How Sorting and Commingling Affects Stocker Costs
By Lorie Woodward Cantu
Editor's Note: This is the eighth installment in a 12-part series on stocker cattle management. This series has been created in partnership with Chris McClure, Gold Standard Labs (bvd-pi.com), a lab services company based in Hereford which specializes in BVD-PI testing and blood pregnancy tests; and Danna Schwenk and Karla Whitmore, CattleXpert Management Software (cattlexpert.com), a software company, based in Elkhorn, Neb., which specializes in feedlot and stocker management applications.
In stocker and feeder cattle businesses, performance and costs normally are tracked by groups, not by individual animals. Generally, the large groups reflecting the cattle's origin are identified as lots, while the sub-groups resulting from sorting are identified as pens.
"When we are establishing solutions for clients, we often use an analogy to help differentiate between ‘lots' and ‘pens,' " said Karla Whitmore of CattleXpert. "A ‘lot' is the original designation, which is like a last name because it never changes. A ‘pen' is the physical address within the operation. The lot will remain constant throughout the period of ownership, while it is possible for the pen to change several times."
In a perfect world, people would be able to purchase perfectly uniform cattle that grow out at exactly the same rate, simplifying record keeping, Whitmore said. But the world isn't perfect.
"The reality of the stocker business is that cattle grow apart," she said.
Because individuals in the lots grow at different rates and the market often rewards uniformity, managers must make some decisions early on. First, managers must determine what is most crucial to their operation: accurate data or uniformity of marketing groups.
"Different operators have different goals," said Whitmore, who consults with clients across the country. "Some people want pinpoint accuracy in their record-keeping, while others want to optimize uniformity. One isn't necessarily better than the other, but managers have to understand there are trade-offs with both approaches."
To maximize accuracy, managers limit the number of times the cattle are re-sorted, which can mean their lots have a wider weight and performance spread. This scenario is often associated with managers who retain ownership of their own calves or managers who are repeatedly purchasing cattle from known sources and want to know exactly how those calves are performing.
To maximize uniformity, managers may re-sort the cattle several times, knowing that each re-sorting affects the integrity of their data and may obscure their true costs. This happens frequently in operations that rely on commodity cattle from a wide variety of sources. In these situations, managers may choose to organize pens based on weight, date of purchase, type of cattle or other criteria that is applicable to their individual operations.
"Each time cattle are re-sorted, managers have to make some assumptions," Whitmore said. "They have to determine how they will charge off the cost of those cattle as they move them into a new pen. Will they use an average or will they pro-rate those charges?" Managers have to choose one method of reassigning costs and stick to it throughout the growth cycle of that set of cattle, she said.
"Regardless of whether managers average or prorate the costs, they have to realize that the effects are cumulative," Whitmore said. "Every time the costs are reassigned, the true costs are masked further."
To ensure that the data is as accurate as possible, it is important for managers to identify and assess all of the costs associated with growing out the cattle, said Danna Schwenk, who is also with CattleXpert.
"One of the most common mistakes people make as they are getting started is overlooking some of their basic input costs," Schwenk said. People often forget to include their labor; the interest on any operating loans they might have; the cost of equipment and/or infrastructure such as doctoring barns; the opportunity cost; and the cost of incidentals such as syringes, needles and other seemingly small expenses that add up over time.
As managers are assessing their costs, they must also determine how they will categorize them, she said. Generally, they are categorized under two broad categories: medical mark-up and yardage fees.
"Again, there is no wrong or right way to categorize costs," Schwenk said. "But when these terms come up in business discussions or coffee shop talk, it's important to clarify what individual operators include under those categories." For instance, one operator may have yardage fees of .30 per head per day while another may have yardage fees of .35 per head per day. The difference may not result from inefficiency on the part of an operator, but from differences in cost accounting.
"You can't compare apples to apples if you don't know what is under the apple's skin," Schwenk said.
While it may appear these initial management decisions are permanent, it's important to understand they're not, Whitmore said.
"Sometimes people assume that once they make these management decisions they have to live with them forever," Whitmore said. "That is not the case. If something doesn't work with a set of cattle, operators can make a new set of decisions with the next set of cattle. The key is learning from the experiences and incorporating the knowledge to improve your management."
A peek into Gottsch Enterprises
"If you do the little things right, the big things will take care of themselves," said Jeremiah Riekin, assistant controller for Gottsch Enterprises, based in Elkhorn, Neb.
Gottsch operates 3 feedlots in Nebraska as well as backgrounding ranches in Kansas, Louisiana, Missouri and in Haskell County, Texas. The company also runs calves on grass and uses custom backgrounders to supplement their cattle supply. In addition, the company has farming and trucking operations. Riekin is directly involved in every facet of the company.
The company's primary focus is its feedlot operations. The backgrounding ranches are used to help manage the risks inherent in the feedlot business.
"Our backgrounding ranches and custom backgrounders give us a reliable source of well-prepared cattle for our feedlots," Rieken said. "By having a supply of calves that are medically straight and on feed, we avoid the pitfalls of introducing 2,000 green, bawling calves into our feedlots each week."
When purchasing cattle, the company considers several things including value, type, region of origin, and timing. Because the ultimate goal is keeping the feedlots operating at maximum capacity, the company attempts to anticipate possible supply shortfalls and buy calves that will grow out on a schedule to help fill that void.
In the world of feedlots, the ultimate determinant of success is profit; therefore, keeping accurate cost and performance records is the company's goal. As a result, personnel use date of purchase as the basic criteria for forming lots. They attempt to purchase enough cattle to fill a lot within a week. The company's buyers are charged with putting together lots that are of uniform weight and type from the same region.
"Obviously, we deal in a high volume of cattle," Rieken said. "We start by purchasing cattle that are as uniform as we can make them, recognizing that there are going to be a few that are light and a few that are heavy. Instead of sorting those off, we leave them with the original lot."
Personnel determined this was the most efficient way for them to manage the cattle because it took too long to gather lots to accommodate the "outlying" light calves and the heavy calves.
"If we are buying 500-weight calves, there might 5 or 6 that are 400-weight and 5 or 6 that are 600-weight," he said. "It takes a long time to put together lots by aggregating that limited number."
Another consideration was the effect of repeated commingling.
"Every time you commingle different groups of cattle, you run the risk of introducing a health problem," Riekin said. "It makes sense for us to limit the number of times that the cattle are commingled and reduce the risk of spreading a bug."
While these were important considerations, ultimately personnel realized that they were spending too much time re-sorting the cattle without receiving an obvious benefit.
"When we first started, we sorted the calves on arrival. Then, when they grew apart during backgrounding, we'd sort them again," Rieken said. "The calves would grow apart again in the feedlot, so we'd sort them then. When we assessed it, all that re-sorting and the resulting impact on the integrity of our data wasn't worth it."
Today, on the backgrounding ranches, the cattle remain with their original lots through the entire grow-out period. They are not re-sorted until they enter the feedlot, where they are re-sorted upon arrival. The company's record-keeping system is designed to prorate the pay weight and average the associated costs to-date.
"When the cattle enter the feedlot, they are entering a new phase of production, so it makes sense for us to make any necessary adjustments at this point," Riekin said. "Making the changes here limits the impact on the integrity of our data. We're in this business to make a profit, and it is impossible to measure your profit if you don't know what the true costs are."
He continued, "What I've described to you is how we do business now, which evolved over time through trial and error. The constant in our company is our willingness to evaluate and adapt. You have to be willing to change. Of course, you run the risk of failing occasionally, but as long as you learn from the small setbacks, you will succeed in the long run."
"Stocker Cattle: How Sorting and Commingling Affects Stocker Costs" is from the August 2012 issue of The Cattleman magazine.