Which is Right for You?
By Austin Bailey and Brad Deeken, FCS Financial loan officers
In the state of Missouri, cattle operations are usually high on the list for producers wanting to maximize the use of grassland, but there are several different enterprises a producer can pursue. The two most common types of cattle operations in Missouri are cow-calf and backgrounds. These enterprises have different time requirements, financial and risk considerations, and different resource needs. When young producers ask for guidance in determining which enterprise might be the best fit, three questions come to mind.
- How much time do you have to spend with your cattle, and when do you have the time?
Cow/calf operators have a more seasonal time demand with the heaviest labor requirements occurring during winter feeding and calving times. This type of enterprise can be complementary to a row crop operation because cows and calves can be turned out on grass and let be during busy crop times. Many cow/calf producers are also able to successfully balance their cattle operations with off-farm jobs.
Alternatively, stockers tend to require more time when calves are on-site. The highest risk of sickness and death loss is the first few weeks after acquisition. A producer must have adequate time to be able to carefully observe cattle and immediately act when there is need. However, these producers also have the option of seasonality by limiting themselves to only one or two sets of calves per year if they opt to do so.
In either type of operation, if rotational or intensive grazing management is involved, the labor requirements can increase during the summer months. Typically, the higher labor requirement for this type of management pays off by extending the grazing season and reducing wintertime feeding.
- What are your financial goals for your operation, and what is your risk tolerance?
A cow/calf business model is typically a long-term business model based on building equity in cows that will eventually pay themselves off and then provide income towards land or living expenses. Cows are purchased on term-debt and generally financed on a 5-year, fixed-rate note with annual payments. The calves are sold to cover expenses, build equity by paying principal down, and, on some years, provide additional income towards farm or living expenses. The cows, however, are maintained as an asset. Many cow/calf producers raise a large percentage of the feed they will need for their cows. The nature of this business model leads to more consistency – both in terms of cash flow and annualized risk for a producer. This consistency allows a producer to maintain a profitable herd using more generalized details and expense and marketing estimates, which can mean less time spent on business management and accounting.
A backgrounding business model is a short-term cash flow plan. Each group of calves is typically financed with a separate declining-balance line of credit. When the calves are sold, all the assets are gone. The proceeds from the sale of calves covers purchase cost including interest and any holding costs with any additional profit being available for farm or living expenses. A producer has more flexibility and can be more responsive to market conditions and opportunities or threats seen on the horizon with this business model. Instead of being locked into a long-term business model, a producer can opt in and out of the market based on the current environment. This responsiveness allows for more flexibility and can lead to greater margin opportunities, but also means there is the potential to be exposed to more risk. A stocker must be vigilant in knowing his actual income and expense numbers, understanding marketing and risk management tools, and being prepared to move when the opportunity to remove risk or seize opportunity presents itself. This means successful producers spend more time on business management in a stocker enterprise.
- What do your resources support?
In a lot of ways, a cow/calf enterprise is a more romantic version of raising cattle, and for many producers, it’s exactly what they want from their business. Cows are kept at lower stocking rates usually needing less care and being kept for years instead of months. Cows are easier on equipment including fencing and working systems and normally easier on the producer, as well. Cow/calf operations can be well managed on a variety of land types with minimal requirements for infrastructure or capital improvements. Many cow/calf herds in Missouri are managed by a sole producer.
Stockers, on the other hand, can be a bit more destructive – both to a producer and on the equipment and fencing needed to handle them. It is important to have working facilities to get cattle acclimated to your operation. Cattle are stocked at tighter capacity, often meaning land use can be maximized, but it also means infrastructure requirements can be different. Labor requirements can be a bit greater at certain times. Although often managed by a sole producer, different times of the year do require additional hands on deck when working with groups of yearling calves.
Which is best?
Any type of production agriculture comes with risk, and raising cattle is no different. Both cow/calf operations and stockers face stress from weather, expenses, markets and more. But both can be incredibly rewarding as well – financially and in the lifestyle they provide. Producers, especially young or beginning producers, should never hesitate to have these conversations with their loan officer who can help ask the right questions and point out risks and opportunities a producer might overlook.
For most producers, the enterprise they opt for in raising cattle boils down to personal preference. The person going out to chop water in the middle of winter should ultimately enjoy what he is doing – maybe not in that particular moment – but in the long run. And, that should probably be the deciding factor.
Austin Bailey is an FCS Financial Vice President who serves livestock producers in northeast Missouri. He operates his own cattle and direct marketing beef business. Bradley Deeken, FCS Financial Vice President, serves livestock producers in central and southeast Missouri. He operates a cattle and custom spreading business in his spare time. If you’re looking for an ag lender who understands the beef industry in Missouri, reach out to an FCS Financial loan officer today.
