Business Plans for Beef Cattle Backgrounding Enterprises

Backgrounding is a feeding program that targets weight gain in feeder cattle to develop the skeleton and muscle tissue of the animals while minimizing fat deposition.

Backgrounding diets typically include high levels of forages and often include limited amounts of cereal grains and various by-products of grain production. Cattle feeders normally purchase lightweight feeder cattle for backgrounding programs, and design feeding programs considering the timing of marketing finished cattle.

The Business Plan

A business plan is important to evaluate financial and production decisions related to the business. A business plan identifies requirements for financing capital items, such as feeding pens, handling facilities and feeding equipment, or sourcing operating credit or financing feeder cattle purchases. In addition, development of the business plan formalizes production practices, such as feeding and health management programs, and describes the marketing program for cattle at the completion of the backgrounding phase. Completing a business plan is similar to planning for a road trip: business plans help you identify where you are going, and, similar to a road map, assist you in reaching your final destination.

Similar to other agricultural endeavours, feeding cattle involves risk. While the price of feed and market price of feeder cattle are the two largest variables that can affect profitability of cattle feeding enterprises, factors such as experience of the cattle feeder, size of operation, animal performance and health status of calves contribute to the success of the enterprise. To reduce risk, some backgrounders choose not to own their feeder cattle, but custom-feed cattle for other producers or cattle investors. A business plan identifies risk factors for each operation, and allows producers to evaluate alternatives to 100-per-cent ownership of feeder cattle and manage their risk accordingly. Risk management strategies form a critical component of the business plan, and will be reviewed by lenders and other stakeholders when assessing the financial viability of backgrounding cattle.

A business plan helps you to:

• Analyze the enterprise on paper and identify strengths, weaknesses, opportunities and threats (SWOT);
• Make the transition from idea to implementation of the business enterprise;
• Provide lenders, cattle investors and other stakeholders with a clear understanding of your business and the requirement for external sources of capital or operating credit;
• Standardize operating procedures and identify marketing strategies for backgrounded feeder cattle;
• Establish performance and financial benchmarks and analyze year-to-year variance; and
• Manage your business more effectively.

Developing your Business Plan

A typed, professional appearance enhances business plans, especially if it will be presented to others. If this is not possible, a neat, handwritten business plan is still better than nothing at all. Elements of a business plan include:

1. Title Page: Includes the business or farm name and contact information for the principal individual(s) responsible for the enterprise. Include the date the plan was created or the period of time that the business plan covers.
2. Executive Summary: The executive summary is one of the most important components of a business plan. As the executive summary is the first and sometimes only part of the business plan that is read, it needs to be a concise summary of the business proposal that identifies the purpose or objective of the operation, outlines capital and credit requirements and indicates how funds will be used. It should be written last so that it summarizes the entire business plan and provides the readers with answers to the following questions:

• What is the purpose of this business plan (operational guide, financing proposal or both)?
• What is the nature of the business?
• What is the business structure (sole proprietor, corporation, partnership)?
• What is being produced or what services are being provided?
• Where will the product and/or services be marketed?
• What knowledge, skills and abilities do you have regarding feeding and care of cattle?

3. Table of Contents: A single page listing topics and corresponding page numbers.
4. Mission, Vision, Values and Goals Statements: These statements are typically one paragraph in length, and clearly state the objective of the enterprise, the short- and long-term goals of the producer and the values important to the individual. Animal welfare, environmentally sustainable production or verified beef production practices are examples of values producers may choose to incorporate in these statements.
5. Industry Overview: The industry overview should be written to provide a reader who may have limited knowledge of the subject with a brief description of the cattle feeding industry. A simple diagram illustrating the structure of the cattle industry is often useful to include in this section to visually represent where backgrounding fits within the beef cattle supply chain. Current statistics should be included, and be sure to reference sources of information. Relevant information may include, but should not be limited to: beef cow numbers, number of feeder cattle by weight class, feed grain and forage production and number of cattle feeders. Industry trends and opportunities can be identified in this section. Once the reader has reviewed this section of your business plan, specific information related to your project can be put into the perspective of the larger industry.
6. Business Description: This section includes information specific to your enterprise. Type of business, structure of business, relation to other enterprises, and size and scale of the operation, including land resources, should be identified.

Ownership of feeder cattle or custom feeding arrangements should be clearly identified in this section, as the content of subsequent elements of your business plan will be affected by this major decision. Custom feeding arrangements will be formalized, with a written contract outlining the responsibilities of both the cattle feeder and investor. Payment for services (cost per gain, yardage plus feed costs or cost per day), expectations of animal performance, health status of calves at time of placement, minimum number of days on feed, death losses and animal warranties should be clearly identified and drafted in the agreement. A copy of the contract should be included as an appendix to the business plan.

7. Human Resource Management: This area describes your business and management experience in feeding and caring for cattle. It is important to identify if you will be paying yourself for the labour and management of the enterprise, or if the profit (loss) of the business will determine the return on your labour and investment.

If additional non-family labour is required for the backgrounding cattle enterprise, a description of employment variables, such as salary, benefits and provision for training, should be included. Development activities designed to improve management expertise should be included in this section.

A contingency plan should be identified in this section that details how the enterprise will be managed and day-to-day operations will proceed in the event of illness, injury or death.

8. Operational Plan: This section outlines the production processes, sets performance targets and establishes costs that will be included in cash flow projections. Backgrounding cattle enterprises should include the following sections within the operational section of the business plan:

Feeding Program

Excluding the purchase of the feeder calf, the cost of feed represents the single largest variable in feeding cattle. Backgrounding diets are typically higher in forages to minimize fat deposition and promote frame and muscle growth. Purchasing or contracting some or all of the forage, grain and supplements prior to placing cattle in the feedlot can reduce the risk of significant price increases during the feeding period. It is recommended that nutritional advice be sought in the development of feeding programs and monitoring of animal performance. A feeding protocol can be developed as part of the operational plan to ensure consistency of feeding regardless of who is responsible for daily feeding.

Herd Health Program

With the assistance of a veterinarian experienced in feeder cattle production, a herd health program should be designed and implemented for all backgrounding enterprises. Treatment and vaccination protocols, implant strategies and post-mortem procedures can be developed and documented in the herd health section of the business plan. These protocols can form the basis for a sound record-keeping system as part of a quality assurance program. Annual review of each program within the operational plan allows for ongoing adjustment and fine-tuning of important production practices.

9. Marketing Plan:

Cattle feeders who own their cattle inventory assume a higher risk than feeders who are custom-feeding cattle for other investors. While the potential for profit is greater, so is the potential for loss, and the business plan should reflect the reality of the cattle feeding business. Owning the inventory of cattle requires the development of a marketing plan within the business plan. Consider the following when developing your marketing plan:  

Product

Identify the target weight for marketing feeder cattle. Lighter feeders can be placed on pasture prior to finishing in feedlots, or heavier animals can be marketed directly to feedlots.

Identify the time of year for targeted marketing. Normally, grass cattle are in greater demand during the early spring, and heavy feeders are generally marketed to feedlots during late summer.

Identify where off-type animals will be marketed.

Price Discovery

Backgrounded cattle can be sold via auction (regular, presort, satellite or electronic) or be forward-contracted to finishing cattle feedlot operators. Sale conditions, including weighing considerations, marketing commissions, shrinkage and delivery times, should be clearly identified for all marketing alternatives. It is important to recognize that prices for cattle (finished and feeder) are established at the Chicago Mercantile Exchange. Fluctuations in the value of the Canadian dollar relative to the United States currency represent significant price risk to the Canadian cattle feeder. Risk management plans should identify foreign exchange exposure and strategies to minimize negative effects. Development of marketing plans as part of the business plan allows producers to consider all of the factors that may affect market price for cattle at the end of the backgrounding period. Given the complexity of cattle marketing, producers are strongly encouraged to seek advice and marketing assistance prior to placing cattle on feed in a backgrounding program.

The Livestock Price Insurance Program (LPI) is an easy to use risk management tool that provides beef producers with protection against price risk, currency risk and basis risk. The program uses current and historical market information to set and offer market driven coverage in the form of an insurance policy. LPI protects against volatility in the marketplace and can be used to set a "floor" price on livestock, allowing for the security of knowing what your bottom line income will be. LPI can also be used to obtain a cash advance through the Advance Payments Program.

10. Environmental Plan:

Environmental farm planning is an important component of risk management for any agricultural operation. Beef cattle backgrounding operations may require approval from Saskatchewan Agriculture's Agricultural Operations Unit prior to the construction of an intensive livestock operation (ILO). The Agricultural Operations Act requires ILO proponents to submit plans for manure storage, manure management and mortality management. The intent of this legislation is to ensure provisions have been made to protect surface and groundwater from contamination by run-off from livestock facilities. It is also important to discuss development of any ILO with your neighbours and your local municipality to address any concerns or identify any development bylaws that may be relevant to your enterprise. Saskatchewan Watershed Authority should be contacted regarding licensing requirements related to the provision of water for the cattle operation.

11. Financial Plan:

The financial plan is an important component of your business plan, and usually includes present financial documents as well as pro forma financial statements that identify the financial changes that will occur to the enterprise over a period of time. Requirements for debt financing and repayment schedules should be included in the financial plan. It is important to identify any assumptions that are being made that may affect the accuracy of the financial statements. Examples of documents included in the financial section of the business plan are:

• Breakeven analysis of backgrounding cattle;
• Current income statement and projected income statements for an identified period of time;
• Monthly cash flow projections for the current and subsequent fiscal years;
• Loan amortization tables; and
• A current balance sheet and projected balance sheets for an identified period of time.

12. Supporting Professionals:

Identify supporting professionals that provide services or advice for your operation in this section of your business plan. These can include business partners, such as accountants, lawyers or financial service providers, as well as veterinarians, nutritionists, consultants and marketing partners.

13. Supporting Documents:

A personal resumé identifying your education, prior work experience and management and feeding experience related to beef cattle production should be included in this section. If other individuals will be involved in the management of the backgrounding enterprise, include their personal resumés as well.

For custom backgrounding operators, letters of intent from prospective cattle suppliers or investors should be included. If you have previously fed cattle for someone else, include letters of reference.

Conclusion

A business plan is an important document that allows you to evaluate your enterprise on paper. This document serves as a basis for obtaining financing and procuring cattle supplies. Operational plans are developed and performance benchmarks established in your business plan. Once completed and updated annually, your business plan will provide you with an overview of past performance and a plan for future years.