Our family's been involved in the beef industry for more than 45 years, primarily in the seedstock segment.
I am one of eight brothers and a nephew — along with my father Frank — involved in a registered Angus cattle operation in Kimball, MN. At Schiefelbein Farms, we've always fed out our steers that didn't make bulls. But in 1992, we began a customer buy-back program as a way to create more demand for our customers' calves.
We bid on or buy calves sired by our bulls, whether at auction markets, video sales or direct off the ranch. Then, we feed, finish and market them.
That cattle feeding effort has required us to understand and manage many different types of risk. Here are some of the lessons we've discovered over the past decade.
The Right Feedyard
The most important task is finding the right feedyard. Feedyards aren't created equal and, unfortunately, there are operations willing to bend or break the truth. In selecting a yard, personal experience is the best determinant, but reputation based on word-of-mouth is valuable as well.
The majority of our buy-back cattle go to Circle Five Feed Yards of Nebraska and Bezner Beef of Texas. Because we share information with our customers, our cooperating feedyards must be able to effectively track the animals, market them on a grid and collect carcass data.
Both these feeding operations are experienced in feeding cattle for grid programs, and are strategically located in different regions of the U.S. Two distinct environments (Texas and Nebraska) allow us to reduce our weather-related risks. Lightweight and southern calves go to Bezner Beef and are placed on wheat for 60-90 days before going into the feedyard. Most of our northern calves go to Circle Five for 60-day backgrounding prior to finishing.
The goal of any health program should be prevention (not treatment) of health problems. Health, or the lack of it, can cost more money than anything else when feeding cattle. Sick calves can die or, worse, run up huge medicine bills while gaining poorly.
Most people don't realize they almost never recover financially from calves that get sick — at any time in the animals' life; they almost never perform up to their potential; and often produce sub-par carcasses. Healthy calves, meanwhile, gain faster and more efficiently, and produce higher-grading carcasses.
When we started our buy-back program, many customers questioned the value of preconditioning shots — having weaned their calves at home every year with no sickness or health problems. The fact is, weaning calves in a feedyard is much different than weaning calves at home. Stress causes sickness, and more stress equals more chance of getting sick.
Think about the stress experienced by a calf destined for a feedyard. Pulled from his mother, he's sorted and loaded onto a truck for a 50-mile trip to the auction. There, he's unloaded, commingled with other bawling calves, then sorted again before being chased into a noisy sale ring. After sale, he's loaded onto another truck with strange calves and driven 100 to 500 miles in varying weather conditions to a feedyard.
Once at the feedyard, that calf encounters numerous infectious agents. After being processed in a squeeze chute, the calf is sent to its pen and expected to eat, gain rapidly and stay healthy.
To deal with this problem, we teamed up with an animal health company to develop a vaccination program for all cattle to be purchased through our buy-back program. The results have been even better than expected. In the past two years, more than 2,000 calves were weaned and only six were lost — a 0.3% death loss.
Now, we only buy calves that have had an effective health program: It's the only thing that makes financial sense.
Genetics, Genetics, Genetics
One of the first lessons we learned was the importance of feeding cattle with uniform breed composition. When we began our buy-back program, most of our customers used our bulls along with bulls from other sources, all bred to a myriad of cow types. That made it difficult those first few years to predict how the cattle would perform in the feedyard or on the rail.
A Continental-breed calf needs to be fed differently than a mostly Angus calf. With the industry push toward all-black regardless of breed, we were unable to feed and sort the cattle based on breed type. Instead, we prayed while waiting for the carcass results.
It soon became clear that our feeding success was dependent on buying calves with uniform, predictable genetics. Armed with data from thousands of calves, we began to study it and develop honest, simple rules to help our customers produce valuable calves.
Our feedlot and carcass data indicated that our most consistently profitable cattle were 3/4 Angus-1/4 Continental (Gelbvieh, Simmental, Charolais, etc.). These cattle consistently performed well in the feedyard and in the carcass.
After tracking our genetics closely, we decided to begin offering Balancers (Gelbvieh × Angus) and SimAngus (SM × AN) along with our purebred Angus bulls. We found the hybrid calves returned better gains and more yield, resulting in increased profit. Plus, our commercial producers could take advantage of hybrid vigor and breed complementarity available in these crosses.
We now base our bids for calves in our buy-back program on the performance history of the cattle. Customers using a high percentage of known genetics through an effective, planned breeding program receive the highest bids.
Risk management is easier in theory than in practice. Bankers often advise feeders to hedge cattle at purchase on the Chicago Mercantile Exchange futures board. This can be done easily, but there's one minor catch: you can rarely hedge cattle at a price above the breakeven cost of the cattle.
So what are the alternatives? You can wait for the futures to improve before hedging the cattle, which is risky. But even that doesn't end your risk. After all, if bad winter weather hits, the costs of gain on cattle — and their breakevens — can rocket. Hedging cattle in the winter months can actually add more risk than is removed.
And, let's not forget basis risk: the difference between the cash market and futures market when you sell your cattle. In 2002, the basis varied from $60/head over the futures board to $60/head below the futures board. So, even though you hedged the cattle at a profitable price, you actually only limited the price risk to +/-$60 of the hedged price. Is that really a benefit?
In today's unstable markets, however, it's important — if not essential — to use at least some risk management strategies. We follow a diversified approach. First, we forward contract a significant portion of our cattle where there is no basis risk.
A forward contract is just agreeing to sell a fixed number of cattle directly to a packer at a set time for an agreed-upon price. For example, if the futures market tells us the fed-cattle market will be $70/cwt. in June, and we can sign a contract with the packer to sell 400 head in June for $70, we have effectively eliminated our price risk.
We also spot hedge when the basis is more predictable. History tells us that during certain times of the year, the futures price is typically very close to the cash price. During those times, we use the futures market to reduce price risk.
One bright spot we've found in cattle feeding is marketing the cattle on a grid through an alliance or branded-beef program. Thanks to the emergence of numerous branded beef programs, producers and feeders have more opportunity than ever before to earn added-value premiums.
Packers have created grids that reward cattle for certain desirable characteristics. Most grids and branded programs reward cattle for four traits: marbling, leanness, carcass weight and a black hide. We've been able to earn an extra $10 to $40/head by marketing them on various grids.
Without grids and alliances, we couldn't afford to pay better-than-market prices for our customers' calves. The premium we receive on the grid goes right into the calculation of what we can pay for their calves next year. We get paid more, so we can afford to pay more.
Better Seedstock Producers
Without question, our feeding experience has made us much better seedstock producers. It's given us an entirely different mindset when we sell bulls.
When we select bulls to stay and bulls to become steers, we consider the fact that we will probably end up owning the calves out of that bull someday. That's forced us to be much tougher on our culling.
We also use the data from our customers' calves to improve our seedstock. It's no surprise that when you have a vested interest in everything you do, you do it much better.
Cattle feeding can be overwhelming, and we've lost money — at times — feeding cattle. It took a lot of time, effort and commitment to grasp all that we needed to know to be successful. But I'm more convinced than ever that our success as producers is dependent on getting good, accurate carcass and feedlot information on our cattle.
So, what's a cattleman to do? You need to either feed your cattle or develop a relationship with the person that does. For most folks, that means developing a relationship with your calf buyer or a seedstock producer that feeds his customers' calves.
Let them handle the headaches of feeding, while you, the commercial cowman, reap the benefits. It's this kind of cooperation that will pay big dividends down the road — for all of us in the beef business.