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:: General Livestock - Chapter 5 - Dairy Cattle Industry Issues
Much of the
following information has been
gleaned from Handbook for
Dairymen, Anthony Coletti,
Iowa State University Press,
Ames, IA, 1963.
Introduction
Dairy farming
differs from other types of farm
enterprise in the frequency of
income. With milk and cream
sales weekly, rather than sales
tied to an annual harvest,
continuous cash flow has
provided a valuable economic aid
in this aspect of the farming
industry. Expenses are high for
feed and nutritional supplements
fed to cattle to meet the
metabolic needs of the animals
during constant lactating.
Disease
presents danger, but
improvements in health care and
breeding have reduced the
potential problems over the
years. Improvements continue to
be made.
The cattle
chosen for use in the dairy
process often are "grade cattle"
with no pedigree but with
predominant characteristics of
certain dairy breeds. These
farms focus on commercial
production seeking maximum
returns with minimum investment.
The quality of milk will not
generally suffer in this herd
configuration.
Farms utilizing
purebred cattle often are
involved in the side line
activities of breeding for
resale and competing in shows
and fairs. Operations of this
nature, to be truly successful,
will be involved in careful
recordkeeping of breeding dates,
calving dates, sales, transfers
and other information. Tagging
and tattooing, sketches and
photographs, and proper
registration procedures will all
be meticulously followed to
maximize the results of the
processes.
The breed
chosen for a particular
operation may be tied to the
requirements of the principle
buyer regarding the makeup of
the milk in solids, fats,
proteins, etc. Feed components
and nutritional additives will
also be geared toward these
requirements. Proteins, fats,
carbohydrates, and minerals and
vitamins are all balanced to
provide maximum yield.
Feeds acquired
may include alfalfa, clover,
soybean hay, and certain grass
hays. Care is taken to acquire
feed which has been properly
processed and cured to realize
the greatest nutritional
benefit. Corn, sorghum, and
grass silage may also be
purchased, stored in silos or
bunkers, and fed as a part of
the overall feeding strategy.
Some types of cattle may also
require grains to supply the
requirements of body maintenance
and milk production. A wide
variety of supplements may be
included in feed mixtures to
produce the desired result.
Pasturing
considerations include the
adequacy of grazing material,
type of material, and effect of
material on the health of the
cattle and the milk produced.
The use of pasturing will be
determined by the style and
methodology of the farmer as
well as availability of
satisfactory fields. Pastured
animals will require return to
the milking barn twice daily.
This travel plus the potential
of bloat, poisoning hazard and
undesirable flavoring of milk
due to certain types of forage
tend to weigh against pasture
usage. The positive aspects
include cleaner and better
rested animals, yards and lots
requiring less cleaning, a
reduced fly problem, and the
reduction of mastitis and foot
rot.
Regenerating
dairy herds through breeding the
cows and retention of the heifer
calves for future inclusion in
the herd is very common. This
limits the possibility of
introducing disease into the
herd through purchased cattle.
Calves may be placed with nurse
cows which do not fit the herd
requirements well, but are still
beneficial for this purpose. The
heifer calves retained will not
be productive milk producers
until two years old. Feeding
young heifers requires special
considerations to properly
prepare them for breeding and
milk production.
Bull calves are
generally sold although they may
be kept for use in later
breeding. The earliest a bull
calf will likely be placed in
service is 12 months on a
restricted basis. Rather than
retaining and maintaining bulls
for the herd, dairy farmers may
use stud services or, more
likely, artificial insemination.
Animals
purchased for replacement or
expansion of the herd will
require special handling and
testing to avoid contamination
of the herd. These additional
cost measures can result in the
avoidance of additional expenses
later.
Veterinary
expenses are common in dairy
operations. The following
conditions, among others, will
usually warrant involvement of a
veterinarian: (1) Sickness due
to disease-producing organisms
such as mastitis, metritis, and
pneumonia, (2) problems in
calving or retained afterbirth,
(3) tests for brucellosis,
tuberculosis, leptospirosis,
vibrio, and trichomoniasis in
bulls, (4) pregnancy and
breeding problems, (5) injuries,
and (6) cows off feed.
Modern milking
equipment and facilities are
costly and require certain
maintenance and testing to
ensure proper functioning and to
limit disease potential within
the herd as well as the product.
Stainless steel is common and
the related initial cost is
high. Barns may range from
conventional types to fully
automated high-tech facilities.
Equipment will exist for all
stages of animal and product
handling. Elevators, augers, and
conveyers are used in feed
movement along with feed carts,
silos, mixers and grinders.
Milking machines, pumps, and
storage or transport tanks
handle the milk produced. Barn
cleaning equipment, manure
spreaders, along with manure
dryers and packaging equipment
may be used. Many types of
equipment are necessary to
facilitate dehorning, hoof
trimming, bleeding and testing
the cattle.
Additional
equipment will be used for
pasture care and production.
Expenses for seed, fertilizer
and chemicals, and possibly
pasture lease will be reasonable
in operations utilizing
pasturing.
Industry Facts
Major dairy
breeds include: Ayrshire, Brown
Swiss, Guernsey, Jersey, and
Holstein-Friesian. Another
popular dairy breed is the
Milking Shorthorn. Mature cow
weights of these breeds will
vary from 1,000 to 1,400 lbs.
Record
production figures (measured in
pounds) for the various breeds
is shown below. These records
date to the early 60's as
reported by Coletti. The number
following the production is the
time period for the production
in days.
Dairy Breed
|
Butterfat Produced
|
Milk
Produced
|
Ayrshire
|
1,079 /
305
|
24,630
/ 305
|
Brown
Swiss
|
1,733 /
365
|
34,850
/ 365
|
Guernsey
|
1,451 /
365
|
29,665
/ 365
|
Holstein
|
1,866 /
365
|
42,805
/ 365
|
Jersey
|
1,343 /
365
|
25,293
/ 365
|
Milking
Shorthorn
|
957 /
365
|
23,734
/ 365
|
The following
narrative related to milk costs
and returns was downloaded from
the Economic Research Service of
USDA at the website,
http:/www.ers.usda.gov.
1994-95
Costs of Production from the
Farm Costs and Returns Survey
In 1995, the
general economy and consumer
incomes did not grow rapidly
enough to trigger strong demand
for dairy products. In addition,
generally moderate retail dairy
prices produced modest gains in
sales of most dairy products.
However, expansion in commercial
use did not quite keep pace with
larger milk production. As a
result, average 1995 milk
receipts were down 3 percent in
the Northeast and Southern
Plains regions. Receipts were
down 2 percent in the Southeast,
Upper Midwest, and Corn Belt
regions. Receipts in the Pacific
region rose by one-half percent.
Receipts from sales of livestock
continued to decline across all
six regions, as cattle prices
continued to decline. The total
gross value of production (which
includes milk and livestock
sales as well as other
miscellaneous sources of income,
such as renting or leasing dairy
animals) declined by an average
of 2 percent from 1994.
Total 1995 U.S.
cash production costs averaged
$12.49 per hundredweight (cwt)
of milk sold, down from $12.90
in 1994. Lower feed costs were
primarily responsible for the
decline. With 1994 corn and
soybeans yields much improved,
concentrates costs in 1995
averaged 5 percent below a year
earlier. Both average 1995 hay
and silage costs were down 13
percent.
Cash production
costs varied by region. The
Southeast continued to see the
highest costs, averaging $14.23
per cwt of milk sold, while the
Pacific again saw the lowest
costs, averaging $10.89 per cwt
of milk sold. However, only the
Northeast region failed to see a
decline in total cash costs from
1994 to 1995, as variable cash
expenses stayed unchanged and
fixed cash costs rose 8 percent.
The average
3-percent decline in total cash
expenses from 1994 to 1995 was
enough to improve the position
of U.S. dairy producers' gross
value of production less cash
expenses. On a regional basis,
however, unchanged variable cash
expenses brought the gross value
of production less cash expenses
down by 50 cents per cwt of milk
sold.
Residual
returns to management and risk
improved in 4 out of the 6
regions in 1995, as total
economic costs declined.
However, only the Pacific
region's returns climbed out of
the negative column.
Farm Business
Economics Branch-Economic
Research Service/USDA Updated:
September 30, 1996
Issues
In addition to
the following, see the
discussions under beef cattle
for other applicable
information.
IRC Section
61
Milk sales will
be primarily through
cooperatives with detailed
records provided to the dairy.
Rev. Rul.
77-168 (1977-1 C.B. 248) deals
with the method of computing
basis for their milk base when
additional milk base is
purchased following the receipt
of the initial allocation. In
computing the gain on the sale,
the "first-in, first-out" method
described in Treas. Reg. section
1.1012-1(c)(1) must be used in
computing basis. The full text
of the revenue ruling provides
further details.
Income
reporting may be required on
receipt of payments made under
the Dairy Refund Payment
Program. The Dairy Refund
Payment Program (DRPP),
administered by the CCC, refunds
the reductions in price received
by eligible producers during a
calendar year. Milk processors,
milk handlers, and others
responsible for the marketing of
milk withhold the reductions in
price from their payments to the
producers and send the withheld
amounts to the CCC. If the
producer can prove that milk
marketing for the current year
did not exceed milk marketing
for the prior year, the producer
is eligible for a refund of the
reductions in price. Typically,
an eligible producer receives a
refund of the reductions in
price in a year after the
reductions occurred. Proper
reporting of the refund depends
on whether the producer claimed
the reductions in price as an
expense in the year they
occurred. See Publication 225,
chapter 4, for examples of
proper reporting of refunds of
reductions in price.
By-product
sales include manure either
packaged or in bulk for
fertilizer. Calves may be sold
if not necessary for expansion
of the dairy herd. Breeders with
quality bulls may provide stud
services or sell semen. Milk,
and milk products, may be
prepared for direct sale from
the dairy.
IRC Section
168
Certain areas
of the country have quotas or
allotments for such commodities
as milk. The cost of the quota
or allotment is its basis. If
you acquire a right to a quota
with the purchase of land or a
herd of dairy cows, allocate
part of the purchase price to
that right.
Chapter 6 -
Horse Industry Issues
Introduction
Operations
dealing with horses will
encompass a variety of end
results. Whether the operation
is dealing with race, show,
work, or special purpose horses
will determine the level of
investment and "polish" which is
applied to the appearance of the
operation. Without getting into
specifics by breed, the
following will recount the
possible structure of the
operations.
According to
the U.S. Department of Commerce,
International Trade
Administration, most U.S. horse
meat is exported to Europe where
it is especially popular in
Belgium and France. Horses are
covered under the Federal Meat
Inspection Act and thus must be
slaughtered under federal or
state inspection. Any carcasses
slaughtered for sale must be
inspected. There are no quality
or yield grades for horse meat.
Horse meat is also used in some
pet foods.
Although many
Americans have an aversion to
eating horse meat, the horse
meat industry is now rivaling
the beef and pork industries in
the amounts of fresh meat
shipped abroad. In 1994, meat
from 109,353 horses was shipped
overseas. In Sweden horse meat
outsells lamb and mutton
combined. It is also commonly
consumed in Spain, Italy,
Switzerland, Germany, Austria,
and the Netherlands, but it is
most popular in Belgium and
France.
See the
write-up for beef cattle for the
general concepts of this type of
operation.
Horses
(equines) federally inspected:
1984:
130,825
1989: 342,877
1993: 184,320
1994: 109,353
Most horse
operations will be breeding
race, show, work or special
purpose horses. Ancillary
operations for training and
boarding will also be included
in this MSSP segment.
Training
operations will take in horses
and provide feed, boarding, and
training appropriate to the
purpose of the horse. Race
horses, whether thoroughbreds,
quarterhorses, walkers,
trotters, or other types, will
be provided appropriate training
over a period of time. Show
horses, likewise, receive
extensive training and grooming.
The trainers will charge fees
for feed and board on a daily
rate and charge out the training
at flat rates, hourly rates, or
may accept an interest in the
horse as a fee. This type of fee
requires determination of value
for inclusion as income in the
current year. The amount
determined as income would
become the basis of the
interest. The horse owner would
recognize the transfer of the
interest as a sale and realize a
gain or loss on the transfer as
it relates to the basis of the
horse. See F.C. McDougal et al.
(1974) 62 TC 720 for this court
decision.
A boarding
facility will normally provide
only feed, board, and general
care. These services will be
priced out on a daily basis with
special charges for unusual care
situations as they arise. The
necessity of veterinary services
would be an example of unusual
situations.
Breeding work
horses will entail many of the
same aspects of other breeding
operations without the high
level of appearance. Emphasis on
the work characteristics of the
horses is common with purebreed
considerations downplayed.
Working horses would be those
used in other operations for
draft purposes or herding and
rounding up other animals.
Riding fences in rugged terrain
to determine and execute repairs
would be another function of
work horses.
Special purpose
horses would include those
trained for rodeo, riding,
hackney, or other such uses.
Some overlap of other areas may
be possible. The market for
these horses is not extensive
but lack of recordkeeping might
result in tracking difficulties.
Race and show
horses will likely be
100-percent registered purebreds
with detailed tracking
information available in the
taxpayer's records and through
the breed associations. The
larger, more serious operations
will limit activity to animals
with known breeding lineage of
successful animals to attempt to
maximize potential. Seldom will
a horse with an unproven lineage
rise to the top of the sport.
When this does occur, these
animals will be highly
documented to ensure
profitability from future
breeding activities.
Expenses
related to horse breeder
operations will include
purchases of animals, veterinary
fees to keep the animals in the
best health condition,
facilities for boarding,
feeding, and training, fees for
breeding services (either stud
or artificial insemination,)
insurance coverage of the
animals to compensate for losses
due to injury or accident,
advertising and promotion, and
specialized feed materials.
Events, shows
and races, involving the animals
will require entry fees which
are deducted as current
expenses. A certain type of
race, known as a "futurity",
involves periodic payments of
entry fees toward a future
event. These payments are also
deducted currently even though
the animal may be unable to
participate for any number of
reasons.
Race horses
have been subject to
"syndication," the partitioning
of ownership among, typically,
up to 40 shareholders. The
syndicated shares often contain
breeding rights for the owners
in addition to rights to
profits. See IRC section 464 for
the technical definition and
application of rules for farming
"syndicates."
Stud services
are a common source of income
for owners of recognized
successful animals. The services
may carry guarantees related to
conception. A private treaty is
a one-on-one breeding agreement
which may have any type of
special arrangement imaginable.
No foal free return (NFFR)
allows subsequent year attempt
if no foal is conceived in
current year. No foal no fee
(NFNF) guarantees foal or no
liability is incurred. Neither
NFFR nor NFNF are common in the
United States. The live foal
guarantee likely carries a
higher stud fee due to the
additional financial risk to the
stallion owner. If no live foal
is produced, the mare may return
for service or, possibly,
another mare may be substituted.
These guarantees may affect
income.
Weaning foals
takes place from 4 to 6 months
of age. Colts, as young as
12-months, can impregnate mares.
However, normal usage as a
stallion will not take place
until 2 years. The decision to
castrate, geld, colts will often
be made between 1 and 2 years of
age, depending on the ability to
keep the colt separate from
mares. Training will begin early
with temperament being the
primary goal. Eventual addition
of saddle and bridle will
prepare the foal for being
mounted by the age of two years
when it has achieved the
majority of its growth. A 3-year
old should be in its prime and
require only fine tuning
training for further
improvement.
Industry Facts
The horse
industry is not standard in its
marketing of animals. Horses are
not generally sold in quantities
like other animals. Individual
sales are the norm and factors
related to subjective
characteristics of the horse
greatly affect pricing.
Issues
IRC Section
1231
Transfer of an
interest percentage in an animal
in exchange for training or
other services is considered a
sale or exchange which results
in the recognition of gain or
loss for the fair market value
of the interest transferred
compared to the basis of the
animal. See F.C. McDougal et al.
(1974) 62 TC 720 for the related
court decision.
Treas. Reg.
section 1.1231-2(c)(1) provides
that
"* *
*Whether a horse is held for
racing purposes shall be
determined in accordance
with the following rules:
-
A horse
which has actually been
raced at a public race
track shall, except in
rare and unusual
circumstances, be
considered as held for
racing purposes.
-
A horse
which has not been raced
at a public track shall
be considered as held
for racing purposes if
it has been trained to
race and other facts and
circumstances in the
particular case also
indicate that the horse
was held for this
purpose. [accompanying
clarification included]
-
A horse
which has neither been
raced at a public track
nor trained for racing
shall not, except in
rare and unusual
circumstances, be
considered as held for
racing purposes."
[Examples follow in the
regulations.]
IRC Section
61
Animals not
fitting the requirements of the
operation will be culled and
sold. These sales may be through
auctions or sale barns, but may
be directly to buyers.
Documentation may be less
detailed on these sales than
sales of high quality animals.
Syndication
sales will normally involve
significant amounts to be
recognized. Stud services will
be a recurring source of income
in many instances.
IRC Section
168
Certain horses
are 3-year property, including,
IRC section 168(e)(3)(A)
-
any race
horse which is more than 2
years old at the time it is
placed in service,
-
any horse
other than a race horse
which is more than 12 years
old at the time it is place
in service.
Any other horse
which qualifies for depreciation
will be 7-year property.
Within the
horse industry, a horse is
considered to have been born on
January 1 of the year of birth
for designation as a 1-year old,
2-year old, etc.
Geldings cannot
be placed in service in a
breeding operation except in
working or "teasing
applications.
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