The Art of Arbitrage The King Ranch examines how the principles of arbitrage and asset turnover ratio can be useful marketing tools rivaling retained ownership.

by Kindra Gordon

hould you retain What is arbitrage? “When a rancher finds value in the market ownership of your calves? Webster’s dictionary defines place, buys those calves, SWhile that is a arbitrage as “the question that hinges on simultaneous buying harvests cheap gains and many factors for each Fe e d e r Ca l f and selling of the same creates additional value — he individual operation, commodity in different Ma r k e t i n g Barry Dunn and his markets in order to profit is using arbitrage. Ranchers former colleagues at the from price discrepancies.” King Ranch Institute for Dunn says, “While this often quickly reinvest that Ranch Management (KRIRM) — arbitrage — may seem like a big money and run the cycle again have some interesting thoughts on fancy word that only academics the subject. use, many ranchers use this and again and again.” Dunn, dean of the College business principle like an artist — Barry Dunn of Agriculture at South Dakota paints on canvas.” State University and former He explains, “When a rancher KRIRM director, reports that finds value in the market place, How do you tie that to However, Dunn says that Dave DeLaney, King Ranch buys those calves, harvests cheap calf marketing? an alternative, which uses the vice president and general gains and creates additional value Dunn concludes, “The widely principles of arbitrage and manager of ranching operations, — he is using arbitrage. Ranchers touted and promoted cattle increasing your asset turnover says the question he is most often quickly reinvest that money management and marketing ratio, is to sell your calves and buy frequently asked relates to and run the cycle again and again practice of retained ownership back lighter, greener calves of less why King Ranch does not and again.” of a rancher’s calf crop has value. Stocker those, and sell them retain ownership through the advantages. Many ranches have at a heavier weight, harvesting the stocker and feedlot phase of How do you define asset made substantial investments cheap gain from your grass and, all of the calves they raise? turnover ratio? in genetics and herd health, most likely, compensatory gain in For many years King Ranch’s Dunn says, “Think of it this way: and one way of capturing that the cattle. production and marketing The implement dealer in your investment is to retain ownership He acknowledges that there plan has consisted of selling community has an inventory of of the cattle as far as possible are additional risks. One might its raised calves after they have expensive tractors and equipment. into the cattle production be biosecurity. Another is the been backgrounded, stockering Because they are very expensive system. This has been used very volatility of the cattle market. purchased cattle as pasture and require large investments, successfully by many ranchers.” But, he adds, “Taking advantage conditions permit and using the dealer probably only has one However, he adds, “There of these opportunities might its feedlot to finish cattle if the or two tractors of each model is always a price tag.” He goes entail honing your marketing market seems favorable. on their lot and only sell a few on to say, “In this case, one of skills. But all marketing plans DeLaney explains that this each year. As a result they turn these is the opportunity to use entail risk and require learning, plan allows him two distinct their investment over very slowly, the business principles of asset even retained ownership.” advantages over retained perhaps only once each year. turnover ratio. Using it is not ownership: arbitrage and an “Compare that to your dependent on size or scale. If you What has the King Ranch’s increase in asset turnover ratio. livestock feed dealer, who is have a successful business model, record been? Here, Dunn explains more buying and selling feed all of the one way to take advantage of it is Dunn reports that a King Ranch about these two principles: time, perhaps every day. A feed to turn it more often.” Institute graduate student recently dealer turns their investment in analyzed whether or not over How might these business ar • bi • trage: \’är-be-’träzh\ feed over very rapidly, many times the last eight years King Ranch each year. Of course each business principles apply to a ranch? would have been more profitable n. the simultaneous has a different operating profit Dunn suggests considering the if it had retained ownership of margin, but in terms of total drought management strategy its calves. The findings? “King purchase and sale profit, a business that captures of running a portion of your Ranch’s financial and production of the same commodity their profit margin multiple carrying capacity as stockers records revealed a tremendous times each year has an inherent instead of cows. This builds advantage for arbitrage and in different markets advantage. They are frequently flexibility into your operation, increasing asset turnover ratio in order to profit in the marketplace, capturing and as precipitation and pasture over retained ownership,” Dunn created value.” conditions permit, one choice concludes. HW from price discrepancies. you will have is to stocker your raised calves.

24 He re for d Wo r l d / August 2010 www.hereford.org