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:: General Livestock - Chapter 4 - Cattle Industry Issues
Introduction
Small breeder
operations will likely be run on
moderately sized ranches or use
leased grazing land. Some grain
farmers will run small herds on
wheat for a period of time.
These ranches face a greater
risk of loss due to longer
holding period (weight gains
while grazing is slower than
feedlot gains) and greater
potential for health problems.
Absorbing losses of a few deaths
when a small number of animals
are available for sale is a
major financial blow. Many of
these ranchers are into cattle
on short term basis and will get
in and out frequently.
Large
operations may be measured by
sections (640 acres) with herd
sizes in the thousands. The
risks of loss because of deaths
are lessened in these operations
because of the number of animals
available to absorb the cost.
Losses and gains from changes in
market prices, however, affect
the profit more dramatically due
to the number of head involved.
These ranchers are generally in
the business for the long term,
maintaining a herd at all times,
although the size of the herd
may vary with profitability.
Bulls are
purchased for breeding purposes
and held for 3 - 4 years when
access to the cows is
unrestricted. The cost of bulls
is not related to weight, but is
closely tied to breeding history
and physical characteristics. As
a result, the cost will be much
higher than slaughter cattle.
Controlled
herds schedule breeding to allow
for late winter/early spring
calving. The gestation period
for cattle is 9 months so
breeding takes place from May to
July. Summer calves are in
greater danger of death due to
heat stress.
Open herd
ranchers will buy cow/calf
pairs. The calf will be up to
8-9 months old and may weigh
from 400 - 600 pounds but is not
yet weaned. Risk of death or
other health problems is
increased when calf weight is
less. The value of pairs is
higher than stocker or feeder
cattle due to their purchase for
breeding. The cows will be used
for breeders. Bull calves may be
raised for breeding but will
more likely be castrated, made
steers, to raise or sell for
fattening. Heifer calves will
likely be held for breeders.
Closed herd ranchers raise
virtually all breeding stock
without outside purchases.
Cows are
retained until too old to
produce healthy calves and are
then sold at a price which will
vary with the health and
condition of the cows. Periodic
culls from the herd will result
in sales prior to aging
considerations. These animals
may still be viable as breeders
and should bring appropriate
prices.
Yearlings, or
stocker, cattle are purchased at
400 - 700 pounds and are often
placed on pasture (wheat or
grass) or corn silage. This
process is known as
backgrounding. Immediate
placement in feedlots is a
possibility dependent on feed
costs. Grazing on grass results
in slow growth but is good to
balance with wheat grazing so
moves from field to field are
common. Weight gains are slow in
smaller animals and increase
with size. The capacity of
pasture changes with region.
West Texas rangeland will only
support 20-25 pair per section
(640 acres) while wheat supports
up to 5 pair per acre.
Winter wheat
pasture is available for grazing
during early November. By
February, March 10 at latest,
the cattle must be moved off to
allow finishing and harvesting
of wheat crop. Common expense
for wheat pasture grazing is
based on cost per pound (or
100#) gains of the calves (not
cows.)
Feeder (market)
cattle are placed by lot in
feedyards at 700- 900 pounds.
Larger animals will finish out
more quickly at a lower cost.
The weight goal for fat or
slaughter cattle is 1100 - 1200+
pounds. The feedlot will provide
standard feed, custom feed
mixtures on request, health
monitoring and treatment, and
act as sales agent for certain
fees. Often these fees, related
to "lots" of cattle, will be
deducted from sales proceeds
passed through the feedlot to
the rancher. Final settlement
must be made at the time the
last of a lot is sold.
Corn cost is a
major contributing factor in
placement of cattle in feedlots.
With an average ratio of 10
pounds of feed for 1 pound of
growth, a corn price of
$5.00/cwt (per hundred weight)
will mean $.50 feed cost for a
1-pound weight gain. This added
to the previous purchase and
care costs makes it much more
difficult to realize a gain on
the sale of the cattle. Corn at
$3.50/cwt is generally the cost
equivalent of grazing. Corn
costing $5.00/cwt causes a major
drop in cattle inventories
unless some other factor
increases profit potential.
Ranchers
practicing risk management may
hedge against market changes.
Hedging is a common technique
used by businesses to reduce
risk resulting from certain
assets, liabilities or foreign
currencies. Various financial
products are used to reduce
risk, such as futures contracts,
forward contracts, options on
futures and notional principal
contracts. Farmers, cattle
feeders and feedlots generally
enter into hedging transaction
to reduce the risk of price
changes with respect to
inventory and non-inventory
supplies. Transactions of
unrelated commodities is not
considered hedging. See Chapter
8 of the Grain Farmers MSSP
Audit Guide for a more in-depth
discussion of hedging. For
complex situations in hedging,
contact a Financial Products
Specialist for assistance.
Industry Facts
The following
information from Beef Cattle
Feeding and Nutrition by Tilden
Wayne Perry, Department of
Animal Science, Purdue
University, Layfayette, IN was
published in 1980 by Academic
Press, New York. The age and
weight variances shown are due
to tests with a variety of
feeding regimens.
Heifer at Puberty
(breeding age)
|
Age
(days)
|
Wt
(lbs)
|
(straight bred Hereford
or Angus)
|
381-572
|
658
|
(cross
bred Hereford/Angus)
|
381-424
|
726
|
Gestation period (Perry,
p 180-181)
|
272-282
|
760-926
|
Weaned
calf
|
239
|
497-689
|
Productive life of cows,
7 years (p 222-225)
|
Generally,
heifers are considered cows when
they give birth or at 2 years of
age. Calving at earlier than 2
years is considered to be less
efficient for a variety of
factors. (p 195)
As technology
and science advance, these
numbers will change accordingly.
The following
is a sample of the format of
price quotes you may encounter
if necessary to verify prices
reported for sales. Historical
prices may be obtained by
contacting the USDA Livestock
Market News office in
Washington, DC at (202)720-6231.
The direct line to the Market
News Reporter's desk is
(202)720-8054. If the
information is not available at
this office, a referral to the
appropriate office will be
provided. Also, see Appendix E
for Internet sources for
additional information and
reports.
Amarillo, Texas
Fri, Mar 14, 1997
USDA-TX Dept of Ag Market News
Issues
IRC Section
162
Ensure
deductibility of expenses.
Commonly included personal
expenses include interest, fuel,
insurance, supplies, repairs,
and taxes.
See Rev. Rul.
86-24, 1986-1 C.B. 80, which
sets forth the treatment of
costs incurred to purchase
non-purebred cows that are
implanted with fertilized
embryos of purebred calves. The
ruling also contains a
discussion about the subsequent
treatment of sales proceeds
when, after the calves are born,
the cows and calves are sold
separately. Essentially, there
must be an allocation made in
the original purchase price
between the cow and the
implanted embryo. The portion of
the original purchase price that
equals the fair market value of
the cows is allocated to the
cows and the remaining amount is
allocated to the calves. Neither
the costs attributable to the
cows, nor the costs attributable
to the calves are currently
deductible. The cows and calves
are neither capital assets nor
IRC section 1231 assets. Gain or
loss from the sales of the cows
or the calves is ordinary.
IRC Section
61
Many operators
rely on bank records for tax
reporting purposes. As a result,
certain types of income may be
excluded from reporting. Be
aware of possible bartering with
the exchange of livestock for
other assets or services.
By-product
sales include manure either
packaged or in bulk for
fertilizer. Calves may be sold
if not necessary for expansion
of the breeding herd. Breeders
with quality bulls may provide
stud services or sell semen.
IRC Section
168
Steers cannot
be depreciated as property used
in a trade or business of
breeding since they are not
capable of reproducing. The
pre-productive period for
heifers commences on their
conception and ends when they
deliver their first calf.
IRC Section
469
In the case of
a feeder operation fully
utilizing feedlots look for
evidence of management decisions
delegated to managers, foremen
or other employees. If the
taxpayer is not involved in
these decisions the possibility
of actual material participation
is reduced.
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