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General Livestock

Table of Contents

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.

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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) 

  Feedlot Cattle                    Lbs gain per day
--- Hay & Corn, Corn silage, Soybean meal additives
    Calves                      1.35 - 2.03
    Yearlings                   3.65 - 4.23
        (p 240-244)
--- Soybean meal & Urea
    Calves                      2.09 - 2.63  (p 246)
--- Protein supplementation
    Calves                      1.90 - 2.07  (p 248)
--- Average gain for feedlot life   2.12 - 2.16  (p 249)

Finished cattle (no backgrounding)  491 days  975+ lbs
        (p 249)

Backgrounded cattle
    Time on backgrounding   up to 6-7 months
    Weight gain                 100 - 400 lbs
    (Heifer calves finish for market at weights
    150 - 200 lbs less than steer calves)
        (p 250)
    Sample method of backgrounding 350 - 500 lb
    spring calves weaned or purchased in the fall:
                            Lbs Gain per day
    30 days grazing fall pasture/stalk fields   0.75 - 1.00
    165 days winter feeding (with supplements)  0.50 - 1.75
    60 days spring pasture  1.75 - 2.00
    Average weight at background completion 650 - 800 lbs
        (p 251-253)

Feedlot finishing systems (Table 16.1, p 266)

USDA Grade Age Sex Starting Weight Finishing Weight Daily Gain(lbs) Days on feed
Choice Calf Steer 425-550 1050 2.6 200
  Calf Heifer 400-500 900 2.3 190
  Yearling Steer 575-650 1150 2.8 200
  2-year Steer 750 1160 2.8 150
Good Calf Steer 400-500 1000 2.4 240
  Yearling Steer 600-700 1050 2.7 150
  2-year Steer 750 1100 2.9 120
Standard Yearling Steer 700 1125 2.8 150
  2-year Steer 800-900 1250 3.0 140

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

Weighted Average Summary for 21 Texas Auctions 03/07/97 thru 03/13/97 Receipts: 32,103     Last Week: 24,269     Last Year: 21,896

Feeder Steers Medium and Large 1      Feeder Heifers Medium and Large 1

Head Weight Range Avg Wt Price Range Avg Price Head Weight Range Avg Wt Price Range Avg Price
50 200 - 245 225 $86.00 - 119.00 101.39 30 200 - 245 227 $75.25 - 106.00 86.59
129 250 - 295 273 $88.00 - 120.00 102.64 75 250 - 295 273 $75.00 - 93.00 81.38
234 300 - 348 322 $86.00 - 119.00 96.47 206 300 - 348 326 $70.00 - 90.00 79.29
314 350 - 396 374 $86.00 - 108.00 93.89 294 350 - 399 378 $70.00 - 97.00 78.11
408 400 - 448 424 $79.00 - 99.00 90.02 579 400 - 449 427 $66.00 - 85.00 75.99
390 450 - 499 473 $79.00 - 97.00 89.40 584 450 - 499 475 $65.00 - 85.00 74.89
598 500 - 547 522 $75.00 - 95.00 84.29 841 500 - 549 524 $60.50 - 82.25 71.13
464 550 - 598 567 $72.50 - 88.50 82.29 730 550 - 599 572 $62.00 - 80.00 69.44
768 600 - 648 623 $66.00 - 86.00 73.48 596 600 - 648 624 $61.00 - 77.00 66.12
854 650 - 696 669 $66.00 - 82.00 70.61 991 650 - 699 680 $60.00 - 74.50 65.66
1,037 700 - 749 721 $65.00 - 73.00 67.94 688 700 - 749 720 $60.00 - 68.00 64.61
1,087 750 - 797 773 $63.00 - 75.50 68.02 152 752 - 799 778 $60.00 - 67.00 65.38
571 802 - 846 827 $64.00 - 71.00 67.15 44 800 - 848 813 $55.50 - 66.00 61.68
217 850 - 898 874 $62.50 - 68.50 65.36 7 850 - 890 873 $58.00 - 62.50 60.22
74 900 - 938 918 $62.75 - 66.25 64.57 - - - - -


Feeder Steers Medium and Large 1-2   Feeder Heifers Medium and Large 1-2

Head Weight Range Avg Wt Price Range Avg Price Head Weight Range Avg Wt Price Range Avg Price
26 205 - 245 226 $78.00 - 97.00 90.40 27 205 - 245 228 $65.00 - 87.50 75.30
67 250 - 295 275 $68.00 - 102.00 88.81 42 250 - 295 277 $67.00 - 85.00 74.15
130 300 - 345 328 $65.50 - 100.00 86.06 169 300 - 349 329 $61.00 - 80.00 72.86
165 350 - 397 375 $63.00 - 100.00 84.76 142 350 - 398 371 $55.00 - 81.00 70.73
191 400 - 449 425 $64.00 - 89.00 79.18 242 400 - 449 425 $55.00 - 79.00 68.71
334 450 - 498 475 $60.00 - 89.00 78.00 255 450 - 499 475 $55.00 - 77.00 67.90
193 500 - 546 524 $61.00 - 81.00 73.54 184 500 - 547 522 $52.50 - 73.50 65.29
361 550 - 599 577 $61.00 - 80.00 72.98 276 550 - 599 572 $53.00 - 73.00 64.88
234 600 - 649 631 $59.50 - 77.00 68.24 119 600 - 645 619 $52.00 - 70.00 63.22
211 650 - 695 677 $59.00 - 76.00 67.4 91 650 - 695 669 $52.00 - 69.00 62.61
51 700 - 745 726 $52.50 - 69.00 64.1 8 700 - 745 720 $50.00 - 65.00 55.91
75 750 - 795 774 $62.00 - 68.00 64.2 10 760 - 790 770 $52.00 - 58.00 56.15
22 815 - 841 834 $56.00 - 67.50 63.2 2 805 - 805 805 $53.25 - 57.00 55.13
25 850 - 875 853 $57.00 - 65.00 62.83 10 850 - 880 857 $53.00 - 59.00 56.53

Source: Texas Dept of Ag-USDA Market News, Amarillo, TX 806/372-6361

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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.

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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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Page Last Reviewed or Updated: December 10, 2001