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Let’s Talk About Risk

Faced with low grain prices for crops they were growing on rented land and interest rates soaring above 20 per cent in the early 1980s, the de Boer brothers of Monarch, Alta., took what they saw as a calculated risk and established a 2,400-head custom feedlot.

Thinking back on their entry into the cattle feeding business in 1983, Jack de Boer says going from zero to 1,800 head in the first year with no background whatsoever in the cattle business was on the risky side. He and his brothers, Dick and Simon, felt that if they were careful to control the risk, at least they could make a living and, hopefully, profit once in a while.

Speaking at the forum for young producers during the Alberta Beef Industry Conference, de Boer and his son, Darren, offered some insight into risk management strategies they ve put in place through the years at Monarch Feeders.

Initially, they managed risk by expanding the business in small increments, adding pens to custom feed a few more head each year. Seeing that customers liked the job they were doing, they decided they might as well feed cattle for themselves and gradually worked into owning all of the cattle they feed.

It wasn t long before the lack of cropland for spreading manure forced their hand to buy land of their own. Not many of their grain-growing neighbours appreciated the value of the nutrients and organic matter in cattle manure back in those years, de Boer says.

Having their own land helped to mitigate feed supply and cost risks as well. Since they weren t too keen on expanding the grain operation, they purchased equipment to put up their own silage.

With lending rates still hovering in the double digits, they decided they needed to spend more time working on the business rather than in it.

To protect what they had established they created a holding company for the hard assets and an operating company for day-to-day business operations. Profits are transferred to the holding company, then given back to the operating company as a loan without interest.

The difference between the two business structures is important in the event of foreclosure, de Boer explains. With the holding company, the shareholders are second in line after the bank to get paid; whereas, with an operating company, the shareholders are last in line after the bank, Revenue Canada, and unsecured creditors. Another benefit of this structure is that if the operation is forced into bankruptcy for any reason, the land, buildings and equipment can t be touched by the bank and creditors, giving you the ability to start a new operating company and still have your infrastructure in place to continue operating.

Whatever you do, he says its important to credit-proof your operation by negotiating with banks to give only what s necessary for collateral even though they might ask for everything. As you pay down the debt, ask the bank to return the land titles they are holding as collateral but no longer need to cover the outstanding debt.

Aside from having the land to grow their own feed, the best hedge to protect the operating company seemed to be selling and buying cattle every week to help spread market risk.

The first generation s risk-management strategies served the family well. Today, Monarch Feeders is a 15,000-head feedlot, owning its cattle, with a land base of 10,000 acres in Alberta and Saskatchewan, and managed for the most part by the second generation.

Second generation saavy

The second generation is equally well versed as the first when it comes to managing risk.

Darren says he saw the feedlot as a good business and one with which he wanted to be involved. Feeling that he could bring something more than labour alone to the business, he went on to obtain a bachelor s Degree in finance from the University of Lethbridge. His cousins Jason, Jeff and Dan have also become involved in the family business since taking their post secondary training at Lethbridge or Olds College.

Identifying your risks is the first step, says Darren. The best way he has found to keep up to speed with what s going on in the industry and understand the risks is to stay tuned to industry news and views and keep in touch with grain dealers, cattle buyers and others in the industry. These connections give him the background necessary to make educated decisions going forward.

The risks are many, he says, but the greatest risk for a custom feeder is not having customers. We do take on the biggest risk by owning cattle, but having ourselves as our main customer and keeping the feedlot full of cattle, helps to mitigate the risk for the feedlot business, he explains. It s easier dealing with yourself as the customer because you know the type of cattle you want to fit your feeding regime, so there won t be surprises.

Custom feeding does have an advantage in that you operate on margins so you know approximately what your income will be. That can also be a disadvantage because it voids any opportunity in the marketplace to make more than the set amount per head.

Darren identifies the biggest risks for Monarch Feeders in recent years as being the fluctuation in fat and feeder prices, exchange rates and input costs, specifically feed costs.

The farm still produces cash crops, mainly canola and wheat, barley grain to meet some of its feed requirements and, most importantly, it is self-sufficient in producing its own barley and corn silage.

Riding out the ups and downs by buying and selling every week is still one of the best ways to mitigate market risk. Now, they regularly use tools such as contracts with packers, options and hedging the Canadian dollar when selling fat cattle, and contracting grain to lock in at least part of their feed grain costs.

Purchasing cattle price insurance is something they consider week by week. It can be advantageous during downturns in market prices because it offers an opportunity to set a steady bottom price, yet leaves you open to take advantage of rebounds in market prices.

It s easier to take risks if you learn how to take calculated risks, that is, consider both the upside and the downside, Darren says. For example, the farm recently diversified its holdings by making a major investment in something less risky than cattle 5,000 acres of cropland that they ve been converting to grass for pasture near Raymore, Sask.

We have always been reliant on the fall run and that means you pay the going price when everyone else is in the market to buy. Now, as we go through the summer, we can buy lighter cattle for grass then package them up for the feedlot, he explains. We hope the land will appreciate in value, too, but when we were making the decision we asked ourselves whether if it went sideways or down, would it break the feedlot business.

Another risk assessment scenario was the purchase of their own trucking outfit to gain more control over operating costs by reducing their reliance on custom haulers for cattle and hay.

He has heard people talk about the increase in labour costs and having to compete with high oil patch wages, however, that s not a new trend for his generation it s just been a fact for as long as he has been involved in the family business. The challenge is more one of finding employees than losing them to higher-paying jobs because wage is just one consideration for those who choose to work at the feedlot.

He feels that today, it is more important than ever to hire people to work in your business so you have time to work on the business.

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