling truckload lots. They buy calves costing $550, spend $150 on expenses for each animal, and sell $800 calves 4-5 months later. Their average profit on a calf is $100. However, they are able to carry twice as many calves per acre as the cow calf operation, and they turn this inventory two times per year. This means that the stocker operator makes $400 off the same amount of land that the cow calf operation made $200 from.

The more stocker operators turn their inventory over, the more opportunity they have to add to their bottom line. That’s rapid turnover – the five fast pennies – and it’s pretty easy with stocker cattle. You can “double crop” cattle in this type of enterprise: run a set from October to March, liquidate them and realize a true gain in value, then take the money and buy another set of undervalued cattle and run them until August or September. Some people can do this three or four times a year, depending on their location.

The constant buying of undervalued assets, adding of value, liquidation of overvalued assets, then starting the process over again builds wealth while providing cash flow. This helps you fully leverage your land resources by providing more cash flow and return per acre than many other agricultural ventures. It is the basic formula used in many other business models, and it can be applied very profitably to cattle.

A critical part of the this scenario is knowing how to identify overvalued and undervalued assets. I’ll talk about this and more in future articles.

Read More

What facilities will you need for your stocker operation? Blake has answers:

Facilities for a Stocker Operation

Here’s John Marble’s piece on margins and how you might make them work for you.