Investing in Feeder Cattle
Investing in Feeder Cattle
Investing in Feeder Cattle1
Investing in livestock is not new. DNA tests indicate that cattle were domesticated 10,500 years ago and that all domestic cattle today derive from as few as 80 wild oxen 2. In the 12 century – during the days of Richard the Lionhearted – the French word for “livestock” – “cheptel ” became the root for “capital”. Livestock was likely the among the very first forms of personal capital, given that land was viewed as common property at the time of domestication.
In a period of technological disruption, it can be comforting – and profitable – to have a part of your portfolio in a tangible asset that will stay in demand. Ownership of feeder cattle – calves that have been weaned and are being fed a diet of concentrated nutrients in preparation of sale to meat processors – provides two primary financial benefits:
- Returns comparable to the stock market, but with uncorrelated or negatively correlated returns, thus providing lower overall portfolio volatility without sacrificing yields
- Immediate tax deductions for the feed, vet expenses, and other ordinary farm expenses needed to maintain and raise your cattle3
When feeder cattle are introduced into a diversified portfolio, the overall Sharpe’s ratio increases. Yields are maintained relative to stocks, but overall portfolio return volatility is reduced.
As an added benefit for taxpayers, the cash method of accounting in farming permits owners to deduct the purchase cost of feed, vet expenses, and other ordinary farm expenses needed to maintain and raise your cattle, and only recognize income when received. You may also buy all of the feed needed to finish your cattle and deduct that at the time of purchase. This also provides a hedge against feed price increases3.
A little known truth is that cattle can be placed in a self directed IRA. Investors that do not want to invest in the stock or bond market or who want diversification may be interested in this option4.
There are also non-economic benefits to owning tangible assets such as livestock. You can go see them and watch them grow.
We have relationships with numerous cow-calf ranches, livestock brokers and auction houses. Let us know and we will help you find calves, have them prepared for transport, and trucked in good shape to our feedyards. Calves will be pre-conditioned either before or after arrival at our yards as needed.
Cattle are easily financed from agricultural lenders. Subject to a minimum equity contribution of $300 to $400 per head subject to the number of cattle being financed, advance rates can be 70% or more of the purchase price of calves plus the cost of feed to bring them to maturity. This permits the prudent use of leverage to further increase portfolio returns. After all, stocks can only be margined 50%.
Feedlot expenses include feed, yardage, veterinary and other healthcare including implants. You will be billed monthly.
Your cattle will be segregated in a specific pen separate from those of other owners. Each day your pen of cattle will be offered feed, the amount of which will be recorded. If you have 100 steers that received 3,500 pounds of feed on a specific day, and its composition was 60% cracked corn, 30% silage, and 10% supplements, your costs would be calculated for that day would be $179.00, as follows:
Ingredient Lb. fed $/ton $/feed delivered (All prices are examples only. Feed prices vary daily)
Corn 2,100 $100.00 $105.00
Corn silage 838 $50.00 $26.25
Supplement 350 $250.00 $47.75
Total 2,540 $179.00
These calculations will be made every day of that month. A total will be calculated for your pen twice monthly on the 1st and 15th that you will be billed for.
In addition to feed costs, you will be charged a yardage cost per day, per head. Think of it like staying at a hotel. You pay for a room and all of your room service. This is the yardage and feed costs, respectively. Yardage pays for all non-feed costs, including labor, water, utilities, and depreciation on equipment.
Veterinary, Healthcare and Implants:
Included in this category are preventative treatment such as vaccinations, implants and veterinary expenses. Research has shown that these expenses more than pay for themselves. All veternanary and health expenses are a seperate line item in the billing statement. You can elect to have your cattle on an all-natural program if you chose.
We offer both trucking and marketing for your cattle. We have relationships with all the packers within economic trucking distances and will sell your cattle to the highest bidder.
Cattle buyers may buy “live” which is just weight, “on a grid” where price is dependent on how your cattle perform at harvest. Your decision is based on the genetics of your cattle, their condition upon arriving at our feedyard, their nutrition, and their performance during feeding as affected by weather and health.
If you sell a steer “live” that weighs 1200 pounds at a live cash price of $1.00 per pound, you will receive $1,200. If you sell on a grid, you will be paid on the carcass weight with the price based on premiums and discounts in a grid system.
Premium prices are paid for USDA Quality Grades, such as Prime and Choice, and USDA Yield Grades, such as 1 and 2. Additional premiums can be received, such as CAB, Certified Angus Beef. This is one place where the genetics can come into the economics of cattle production.
Discounts are applied to carcasses that are graded with poorer Quality Grades and Yield Grades, or carcasses which are too small or too large.
The decision to sell on the grid or sell live is dependent on all the factors discussed above, and we will help you choose the best marketing method.
1. Please see our Disclaimer
2. University College London. “DNA traces cattle back to a small herd domesticated around 10,500 years ago.” ScienceDaily. ScienceDaily, 27 March 2012.
3. Department of the Treasury, Internal Revenue Service, 2016 Instructions for Schedule F, Profit or Loss, p. F6 Department of the Treasury, Internal Revenue Service, 2016 Instructions for Schedule F, Profit or Loss, p. F6
You can deduct prepaid farm supplies that don’t exceed 50% of your other deductible farm expenses in the year of payment. You can deduct the excess only in the year you use or consume the supplies. For details and exceptions to these rules, see chapter 4 of IRS Pub. 225
3. Can I Buy Cattle With My Self-Directed IRA?, Jason Van Steenwyk Can I Buy Cattle With My Self-Directed IRA?
Basics of Investing in Feeder Cattle
If you are new to investing in feeder cattle, start here